Tuesday, June 15, 2010

The Decline of Venture Capital, Part 2 - Venture Operating Expense

With the advent of Software-as-a-Service, $3 products designed for the App Store, and with virtually all semiconductor companies going fabless, many startups looking for money plan to use the cash to pay operating expenses, not for capital outlays. This is a major shift from the traditional VC investment which was too risky for bank finance, and too technical for just about any loan officer.

While there are still a handful of companies that need money for R&D and new production facilities, many companies seeking funding have a product, but they need money to hire salespeople and develop marketing campaigns. Software, a long-time VC favorite, has turned into Software-as-a-Service (SaaS), where companies pay a monthly fee, not one upfront charge to use the product. For software developers, chasing after “recurring revenue” taxes sales and marketing resources extensively., a leading SaaS provider, spent 61% of its revenue last quarter on SG&As (sales, general, and admin. costs), including commissions and advertising. Meanwhile, traditional software vendor Oracle spent less than a quarter of its revenue on such expenses.

Similar to the SaaS startups, small development shops running websites or placing products in the App Store do not have massive R&D budgets or capital requirements. But they need salespeople and marketing staff to turn their products into revenue. While these companies can bring some capital needs for servers and network equipment, these requirements are not all that different from non-technology companies which need the same products to run a network and maintain databases, which is also why there are more people implementing technology than creating it.

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