Investors rekindled their love for consumer Internet companies this year, including those with online search, entertainment, and social media offerings, causing some to begin worrying about the dreaded "B" words. You know, words like "boom," "bubble," and perhaps the scariest of all ... "bust."
From the initial public offering (IPO) of professional networking site LinkedIn in May to this month's IPO for daily-deals site Groupon, investors have poured more than $5 billion into consumer-based offerings globally so far in 2011. And there are more attention-grabbing consumer Internet IPOs waiting in the wings, like Zynga. (Who knew we needed Farmville?)
But, according to VentureSource, venture-backed Internet firms attracted just 25 percent of funding in the third quarter of 2011. While still impressive, that's down from 31 percent in the third quarter of last year. And, as the fervor subsides a little, it seems that investors are beginning to show a little love to business-to-business Internet companies, also known as "B2B" firms. A recent Wall Street Journal article detailed some of the bigger investments garnered by online business startups, including a $85 million cash infusion in Workday Inc., which builds business service solutions for HR, payroll, and financial management and $50 million in Marketo Inc., a company that provides "revenue-focused marketing automation and sales effectiveness solutions."
That's good news in my eyes. In the Midwest, we need more investors to put their money in companies that offer B2B solutions to identified problems. Our tech companies aren't the "build-it-and-they-will-come" types, like Google, LinkedIn. Most of our tech companies will never be household names. They find needs -- often business needs -- and fill them. Many Midwest-based tech companies create behind-the-scenes technology that helps service and retail companies, as well as manufacturers -- a historically large sector in the Midwest -- operate more efficiently and profitably.
Still, these B2B IT companies can become very profitable and go on to generate significant returns for investors as well as wealth and jobs for the communities they're in. Take Hyland Software, for example. The Westlake, Ohio, company makes an enterprise content management (ECM) system called OnBase. Hyland's technology automates business processes that depend on documents, content and people. While its technology is pretty much the same as its competitors', Hyland delivers it in a novel way.
"We differentiate with a product that's designed to flexibly grow with the organization, using it to yield maximum value," said Kaitlin McCready, a public relations specialist for the company. Some Hyland customers pay more for their software-as-a-service (SaaS). But that software is "point-and-click configurable up front" and deployed department-by-department, which usually make it less expensive for customers, over time.
Hyland goes shoulder-to-shoulder with giants like IBM and Microsoft in its industry. And the company's technology and industry leadership translate into economic growth in Northeast Ohio. With nearly $200 million in revenue last year, Hyland employs 800 people in Westlake,
JumpStart Inc., the venture and entrepreneurial development organization for which I work, invested $350,000 in another growing business-to-business technology company in 2008. OnShift makes software for companies with shift-based workforces, enabling them to save money and time by optimally scheduling their staffs. Their initial target customers are long-term care facilities and hospitals. Last year, OnShift raised another $2.3 million from venture capital funds -- including JumpStart -- led by Draper Triangle Ventures in Pittsburgh. "The company has a unique offering that is having a compelling impact on customers," said Michael Stubler, managing director and co-founder of Draper Triangle Ventures.
Then there's Electron Database Company of Independence, Ohio, another company JumpStart is invested in. The company is not easy for me to explain in a sound bite, but it is creating a transformative database software application to dramatically improve the performance of enterprise applications, data warehouses, and cloud computing infrastructures. If its technology takes off, it will enable the rapid growth of the cloud computing market, which is experiencing an explosion in the volume of data that needs to be effectively managed.
And while the names "Hyland," "OnShift" and "Electron Database" probably won't roll off the tongues of most consumers any time soon, these B2B technology companies each have the potential to provide significant return on investment, as well as a significant impact on their industry and local economy. I hope -- as should most of the Midwest -- that the trend of investors recognizing the potential of B2B software solutions continues.