March 07, 2004   |   Sarah Lacy [The Business Journals] — This subset of enterprise software had lost its buzz, but now VCs like Tim Connors see huge opportunities. While the earlier generation of companies just delivered data, dozens of startups are now telling executives what the data means.

That's why Mr. Connors, general partner at U.S. Venture Partners, invested in eight new companies he considers the next generation of business analytics.

The sector comprises 80 percent of USVP's software deals at a time when many firms have flooded the market with anti-spam and security offerings.

Older business analytics companies gathered data now available through enterprise software databases, presenting it to executives to develop a business strategy. The newer companies that Mr. Connors and other Silicon Valley venture capitalists are excited about take the process a step further. The companies crunch the data using complex algorithms and draw conclusions for the CEO.

"Traditional analytics vendors put out a report, and getting a report is great, but you have to know what you're looking for," Mr. Connors says. "What we're funding is different. This is not just a report to give executives to make decisions; it delivers the decisions just by dropping in the software."

As one of USVP's portfolio company CEOs explains it to her mom: It's like the evolution of the map.

"You had street addresses and then maps and now you have systems in the car that tell you how to get places and avoid problems," says Daphne Carmeli, CEO of Metreo Inc. "The next level may be giving recommendations based on where you've been and what you like. Real analytics isn't about data; it's about predicting behavior."

The most promising companies, including several that are doubling revenue year-over-year, are the ones targeting a specific vertical or division within big companies. It may be too niche-focused for many incumbents and too early for some analysts to track, but it's a rare wide-open opportunity in the crowded world of enterprise software, VCs like Mr. Connors say.

Estimated to be a $9 billion industry in 2004, business analytics is not new, but it hasn't yet fulfilled the original promise of using data to cut costs and grow revenues, says Laura Preslan, analyst at AMR Research. Although the data is good, without predictive indicators, 85 percent of customer analytics do not deliver a meaningful return on investment, according to AMR.

That's exactly what these start-ups are seeking to do. Examples include:

• Valley-based Metreo and Vendavo Inc. are both in the price management space. Each company's technology analyzes buying patterns of customers, giving companies insight into how much they should charge a given customer based on a variety of factors and whether salespeople should walk away from a given deal. Vendavo has raised $44 million from DCM-Doll Capital Management, Sigma Partners and InterWest Partners and others and sold twice as much software in 2003 as it expected. Metreo has raised $40 million from USVP, Redpoint Ventures and Sequoia Capital and saw revenue growth of 400 percent each of the last two years.
  
  
• San Mateo-based Biz360 tracks how often a company is being cited in the press and analyst reports and how it is being cited versus competitors. It boils down the data to give the company an idea of how it's perceived in the market and how well its public relations department is doing. The company has received $20 million in venture capital from B A Venture Partners, Foundation Capital, Granite Ventures and has grown revenue 200 percent last year, adding 30 new customers.
  
  
• PerformanceRetail Inc. targets the highly-distributed convenience-store industry, largely controlled by large oil and chemical companies. Its product tracks inventory at the stores and compiles reports for buyers on what's selling. It also does pro-active alerts for store managers, telling them, for instance, if a certain cashier's drawer is short $40 every day. Funded by Granite Global Ventures, USVP and Venrock Associates, it has raised $40 million. Based in Austin, Texas, it's close to being profitable, says Katy Roth, PerformanceRetail spokeswoman.
  
  
• Object Reservoir Inc. targets the oil industry, helping companies make $5 million to $20 million dollar decisions on where to drill, based on the makeup of the reservoir and seismic data. Funded by USVP and others, it's raised $14 million, and has been around for more than eight years. Mr. Connors expects it to be profitable soon.

Many of these companies are gaining traction with increasing numbers of deals from $500,000 to several million dollars. For Mr. Connors, the furthest along are Object Reservoir and Metreo.

"In 2002 it was a pretty evangelistic sale," he says of Metreo. "For the latter half of 2003 and 2004, quite a few companies have price management built into their budgets."

Biz360, too, is spending less time having to evangelize its technology.

"The last three years have been all around investing in technology to reduce costs," says Bud Michael, president and CEO of Biz360. "Business analytics is terribly relevant right now because these corporations have to find a way to continue to grow and grow profitably. The only way is by fine-tuning and understanding your business."

The down economy has actually been better for these businesses, Metreo's Ms. Carmeli says. Before, CEOs weren't worried about things like fine-tuning pricing, but rather how to get product out the door fast enough to meet demand. In a market collapse, the first priority is cutting costs. The second is boosting the top line with that trimmed staff, she says.

Biz360 investor BA Ventures hasn't done as many of these deals as USVP has, but has taken a meeting with every one of them that's come calling, says Sharon Weinbar, director. Those they haven't funded have had too vague of a tool or too steep of a price, she says. The successful companies are staking out a part of the business and attacking it with some domain expertise.

Of course, companies with a more limited scope run the risk of being too narrow to build a big standalone company. But even those could be acquisition targets. If the market continues to grow as venture investors and some analysts expect, several of these startups will be ripe for consolidation once the markets reach the $300 million or so size.

© 2004 The Business Journals