Forget Facebook! Meet 12 investors on the hunt for the next Microsoft

Smart investors are betting big on business technology.

Sure, all the buzz goes to consumer-focused companies like Facebook and Zynga. But while those companies’ post-IPO performance has been tepid at best, enterprise startups have been quietly kicking ass.

In 2012 alone, acquisitions in the billion-dollar range include Meraki (acquired by Cisco), Yammer (acquired by Microsoft), and Quest (acquired by Dell). In addition, SAP closed its $3.4 billion acquisition of SuccessFactors, and human resources software maker Workday held a stellar IPO.

The investors behind these and other enterprise startups are a different breed: Not as flashy, and a bit more technically savvy than the average venture capitalist.

These investors are looking for small startups that are trying to sell innovative technology to the world’s largest organizations. The best of them have a real shot at knocking out giant incumbents like Microsoft, SAP, and Oracle, and winning billions of dollars in revenue.

As one of them, investor Ping Li, put it, startups are winning because they are creating “Apple-like experiences for business users.”

But how do you get the attention of enterprise investors? (And how do you compete with them?) You’ve got to start by knowing what makes each of them tick.

Jim Goetz: The enterprise advocate

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Firm: Sequoia Capital
Nerd Cred: He studied as an engineer and gave up on a PhD to start his career as a rookie product manager at SynOptics.
Hottest Investments: Palo Alto Networks, Jive, AdMob (acquired by Google), Karma (acquired by Facebook), Nimble Storage, Barracuda Networks.

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VentureBeat: With enterprise software in vogue, are you taking more meetings than in previous years? 
Goetz: Maybe a tad. We’ve been enterprise investors for 40 years … at times, it’s more attractive when no one is paying attention. The number of meetings has picked up a bit, but the quality has gone down.

VentureBeat: If the quality has gone down, what’s better now? Is it easier for startups to infiltrate the enterprise?
Goetz: We are using the business model as a weapon. Recurring revenue rather than a one-time license. [Editor’s note: companies like Salesforce.com have paved the way to recurring revenues with SaaS models that charge customers subscription fees instead of software license fees.] We’re experimenting with user acquisition models that embrace successful consumer techniques. These are things that are difficult for larger companies to embrace.

VentureBeat: Box’s CEO Aaron Levie recently said that Pinterest‘s design is 10 times better than most software that businesses currently use. Do you agree?
Goetz: I think that design is beginning to become a mantra in the enterprise. It’s both an interactive and UX design focus, and it has increased dramatically. I would argue that most successful enterprise companies have paid lip service. For the next generation, it has become critical. Product design is not just a differentiating factor.

VentureBeat: Do you have a couple of cool case-studies to share of sexy enterprise companies?
Goetz: MobileIron is allowing CIOs to track every mobile device in their environment whether it’s Android, iPhone, or RIM. Meraki can get you connected to a network no matter where you sit — all through a single cloud log-in. That hasn’t been possible before in the wireless networking space.

Ross Fubini: Mr. Nice Guy

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Firm: Canaan Partners
Nerd cred: He was a senior director of engineering at Symantec, leading a team that protected hundreds of millions of email boxes a year from viruses and spam. He’s also a triathlete.
Hottest Investments: Piazza, CitrusLane, GingerIO, and KarmaLoop.

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VentureBeat: For perspective, how many meetings do you take each year? How many startups do you fund?
Ross Fubini: It’s in the hundreds range, and I would typically consider funding 20. The problem, to be honest, is finding that combination of great team that has a market insight. If I could find 50 of those, I would fund all 50.

VentureBeat: What’s the biggest trend you’re keeping an eye on?
Fubini: iPad, iPad, iPad. People think the tablet revolution is a big deal. I think it’s a bigger deal. Doctors are one example, also people who run sales ops or architects reviewing blue prints. All these will have new mobile interfaces. Some of these new mobile applications we can’t even envision right now.

VentureBeat: You’ve invested in both consumer and enterprise startups. How is the experience different? 
Fubini: They are getting more and more the same. In both cases you’re fighting for people’s time. In the same way that the best games or social networking sites are addictive, enterprise companies are building products that help people do their job. Some of the best stuff will help you get home faster, or help you make one decision. The differences? I’d say that most consumer products are more about fun than they are about value.

VentureBeat: How do you cut through the jargon to really understand a company’s value?
Fubini: Be precise about the problem you’ve identified. You should be able to explain it without relying on terms like “big data.” You don’t have a “big data” experience at Whole Foods because they’ve recently begun stocking new cheese. But you are experiencing it as a result of buying analytics. The best innovations are indiscernible from magic. I want to see the rabbit; I don’t want to see the hat you’ve pulled it out of.

Zach Bogue and Matt Ocko: The power duo

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Firm: Data Collective, which just launched in August, 2012.
Nerd cred: According to the firm’s website, Ocko  has been granted over 20 patents in diverse technologies like hardware systems and social games. He still reads C++ code and admits to occasional struggles with Erlang. (Side note: Bogue is married to Yahoo CEO Marissa Mayer, who recently had a baby.)
Hottest investments: CitusData, Kaggle, and LendUp.

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VentureBeat: Do you have a thesis that you’re working with? If so, can you divulge?
Matt Ocko: Big data is the next secular trend that disrupts the enterprise for 10 to 20 years, starting in the early 2010s, similar to how PCs and LANs did across nearly 20 years starting in the early 1980s.

VentureBeat: Can you call bullshit on a commonly-held myth around enterprise startups?
Zach Bogue: The myth is that the enterprise is unwilling, or willing but incapable, of recognizing innovation from small startups. Today, nothing could be further from the truth. Many of our startups have several Fortune 500 customers before the end of their seed financing periods.

VentureBeat: How do you cut through the jargon to really understand a startup’s value?
Ocko: Three of our four founders still read code, understand chip architecture, and can light up their own clusters in AWS or a datacenter. We have 40 additional “equity partners” that look like us in terms of experience, technical chops, and customer connections. Our ability to both rapidly and deeply dive to the heart of a startup’s technical value, vet it with potential customers, and understand its long term value is unique.

VentureBeat: With the enterprise being so trendy these days, has this made your job easier?
Bogue: We don’t really pay attention to what is trendy and what isn’t. If anything, our experience is that trendiness just clouds markets and can obscure great companies behind merely trendy ones. We prefer that our world remain untrendy if possible.

VentureBeat? Can you provide 1 or 2 examples of really cool big data challenges that have been solved?
Bogue: The Chief Scientist and other leaders of the US Air Force successfully solved the tragic and very hard to understand problems with [its] multi-hundred-billion dollar F-22 fighter jet program. This was done by delivering real-time analysis of billions of events recorded across hundreds to thousands of sensors per plane, across hundreds of planes.

Ann Miura Ko: “The investing ninja assassin“

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Firm: Floodgate Capital, launched in 2010.
Nerd cred: Miura-Ko has a PhD in Quantitative Modeling of Computer Security from Stanford University.
Hottest investments: ModCloth, Digg.com, and Twitter.

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VentureBeat: What big trends are you keeping your eye on?
Ann Miura-Ko: Big data analytics, [meaning] new ways of interacting with data as it becomes increasingly high dimensioned, high volume, and high velocity. Also, mobile enterprise. I believe that this is going to have a huge impact on optimization of work flow, predictions of business processes and performance, and overall transparency of business metrics.

VentureBeat: Is the enterprise sexy again? Is this just a phase?
Miura-Ko: Enterprise is definitely bringing sexy back. Consumer seems to come in and out of favor, but enterprise customers are not as emotionally driven as consumers. As a result, if you’re providing a product that delivers great unit economics, you will find customers on the other side.

VentureBeat: Can a 20-something start a company? Do you need corporate experience to understand the pain points?
Miura-Ko: If you’re a scruffy 20-something with real technical insight, I would encourage you to start an enterprise company. You either need market insight, which requires some degree of industry experience, or you can rely on a core technical insight, which 20-somethings can have.

VentureBeat: How is enterprise investing fundamentally different from consumer?
Miura-Ko: I would say that enterprise is actually a bit more predictable. Enterprise customers are less emotionally driven, which means you can at least attempt to logically predict how the business will evolve.

Ping Li: The finance whiz

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Firm: Accel Partners
Nerd Cred: He is an avid programmer and picked up his first language, Basic, as a kid. Li was also one of the first investors to grab coffee with Jeff Hammerbacher, Facebook’s data scientist, to discuss the seeds of an idea to commercialize Hadoop.
Career-making investments: Cloudera, Fusion-io, Lookout, BitTorrent.

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VentureBeat: You’re managing Accel’s $100 million fund dedicated to enterprise software. What are you looking for?
Li: We don’t have one thesis. This is the first time that data has been democratized so large companies can access and get value out of it. Hadoop (the open source computing technology to store and process large quantities of data) is making that possible. I’m also excited about the mobile ecosystem in this post-PC era.

VentureBeat: Can you call out any pervasive myths?
Li: Everyone aspires to be like Dropbox — you can infiltrate without hiring salespeople. [Editor’s note: Read more about the “Dropbox effect.”] I think there are technologies that require salespeople. There has been too much hype around not needing them.

VentureBeat: Do founders need grey hair and corporate experience to understand the pain points?
Li: I think it’s totally believable and credible for a 20-something to start an enterprise company. Over time, they will have to add to the team to fill out the dimensions that won’t come naturally to them. I don’t actually think you have to have been at a large corporation for a long time to come up with a great idea. There are some great open-source companies with young founders. Look at Jeff Hammerbacher at Cloudera — he identified a pain point around big data and the potential of Hadoop.

VentureBeat: When it comes to enterprise software, we are so mired in jargon. How do you know when a startup is more than bluster?
Li: I look for authentic entrepreneurs who really understand the market. They don’t speak in jargon or buzzwords. Entrepreneurs: you should be able to explain your startup in a way that everyone can understand instead of using terms like “big data” that make it sound like anything else. It’s not easy to do … jargon is a crutch.

Asheem Chandna: The revenue generator

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Firm: Greylock Partners
Nerd Cred: He’s a computer engineer with a master’s from Case Western Reserve University and decades of experience with startups like Check Point Software and CoroNet Systems.
Hottest investments: Palo Alto Networks, Delphix, Zenprise.

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VentureBeat: Do you buy the notion that the enterprise is “sexy” again?
Asheem Chandna: The enterprise has always been sexy and profitable. It’s worth remembering that companies that appear sexy today were started five or 10 years ago, when enterprise was viewed as dead.

VentureBeat: Do you have a thesis that you’re working with? If so, tell me more.
Chandna: I believe it should start with a team that includes the very best technologists in a specific space. They need to deliver a minimally viable (and yet awesome) product in 9 or 15 months and a more complete and complex product in 18 to 24 months. And then iterate on the more advanced features with customer feedback based on real actual product use cases.

VentureBeat: Would you fund an inexperienced 20-something with an idea to start an enterprise company?
Chandna: Typically not, but there are always exceptions. Prior experience is usually a prerequisite for understanding the customer pain points. But come and prove me wrong — I love learning from entrepreneurs I meet.

VentureBeat: Do you typically call their customers in the due diligence process?
Chandna: Yes, with the company’s approval of course. We often go beyond that and introduce them to other potential customers and technologists to see their reactions. Gaining enterprise customers can be difficult. However the best customer organizations are always looking for new innovative solutions that can deliver superior business value.

Jason Pressman: The thought partner

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Firm: Shasta Ventures
Nerd Cred:  He collects novelty vehicles, and is a trivia whizz.
Hottest investments: Zuora, TypeSafe, NodeFly 

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VentureBeat: Has the renewed interest in enterprise software made your job any easier?
Jason Pressman: The only thing that seems a bit easier is recruiting engineers. We’ve started to see a lot of talented engineers leaving consumer and seeking enterprise businesses as some seem to believe there is more substance in the enterprise. Going forward, I think there is some risk that many investors who just recently said the enterprise is a dead-start [will] make it more challenging to compete.

VentureBeat: You’ve done a bit of both. How is investing in enterprise startups fundamentally different from consumer?
Pressman: It generally takes more capital to bring an initial product to market for enterprise companies. There are generally tried and true strategies for going to market, like freemium for simpler products with lower price points versus tight sales processes for more complex products with higher price points. Entrepreneurs are generally more experienced than in the consumer space.

VentureBeat: Do you call a company’s customers during the due diligence process?
Pressman: Yes, when we engage in diligence we always call customers and view this as a critical path to understand how a company meets its customers’ needs. Great companies in the consumer and enterprise space are maniacally focused on their customers!

VentureBeat: What’s the most pervasive myth that you can call bullshit on?
Pressman: I have never seen an investor pressure a company to pivot from consumer to enterprise and would strongly discourage companies from trying!

Bob Goodman: The true believer

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Firm: Bessemer Venture Partners
Nerd cred: He’s a keen contributor to the company’s cloud computing blog. He’s also run two successful telecommunications companies, Celcore and Boatphone. 
Hottest Investments: BroadSoft, Millenial Media, Flarion Technologies.

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VentureBeat: Do you have a thesis that you’re working with?
Goodman: We have really begun to focus on our thesis in the past few years: it’s the virtualization of everything. It’s the ability to manage applications across the cloud and the private data center, and move between them. We began investing in technology to keep enterprise functionality up and running in the cloud — these companies are smoking now.

VentureBeat: Can you call bullshit on a common myth about enterprise investing?
Goodman: I can debunk the myth that it’s become popular on the venture side. The public was excited about Zynga, Groupon, and Facebook and are beginning to shift their focus to more enterprise public companies. On the venture side, it hasn’t caught up yet. I can call bullshit on that.

VentureBeat: How about the “Dropbox effect,” the idea that companies can devote their energies to the product, employees will love it, and it will magically trickle into the enterprise?
Goodman: Dropbox is fundamentally a prosumer or consumer solution. I think the idea of people putting their files and content in the cloud for dissemination for sharing and storage is strong. But companies need enterprise-class solutions. You have to be careful about consumer companies that think they are going to win in the enterprise.

VentureBeat: What major shifts in the industry will impact the current generation of enterprise startups?
Goodman: There are new ways of selling. You can sell freemium solutions to the enterprise and it will occasionally work. Get low-level employees who can spend $5,000 on their credit card to buy the product. Later on, you can make the enterprise sale. It’s a little something like LinkedIn — they would go to the CIO or CFO and say, “Do you realize that 300 people have signed up for LinkedIn subscriptions?” That gets them inside the company and allows entrepreneurs to distribute their product without coming up against the firewall. People can try it in a division before you make a larger sale.

Kevin Spain: Mr. B2B

Firm: Emergence Capital Partners

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Nerd Cred: Spain’s first computer was a Commodore 64, which his parents gave him when he was 10 years old. He convinced them to give him a modem, and he began dialing into bulletin boards and trading software programs. In his own words: “I was a geeky bulletin board dial-up kid.”
Hottest investments: Doximity, VigLink, Veeva Systems.

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VentureBeat: As a long-time business to business (B2B) investor, what are your thoughts on the enterprise software renaissance?
Kevin Spain: We have been investing in SaaS and cloud before the terms even existed. The entire thesis of the firm is that the Internet would create a renaissance for business technology. I think this creates an opportunity for us because we were doing it before anyone else. One thing that has been made easier is this increased attention has brought more entrepreneurs to the table thinking of how to transform technology in the enterprise.

VentureBeat: Have you found that the competition is heating up? Are there new faces at the table that are angling to fund the hottest B2B companies?
Spain: No question. Most venture firms are not focused though — they have their fingers in a little of everything. Undeniably we are seeing more interest from many traditional VCs. In reality what a lot of these guys will find is that enterprise is different now than the last time they were enterprise investors. They were investing in enterprise when companies like SAP had the business model in proprietary software. There is a pretty steep learning curve when it comes to how B2B applications should be sold today.

VentureBeat: What qualities are you looking for in a founder? Would you fund an inexperienced team? 
Spain: I think it depends on the nature of the application. If you are building something for a vertical, it really helps to have domain expertise. You will need to have spent some time in the industry to understand the nuances. However, in many cases it’s beneficial not to have grey hair. Box is a great example of this — Aaron Levie (the company’s enigmatic 20-something CEO) runs product; Dave Levin, a long-time Salesforce guy, runs the go-to-market strategy. From a product perspective, being on the younger side brings a drive and fresh perspective.

VentureBeat: Do you advise your portfolio companies to market their software to CIOs or CMOs?
Spain: It’s a mix. There has been a lot made of the thesis that CMOs will be the primary consumer of IT (editors’ note: Gartner research predicted that CMOs will exert greater control over the “big data” budget by 2017). Certainly, CEOs are demanding that their top marketers take a more quantitative approach to what they do. It requires more technology to do that well. That’s where many of our portfolio companies come in.

Cindy Padnos: Queen B2B

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Firm: Illuminate Ventures
Nerd cred: After founding Illuminate, she spent six months combing through academic papers. She was able to prove that women entrepreneurs fail less frequently.
Hottest Investments: Hoopla, BrightEdge, Influitive, CalmSea. 

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VentureBeat: In your experience, how is enterprise investing fundamentally different from consumer?
Cindy Padnos: B2B is less of a hits game than consumer: It’s not all or nothing. Typically, multiple enterprise companies can succeed in a single category. The success metrics are entirely different — recurring revenue growth, customer retention, and unit economics are some of the factors that matter most. For investors, it’s a confidence boost that the core technology often has an intrinsic value that can generate returns even if a market or category is slow to take off. B2B has more realistic investment terms and fewer venture investors pursuing the same deals.

VentureBeat: Can you debunk a commonly-held myth about enterprise investing?
Padnos: One myth is that it requires a great deal of capital to launch an enterprise startup. That’s simply not true. We have seen many examples of companies that bootstrapped to their first product and went on to gain dozens of paid customers, having raised less than a million dollars to do so.

VentureBeat: Do you have a thesis that you’re working with?
Padnos: Our fundamental belief is that B2B cloud-based companies offer lower risk and higher return than virtually any other category of early-stage venture tech investing. They require less capital early on, fail less frequently, and can build sustainable differentiation through their intellectual property.

VentureBeat: Do you believe that the enterprise is sexy again?
Padnos: For some of us in the B2B world, it has always been sexy! My measure of sexy from an investment perspective is how well a sector performs. All the data we’ve seen shows that enterprise investments have been outperforming consumer both in terms of mergers and acquisitions and post-IPO performance for several years. We don’t see that changing anytime soon.

Pete Sonsini: The rising star

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Firm: New Enterprise Associates
Nerd Cred: Sonsini is the son of Larry Sonsini, chairman of the prestigious Silicon Valley law firm, Wilson Sonsini Goodrich & Rosati, and grew up being exposed to tech. He told the Wall Street Journal in a recent profile that early in his career he knew he’d make “a lot of money in virtualization” software — which he did, through a stint at VMWare, where he led strategic partnerships for four years.
Hottest Investments:  Embrane, Xensource (acquired by Citrix Systems), Teracent (acquired by Google).

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VentureBeat: Do you have a thesis that you’re working with?
Sonsini: My thesis can be summed up in two words: lazy developers. To be more specific, there is a great opportunity for new cloud services in that, currently, developers are assembling apps using piece parts in the cloud as opposed to coding everything from scratch.

VentureBeat: Can you dispel a commonly-held myth that you hear from entrepreneurs and other investors?
Sonsini: One myth is that “you don’t need to raise significant venture capital to scale a business that targets the enterprise.” It may be easy to launch a product; however, it takes a lot of capital, experience, and networking to build teams and be competitive with contenders. [Editor’s note: This is an opposing view to Illuminate Ventures’ Padnos, which demonstrates the range of opinions and investment styles in Silicon Valley.]

VentureBeat: Would you encourage anyone with a good idea to start an enterprise company?
Sonsini: I would encourage the 20-somethings to go ahead, but I would explain to them that they need people with experience and expertise to really succeed. VMware was started by inexperienced young entrepreneurs and academics, but they had Diane Greene to guide them. It’s vital to have some level of business know-how around the table in order to hone the market.

VentureBeat: Should enterprise startups market to business users or IT?
Sonsini: It’s important to have a story for both CIOs and business and marketing users. Right now there is collaboration between marketing and technology that’s closer than ever; both impact the buying decisions. Marketers have realized they need to understand data sources in order to efficiently make use of the outputs. It’s like flying a plane: To know how to do it without crashing and burning, you need to understand the physics of flight and how the plane works.

Top image courtesy of Jim Goetz: DJ EVENTS’/ FLICKR