Jeff Bussbang, a VC with IDG venture summarises the key points discussed in the Microsoft VC conference:
•The enterprise software business model is dead. Price pressure is incredibly intense between open source, Microsoft moving up the stack, vendor consolidation, IT buying wariness, the ASP model, overfunding in interesting sectors and many other factors. It used to be that you could build a profitable enterprise software company at the $15-20M threshold. But with today's pricing pressures and high cost of sale, it seems to have jumped to $40M, 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. Linux, Apache, MySQL and PHP - all open source components 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.
• 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.That’s not the case anymore. 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- this provides impetus for multi-hundred million dollar software segments that Microsoft is thrilled to help young companies build (on top of their platform, of course). Microsoft's IP strategy is now all about aggressive cross-licensing rather than offensive litigation.
My Take: The interest in enterprise software shall not dwindle – while current market conditions may appear that would be the case, in the age of consolidation, several niche players as part of the software ecosystem shall continue to thrive. No wonder when Microsoft wants to decide on large numbers for funding new initiatives – it is bound to lose the edge in being the first to roll out new things – Microsoft should be seen as the innovator – traditionally they have been seen to be someone moving into a space after startups have moved in. This contrasts with the splendid efforts that Google is putting in place to retain the startup culture.