Ernst and Young: It's a Jungle Out There

dollar deals of the late '90s. Is there any hope? Yes, according to Nigel Martin, a partner at Ernst and Young, which has established a solid practice consulting start-ups and helping new companies secure venture capital. Despite the current economy, Martin, who runs the company's software industry business in the Pacific Northwest, says investors are still looking for innovative technology,especially software that provides customers an immediate solution and quick ROI. But, as he tells VARBusiness associate editor Rob Wright, while increased software funding is promising, Martin believes there's still one all-powerful factor that still stands in the way of a full recovery for the IT industry.

VB: How has venture-capital activity been on the West Coast? Are there any new start-ups?
Martin: Actually, it has picked up a lot on the West Coast. We're not quite at the level we were at three or four years ago, but it's getting there. There are more start-ups today than last year, but they're not necessarily getting millions of dollars thrown at them like they did in the past.

VB: What are some of the hot areas in the software venture-capital field?
Martin: Activity has shifted away from e-business. Application-development tools are big right now. If you have a software-development tool that can be integrated quickly and can speed up development and give you tangible results, a customer will buy it. Data mining and business intelligence are also big. Oddly enough, supply-chain management software is very popular among start-ups, too.

VB: Really?
Martin: Yeah, I know. Go figure. The market is saturated with supply-chain management software that doesn't work too well, and all the established vendors are dying. I'm baffled.

VB: How has the venture-capital and start-up process changed in the past year or so?
Martin: Funding takes a lot longer now, which is good. Two or three years ago, investors didn't do their homework and just threw money at anyone with a heartbeat. The market was abused. You had some companies getting tons of capital and going public without any revenue or even a simple business plan. Today, it's back to 90- and 120-day cycles. Plus, the market today is much more business-driven than technology-driven.

VB: How do you mean?
Martin: Investors are scared right now. There's a risk vs. reward for funding a start-up. Many start-ups won't make it. A lot of start-ups are looking to be bought out by larger companies, and some investors simply want to cash out early. It's a tough environment for new companies. Only an absolute no-brainer technology,I mean, one that is so compelling everyone just has to have it,will survive to grow up and [lead to the creation of an established software vendor.

VB: That's a gloomy outlook. Isn't the increase in start-ups a good sign?
Martin: It is, but people have to understand there's one thing that controls the software industry, and that's enterprise-

buying. When the Fortune 1000 companies come out of their shells, it will spark the recovery because they dictate what succeeds and what fails. It will take at least this year for them to emerge from their doldrums and increase IT spending. And then it will take some time for investors to really get moving again. So I don't think we'll see a true recovery until next year, but we'll get there.