Hot VC areas

Michael Alan Hamlin

Posted on March 19, 2008

Entrepreneurs know best…

If you are interested in becoming an entrepreneur in 2008, consider opportunities in these areas: Software as a Service, Next Generation Mobile applications, online advertising, social networking, and online video tools and enterprise video conferencing. That list of hot VC areas was compiled from a variety of sources – including Goldman Sachs (Which announced last night that the investment bank has also been heavily stung by the subprime mess.) and BusinessWeek – and presented last week by Paco Sandejas, a well-known venture capitalist who is managing director of Narra Ventures.

Sandejas was speaking at the Innovation Forum sponsored by the Brain Gain Network (BGN) which he founded, Ayala Technology Business Incubator (Ayala TBI), and Philippine Emerging Startups Open (PESO). BGN is a website forum and resource for Filipinos and others involved in the Philippines with technology backgrounds, jobs, and interests. The idea behind the forum is to get members to contribute ideas, opportunities, and expertise that can help foster technology-focused entrepreneurship in the Philippines.

Ayala TBI is a network of existing and under development business incubators, including a location at TechnoHub, a joint venture technology complex developed with the University of the Philippines in Libis, and UPV Cebu, an undertaking with the University of the Philippines Visayas. PESO organizes an annual business plan competition modeled after a respected MIT entrepreneurship competition.

Choosing technology entrepreneurship over other opportunities increases the likelihood of venture capital funding, according to Dow Jones VentureSource statistics presented by Sandejas. From 2004-2007, information technology dominated VC deals, typically taking approximately 60% or more of total venture capital invested. And deals are up: Sandejas told those attending the forum that 2007 was a banner year with 74 IPOs generating $52.9 billion, and $29.9 billion in new VC investment went to 2,648 other companies. Energy, health care, and Web 2.0 companies were the principal targets. First-round investments averaged $7 million.

Most of those deals, of course, were made in Silicon Valley and other U.S. technology hubs, and Sandejas said it would be easy for him to just sit around San Jose and wait for deals to come his way. But that wouldn’t help the Philippines much, which trails far behind popular Asian destinations for VC investment. Last year, U.S. VCs funneled around $1.4 billion into China and $1.1 billion into India.

There were just a handful of Philippine deals, but Sandejas thinks that could change, telling participants that money is available to startups and other companies that can innovate. FORTUNE senior writer Anne Fisher, writing on the world’s most admired companies recently, sought to define innovation from what she observed among these respected companies. She said, “Innovation is the creation of something new that makes money.” Otherwise, something new is merely a useless invention.

Sandejas, who has developed innovative video technologies himself that are found in products developed by Sony and Cypress Semiconductor, expects to find innovative companies in four priority areas. The first is thin clients, or networked computers that rely primarily on a server – or the Internet. He believes that small, cute, and inexpensive thin clients can increase PC penetration in the Philippines.

Companies that develop Software as a Service (SaaS) applications are another target. Salesforce.com made SaaS, also referred to as software on demand, a reality, and a popular reality at that. Because corporations and consumers alike are increasingly reluctant to purchase expensive software licenses, Sandejas believes that a significant shift to less expensive SaaS applications delivered over the Internet is inevitable. Of course, higher bandwidths will have to accompany their development.

The two other areas Sandejas is enthusiastic about are embedded software development and optical and wireless network development. Embedded software can provide an important niche for Philippine developers, Sandejas said, because “China doesn’t know the value of embedded software yet.” A good number of consumer products companies maintain embedded software development facilities in the Philippines, and NVC was an early investor in the embedded software division (formerly a subsidiary known as Eazix) of Integrated Microelectronics, Inc.

Optical and wireless networks are attractive according to Sandejas because the dominant technology today, DSL, is slow and availability is spotty. At the same time, Filipinos are craving for higher bandwidth because the Internet is fast becoming the primary source for music, video, and social networking. As better, faster broadband becomes more widely available, he believes costs will decrease significantly, making it even more attractive and the investment a volume play.

But Sandejas cautions that he could be wrong. “Don’t believe us,” he said. “Entrepreneurs know more than we do.” And that’s what’s hot ultimately.

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