I have a tremendous amount of respect for venture capitalists. For a while when I was on the vendor side of the world, I wanted to be one. Any business where you only need to be "really" right 10-15% of the time certainly puts the odds in your favor (especially if you have the right network and skill set). But in the past few years, only a very small percentage of venture investors in the enterprise software market have had any "exits" or liquidity events with their investments where they've actually made money. Consider the case of Open Ratings. I have no idea what the previous valuations were prior to the D&B acquisition, but you can be sure the venture investors took a haircut on the announced sales price. And some might argue Open Rating's backers were lucky -- they got out with something.
Later today, I'm meeting with a couple of venture investors contemplating an investment in the Spend Management sector. Their investment thesis is a good one -- the company in question has an incredibly novel approach to a focused Spend Management process and their solution does something that no one else is doing these days (and it would be very hard to copy). And most important, when prospects see the solution in question, they want to move to a proof of concept quickly because they see what they're leaving on the table without it. At the right valuation, the vendor is probably a smart place to park some dollars.
But of all of the vendors and service providers that I come across in the Spend Management arena, few are truly differentiated. Consider that there are at least a dozen (probably far more) e-sourcing vendors out there in the market today. But back in 1999 and 2000, there was no shortage of venture investors willing to invest $10 or $20 million bucks in the likes of nearly half a dozen vendors with nearly identical value propositions and platforms such as Perfect (before the Sandy days), Frictionless, Emptoris, B2eMarkets, and many others. The investors in B2eMarkets, the only real "exit" so far in the platform space, realized a significant loss when they sold to Verticalnet.
So what would I look for in a Spend Management investment? I'd weigh the management team, solution differentiation, competitive sustainability, and customer needs equally. Truly novel technology may or may not be an advantage, depending on the customer segment. For example, a vendor or service provider that cracks the code on the low-end of the middle market from a Spend Management perspective may or may not own a large code base (or even any process patents). But they certainly would be valuable. And that's a bet that I'd be inclined to make.