February 11, 2013, 4:00 PM — While some of the most successful consumer Internet companies are capturing the headlines today, more than 70% of venture exits in the last two years valued at over $500 million have been in the enterprise sector.
These exits have also outperformed their consumer brethren post-IPO. Of the top 10 largest IPOs in the last two years, all the enterprise companies in that bracket are trading above their offering prices; only one of the consumer companies (LinkedIn) is doing so. The average growth company in the enterprise sector is healthier than it was several years ago, driven by capital efficiency in R&D and sales, and more profitability at scale.
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Why the wealth of activity in enterprise sectors? The answer lies in two exponential changes these companies are taking advantage of: the massive expansion of computing power and the growth of big data. These are not new trends, but we are on the steep part of both curves and it is making the cycle of innovation/obsolescence shorter than it has ever been before. This is creating great opportunities (at Menlo Ventures, for example, half of our investments are in enterprise technologies), but also big challenges.
Computing power and the cloud
The first major challenge results from Moore's Law, which states that processing power doubles every two years. We're climbing an incredible ramp in computing power that has changed the game for young enterprise technology companies.
In the past, developing a new network switch or storage subsystem required a company to develop its own chips to push performance higher, at enormous financial cost and technical risk. Today, commodity components have so much power, the trick is not faster processing, but higher efficiency and utilization. This means that value creation is occurring in software, not hardware, even if the product that is shipped is a physical device.