How To Pick Winning Startups in Crowded Tech Fields? Specialize, VC Says

In 2013, veteran investor and former executive Matt Holleran quietly opened a specialized kind of venture firm that he suspects will become more common.

Cloud Apps Capital Partners focuses on a single market—Web-based software applications for businesses. It aims to fill an early-stage startup funding niche that Holleran believes is not well-served by the general venture capital ecosystem.

Holleran’s idea is that startups—especially in well-established technology areas like business applications that run online—need guidance from investment firms very deeply rooted in the markets they’re trying to crack. That expert’s roadmap is increasingly important as a tech sector becomes more saturated, leaving fewer open areas for younger contenders, he says.

“We have the strategic framework,” Holleran says of his San Francisco-based firm. “We’ve identified the important business problems that should be solved.” That perspective also includes the problems that have already been well solved, he says—knowledge that can save startups time and money trying to grab market share from entrenched competitors.

Holleran and Cloud Apps Capital venture partner Judy Loehr, a fellow veteran, have been operating somewhat behind the scenes until now. This week, the firm made a more public launch, announcing it has raised an oversubscribed first fund of $53.7 million, largely from institutional investors. The fund will probably invest in a total of 10 to 15 young companies, Holleran says.

Cloud Apps Capital has already invested in seven startups, including Pleasanton, CA-based ServiceMax. That Bay Area company’s software manages the work of field technicians, the millions of workers who install and maintain machines and equipment at businesses and in homes worldwide.

Holleran says he expects to see more market-focused venture groups such as Cloud Apps Capital arise, as tech sectors become more crowded with successful heavyweights while a host of newbies try to nudge their way in.

He says startups need support from investors who understand the complex landscape of a well-developed field, where new entries must try to distinguish themselves from the pack—sometimes by creating variants on the original technology, sometimes by serving niche groups of customers, sometimes just with a superior marketing strategy.

“You need to have the context to make the good decisions,” Holleran says.

There’s an interesting symmetry in the idea that the increasing differentiation among startups in maturing fields may be mirrored by an increasing specialization among the investor firms that serve them.

Holleran says the landscape has changed significantly since the late 1990s for developers of Web-based business software that is sold as a subscription rather than as a program installed and operated on a company’s own computers.

Back in the 1990s, pioneers in the field such as and NetSuite had to start from scratch, building all the software, databases, and network elements to support an online computing environment, Holleran says. Those expensive launches also included investments in sales staff who had to introduce prospective customers to a new term: “the cloud.”

These days, startups can simply plug into cloud services run by Amazon, Google, Microsoft, Salesforce, and Oracle to support the unique applications they create for customers, Holleran says. The global market for Web-based business software is projected to reach $50.8 billion by 2018, according to a report by market intelligence firm International Data Corporation (IDC).

But that doesn’t necessarily make life easy for new companies, Holleran says.

Venture firms want to see a startup gain traction in the market before they’ll invest $10 million to $15 million in it, Holleran says. Today’s “Cloud 2.0” startups need $3 million to $4 million to complete their software design, test it with businesses, attend to their needs, and build up the customer base VC’s want to see, he says. And startups require more support than what he calls “headless syndicates” of angel groups or other early-stage investors have time to give.

Holleran pitches Cloud Apps Capital as the experienced guide that joins the startup’s board, helps design its go-to-market strategy, and recruits executives and other board members for the young company from among the venture firm’s deep network of contacts.

His advice may include steering away from the very market niches that have demonstrated the most success, because they’re likely to be the most fiercely competitive. The very success of companies in those niches should not provide proof that new startups will also be rewarded by jumping in, but should warn them not to pile on, he says.

Ironically, when a big global market is already established, that may be a sign that the chance of success by any single new entry is substantially … Next Page »

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