Government // Mobile & Wireless
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1/14/2010
07:20 PM
Rob Preston
Rob Preston
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Down To Business: Don't Give Up On The Innovators

As the IT industry consolidates and the recession continues to shorten CIOs' vendor short lists, innovation could become a casualty.

In laying out his top 10 list of CIO priorities for 2010, my colleague Bob Evans urges business technology organizations to stay connected '"with some unconventional vendors whose solutions might help spark a breakthrough." The risk Bob is highlighting: As small and midsize innovators get acquired and CIOs reduce the number of vendors they work with in order to cut costs and simplify management, companies aren't being exposed to the kinds of disruptive technologies and thinking that could truly differentiate them.

Market trends aren't helping any. Not only has the worst recession in 25 years kept innovative companies off CIO short lists, but the industry is maturing and consolidating. While the biggest M&A deals hog all the press, it's the acquisitions of small and midsize innovators that will, over the long term, have a deeper impact on innovation.

As far as 2009 is concerned, think Cisco's acquisition of Web security company ScanSafe and application management vendor Tidal Software; EMC's acquisition of data center automation company FastScale and server configuration management vendor Configuresoft; IBM's acquisitions of predictive analytics specialist SPSS, database security vendor Guardium, and business process management vendor Lombardi; Oracle's acquisition of app configuration management vendor mValent; HP's acquisition of storage management vendor Ibrix; and Microsoft's acquisitions of IT process automation vendor Opalis and identify management vendor Sentillion.

Readers can decide for themselves which of those and scores of other acquisitions will unlock and enhance innovation, and which will smother it. Getting acquired can sometimes be just the thing a company needs to take its R&D and product marketing to the next level, but all too often it just buries the acquired vendor in bureaucracy.

For the entire decade, Cisco was the most voracious acquirer of venture-backed companies, according to researcher VentureSource, having snapped up 48 of them. IBM (35), Microsoft (30), EMC (25), and Oracle (23) round out the top 5. Noteworthy is the fact that the top 10 acquirers of venture-backed companies last decade were all IT vendors.

Meantime, only six venture-backed companies that could be categorized as enterprise IT companies went public in 2009, about the same as in 2008, according to VentureSource. IPOs are important because they're the main valve for innovative startups to burst into innovative midsize companies rather than have to sell out to the behemoths. The largest IPO last year, raising $370 million, was for A123 Systems, a supplier of lithium ion batteries. The other five were for SolarWinds, a network management software vendor; Medidata Solutions, a provider of hosted software for managing clinical trial data; LogMeIn, a maker of computer remote control and file sharing software; Echo Global Logistics, a provider of transportation technology services; and Fortinet, a security software vendor. Filing for an IPO in December was wireless LAN vendor Meru Networks.

There are signs of new IPO life: A recent survey by BDO Seidman of 100 investment bank execs predicts that the number of U.S. IPOs will rise about 25% in 2010 compared with 2009; 83% of respondents predict an increase in the number of tech IPOs. Among the 15 "hot tech companies" pegged by the Silicon Alley Insider as ready to go public in 2010 are social networking sites Facebook, LinkedIn, Friend Finder, and Zynga; solar panel company Solyndra; site registrar GoDaddy; phone device company MagicJack; electric car company Tesla; online marketing services company Quinstreet; and electronics retailer NewEgg. Still, none of Silicon Alley Insider's 15 can really be considered an enterprise IT company.

While the biggest IT companies continue to get bigger and a handful of smaller ones are finding an escape hatch by going public, startup activity continues to plod along. Venture capitalists invested 46% less in high-tech firms in the 2009 third quarter than they did in the year-earlier quarter, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association.

The total $1.51 billion breaks out this way: $622 million invested in software firms, compared with $1.34 billion in the year-earlier quarter; $283.5 million for IT services firms, compared with $453 million a year earlier; $248.8 million for networking and equipment firms, compared with $190.2 million; $148.6 million for semiconductor firms, compared with $387 million; $123.3 million for telecom firms, compared with $313.4 million; and $82 million for makers of computers and peripherals, compared with $123.3 million a year earlier.

While software firms (just to take one sector) completed more VC deals (128) in the third quarter than firms in any other tech or non-tech sector, the number of software deals and dollars invested were at their lowest level since the third quarter of 1996, according to the MoneyTree Report.

Recessions distort markets, so we'll see whether startup and midsize companies see more light in 2010. Regardless, CIOs interested in doing more than business as usual should consider giving them a second look.

Rob Preston,
VP and Editor in Chief, InformationWeek
rpreston@techweb.com

To find out more about Rob Preston, please visit his page.

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