Venture capitalists are begin-

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					                                                    Venture Capital Analyst | Technology

                                                                                           ture costs covered, your company will
Software Startups Look to Services Model                                                   never compete with a perpetual license
To Rejuvenate Their Ailing Businesses                                                            And some VCs say that there are
                                                                                           some aspects of the enterprise that cor-
By Jonathan Shieber                          Oxley compliance software provider            porations will never want to outsource.
                                             backed by Insight Venture Partners            They argue that security and compli-

           enture capitalists are begin-     with headquarters in Cokato, Minn.,           ance technologies are too sensitive for a
           ning to explore whether start-    have said that they would begin offering      company to trust to a third party.
           ups selling software under a      hosted services. “We’re actually going to     “People are making a lot more hay out
traditional licensing model can increase     be introducing an ASP pricing model in        of this than there really is,” said Erik
their revenue and rejuvenate their           February,” said Paisley Consulting CEO        Lassila, general manager of Clearstone
business by transitioning to a services      Tim Welu. “It allows us to sell product       Venture Partners. “You’re not going to
model. “The trend toward delivering          to more of the medium size market             magically transform your business by
software as an on-demand service and         without the large upfront costs and the       selling software as a service.
charging for it in that way is very real,”   maintenance costs.”                                 “In the long haul when servicing
said Glenn Solomon, a general partner              For MagicSoft, the transition to a      the Global 2000 some [solutions] will
with Partech International. “Every           services model from a licensing model         be hosted by the vendor and some will
company that has started with a licensed     was a matter of the company’s life or         be taken internally. And it depends
model is certainly thinking about it, if     death. “The industry is moving more           on how much sensitivity there is
not in transition toward some form of        and more towards managed services,”           around the data,” he said. Despite these
that model today.”                           said MagicSoft CEO and investor               misgivings, most venture capitalists are
      One of the main reasons for com-       Carlyle Eckstein. “We’re in survival          convinced that some sort of combina-
panies to change is that it reduces the      mode and the best thing for us is to          tion of licensing and services is neces-
costs for potential customers and            move over into the managed services           sary for startups to reach the broadest
smoothes revenues. “A lot of the stuff is    arena as an ASP.”                             number of customers. “Anybody who’s
getting repackaged in a lot more cus-              After deciding to transition its        funding something [exclusively] with a
tomer friendly ways,” said Mark              product to a service offering the com-        traditional model is a knucklehead,”
Sherman of Battery Ventures.                 pany was able to close on a $500,000          Mr. Sherman said.
      And enterprises prefer the low cost    round of bridge funding that it expects
options. “The big issue for everyone is      to lead into a larger $3 million first
that the barrier to get a product placed     round. And investors are already              Battery Ventures Makes
in an enterprise continues to go up. It
puts the bar much higher for any
                                             knocking at MagicSoft’s door, said
                                             Mr. Eckstein, who also serves as a man-
                                                                                           Its First Move in India
vendor to get a product or service in-       aging director of MagicSoft’s backer,         Battery Ventures is moving to capitalize
house,” said Tom Clancy, managing            NextGen Capital. “The power of an             on the globalization of the communi-
director with Enterprise Partners            ASP, if you can get it to work in a           cations industry by backing an Indian
Venture Capital. “If you look down-          sector, is that it’s almost like a mono-      company started by entrepreneur
stream into the (small-and-mid-              poly… If you can gather enough of an          Gururaj “Desh” Deshpande, who’s taken
size-business) markets, they have much       industry and you become the player,           two companies public since leaving India
less IT infrastructure, so things that are   it’s a very powerful position.”               in 1973. Battery was not a backer of
packaged and things that work out of               But even with all the opportuni-        either Cascade Communi-cations or
the box are better for them. Software as     ties that software services present, ven-     Sycamore Networks, both of which
a service and as an appliance both have      ture capitalists acknowledge that there       Mr. Despande founded, but was ready to
these virtues and are more attractive,”      are risks to making the shift as well.        lead a $15 million round for Bangalore-
Mr. Clancy said.                             “It’s important to understand as we’re        based Tejas Networks.
      In the past few months companies       transforming away from the perpetual               Although U.S. VCs have invested
like MagicSoft, a Fairfax, Va.-based         license how the economics work,” said         in plenty of companies that while based
provider of video-conferencing software,     Mr. Clancy, of Enterprise Partners. “If       in the States have most of their opera-
and Paisley Consulting, a Sarbanes-          you don’t get the underlying infrastruc-      tions in India, they have done few

                                                                     3                                                 February 2005