$3 billion is the amount of venture capital (VC) funding that has flowed into information management, access, and analysis software vendors since the beginning of the slow economic recovery in 2009 and through August of 2013. Does this level of VC funding denote irrational exuberance or a wave of unprecedented innovation?
The answer, of course, is that these don't have to be mutually exclusive outcomes. On the one hand most of the information management, access, and analysis software vendors that have received VC funding over this time period have positioned their software to address requirements of Big Data use cases.
Big Data is a multi-billion dollar opportunity for software but also hardware infrastructure and services vendors. IDC estimates the Big Data technology and services market to be a $11 billion dollar market. IDC also tracks the much broader Business Analytics market that is expected to reach $104 billion by the end of 2013.
Our research on the VC funding for these software vendors identified 121 companies that received funding through 290 funding transactions or rounds from January 2009 through August 2013. Note, as shown in the IDC Infographic below, 5% of the total funding amount collected was for consulting companies. In other words, the vast majority of the researched deals were about software vendors but the fact that some consulting firms have received funding is interesting in itself as this phenomenon happens rarely due to the less scalable nature of these labor intensive companies. The VC funds invested in the eight months of 2013 were already greater than the amount invested over the full year 2012. 85% of vendors receiving funding have been founded within 3 years, as shown in the Infographic below, and deal announcements since August suggest that the pace of investment is not slowing down.
So, yes, there is irrational exuberance in this market. Many of the vendors are addressing the same customer issues, some using very similar technology. A few of the vendors will reach the IPO stage as 3 have so far, more will be acquired by larger IT vendors as 17 have been to date, a lesser amount will be privately held niche vendors for a time before a small percentage of these vendors transition into the broader analytics market, but the majority will run out of cash and go out of business. As the market rises and eventually growth plateaus or contracts, there will be significant progress made in furthering Big Data technologies.
The high level of funding is spurring a strong wave of innovation at these startups. This innovation is lowering the costs to manage and analyze existing data sets and enabling the use of new information management and analysis techniques and methods that were not feasible (at an acceptable cost to most organizations) just a few years ago. These startups have also forced large, established IT vendors to introduce new products and improve their existing products to address the new competition.
The effect has been felt on the full software stack from the information management layer to the BI and analytics, and packaged analytic applications layers. In fact, as shown on the Infographic there has been a shift in VC funding from the information management layer to the top two layers of the software stack. More details on the funding patterns are shown in IDC's report Venture Capital Funding for Big Data and Analytics Software (IDC #243481, September 2013; paywall), which shows the distribution of funding across vendors focused on Hadoop ecosystem, text analytics, predictive analytics, rich media analytics, non-relational databases, and analytic applications.
The short term benefits of this VC funding and the resultant innovation and job creation is felt across U.S. (92% of the funded companies analyzed are headquartered in the U.S.). Not surprisingly, California leads the way with 60% of the funding dollars, followed by Massachusetts, New York, Washington, and Texas.
It's also interesting to point out the number of VC firms that have placed their bets on the Big Data and Analytics software market. There is a large number of VC firms and angel investors participating in the market, with Andreessen Horowitz, Greylock Partners, and Sequoia Capital leading the way in the number of investment rounds. Greylock Partners have invested the most in this market, but Andreessen Horowitz and Sequoia Capital have funded the most vendors (7 each). In fact, twelve VC firms have funded five or more vendors suggesting a hedging strategy based on a portfolio of investments. I have not found reliable research on the success rate of VC funding. Some sources suggest the rate of a profitable exit is one in three, but if anyone reading this blog has better insight on this please share the information in the comments of this blog post.
Regardless of whether we assess the current level of VC funding in this market as indicative of irrational exuberance or a sign of broad-based innovation, the market is experiencing a typical rush to capitalize on an opportunity that may come only once in a multi-decade market cycle. As a key pillar of IDC's 3rd Platform, Big Data & Analytics technology is playing a key role in transforming industries, careers, and interactions among people and things, so at least it's not generating irrational innovation.