Who’s Afraid of Big, Bad Wolf?

As IDG Ventures Boston popped the champagne corks last week to celebrate the close of its $185 million fund (see fund notes, page 4), General Partner Jeff Bussgang was found picking up market trend tips during Microsoft Corp.’s annual VC conference in Mountain View, Calif.

In his blog from last week’s event, Bussgang acquiesces to the notion that the enterprise software model is nearing death, at least from a VC ROI perspective. He wrote the following blog prior to hearing Microsoft CEO Steve Ballmer deliver a keynote. Bussgang promises an update if Ballmer “says anything of interest.”

Notes From a Microsoft Event

Jeff Bussgang

General Partner


Every year, Steve Ballmer and crew come down from Redmond and expose 100 VCs to their upcoming plans. The buzz points in the audience this year include:

The enterprise software business model is dead. This is a refrain many VCs are mumbling to each other lately. It used to be that you could build a profitable enterprise software company at the $15 million to $20 million threshold. But with today’s pricing pressures and high cost of sale, it seems to have jumped to $40 million, and it’s harder to reach that threshold quickly. VC appetite for standard enterprise software appears to be dwindling to nothing.

LAMP cost of ownership vs. Microsoft is a myth. This is a new acronym that I learned today. It stands for Linux, Apache, MySQL and PHP – all open source components that are eating away at Microsoft’s value chain. Microsoft firmly believes that they are right on the facts and losing a perception battle with their core developer community – and need to fix this, fast.

Microsoft is no longer the Big Bad Wolf. Believe it or not, Microsoft feels downright warm and fuzzy lately to a VC. It used to be that VCs would complain that investing is software is dumb because Microsoft will simply build it and give it away for free. Nowadays, you hear much less of that. The law of large numbers has settled into Redmond’s decisions. If a business is less than $1 billion in platform revenue potential, it’s not interesting enough to warrant Microsoft’s attention. Therefore, there are plenty of multi-hundred million dollar software segments that Microsoft is thrilled to help young companies build (on top of their platform, of course). Also, Microsoft’s IP strategy is now all about aggressive cross licensing rather than offensive litigation. This company has really grown up over the years.

We’ll see if anything new comes out of Ballmer’s keynote over breakfast. Last year, he spent much of the time trying to convince us (and himself) that Microsoft would catch up with and crush Google.

One year later, they seem to have slipped farther behind.