Big Data Getting Big Bucks from VC Firms

It’s time to party like it’s 2001 if you’re in the big data analytics space. Venture capital (VC) is flowing into software startups–a good number of them in the big data space–at the fastest rate in 12 years, according to a recent report.

According to the MoneyTree report released last month by Price Waterhouse Cooper and the National Venture Capital Association (NVCA), VC investments in the software industry amounted to $3.6 billion during the third quarter of 2013. That’s the first time software-sector investments topped the $3-billion mark since 2001, just before the dot-com bubble imploded.

Being a software startup is cool once again. According to the MoneyTree report, there were 420 VC deals completed during the third quarter, a 23 percent bump from the second quarter. Software is dominating the VC landscape right now, with the biotechnology industry taking a distant second place with $852 million going into 123 deals last quarter.

“It’s an exciting time to be an entrepreneur with a software company,” said Mark McCaffrey, a partner with PwC. “More venture capital dollars are going into more software deals than we’ve seen in the past decade.”

Nine of the 11 largest investments in the third quarter went into software companies, according to the MoneyTree report. This was an abrupt turnaround that few could have predicted. In fact, according to earlier MoneyTree reports, VC deals in the software space had been falling off in 2013, as more money went into biotechnology and other fields (see figure 01). Something apparently happened in the third quarter that persuaded investors that software was really where they wanted to be, which led to about $1.5 billion more being invested in the third quarter compared to the second quarter. That is a big turnaround, and it’s not completely clear why that happened.

Fig01. Courtesy of PwC and NVCA

Whatever the cause, the red-hot software sector isn’t cooling off. Mongo (formerly 10Gen) kicked off the fourth quarter on October 4 by announcing it had just closed a $150 million round of funding involving a range of investors. MongoDB is one of a handful of NoSQL databases gaining traction as the foundational data stores powering next-generation big-data applications. It competes directly with CouchBase, which closed a $25 million round during the third quarter, and Datastax, the Apache Cassandra commercializer that closed a $45 million round in July. Other big data names, like Tableau and QlikTech, have already cashed in with big IPOs, and it seems likely that VC firms will look to do IPOs as an exit strategies for their more mature investments.

MoneyTree didn’t break down the investments in the software industry (except to label some of them “Internet-Specific,” which actually isn’t that helpful), so it’s difficult to know exactly where the $3.6 billion went. But anecdotal evidence suggests that much of it went into the big data analytics space. Disruptive technologies like Hadoop are having big impacts on IT spending patterns and causing IT megaliths like Oracle, IBM, SAP, Microsoft, and others adapt in a hurry or miss the wave.

VC firms and entrepreneurs bootstrapping their own startups sense enormous opportunity right now to get in the lineup now and be in position to ride the big analytics wave, which Wikibon analyst Jeff Kelly recently predicted would grow from about $18 billion in spending this year to about $47 billion by 2017. That’s a compound annual growth rate (CAGR) of 31 percent, which is a whole lot better than your grandma is going to get on her annuity.

Of course, the big IT dogs aren’t sitting idly by, watching their maintenance license revenue trickle in (although we’re sure they’re doing that, too). Intel and SAP have big investment funds that have been active in the big data space. For example, SAP recently announced it raised more than $650 million for a new direct investment fund, SAP Ventures Fund II, to go along with its SAP HANA Real Time Fund, which has $405 million. Other companies, like IBM, are expected to become more active in the M&A area when the big data consolidation begins, which many expect to start within two years.

The big data runup looks swell if you’re a startup surfing the big data analytics wave.

While we already have a clear set of leaders in the NoSQL and Hadoop areas, there’s a lot of territory left to carve up. Among the smaller big data software companies that recently received funding are firms like Affinio, a big data graph engine developer that announced $1.5 million in funding by Build Ventures; Sqrrl, a developer of a security-minded NoSQL database that received $5.2 million series A round of venture funding; Cirro, a predictive analytics software developer that announced $8 million in series A funding; and Numerify, a developer of big data integration software that announced $8 million from Lightspeed Venture Partners and various angel investors. Undoubtedly, there were dozens more.

If you’re at a big data startup looking to get noticed, you had best head west, because VC firms in Silicon Valley dominate the VC landscape no matter what industry is being considered, according to the MoneyTree report. The top three VC firms during the quarter–Andreessen Horowitz Kleiner Perkins Caulfield & Byers, and New Enterprise Associates–are all based in Menlo Park, California. Collectively, these three firms closed 69 deals.

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