Not surprisingly, venture capitalists are sticking with a proven formula and focusing most of their attention on software, appliances and platforms that address either data management or the datacenter itself.
Part of the reason those areas are proving so hot is that enterprise software companies like SAP, Oracle, Microsoft and IBM have spent more than two decades giving companies the proprietary software they need to collect and manage their data. And all that data has to be stored and managed somewhere.
Meanwhile, virtualization software is reducing the size and energy demands of corporate datacenters while software-as-a-service (SaaS) (define) and service-oriented architectures (SOA) (define) have emerged as the data-management strategies of the future.
As a result, companies providing the software that give companies flexibility in their IT environments and deliver a nearly immediate return on investment are the ones who are getting the lion's share of VC funding today.
"Large enterprises are looking at all this data and viewing it as a strategic differentiator," Mhatre said. "They need more leading-edge solutions. Because of that, they're more open to doing business with startups that have something new to offer to manage and deploy in their datacenters.
Mhatre said the macroeconomic climate for venture capital is directly impacted by the innovation taking place within the software startup community. Large enterprise customers, he said, also aren't afraid to invest in startups with fresh, well-thought-out ideas.
"If you have the newest technology that allow customers to be more efficient, you'll get investment from the enterprise customers," he said. "More investment breeds more innovation. Innovation breeds more investment from the venture capitalists."
As a result, Mhatre and Sherman both said VMware serves as an indicator of venture investments to come, and as a warning to established software companies: Despite their size and clout, if they don't have something new to offer, you can bet there are startups out there that will.
"VMware pioneered the notion of using software to virtualize a server," Mhatre said. "None of the large technology conglomerates like HP or IBM or Oracle or Sun really have a focused initiative around commercializing virtualization. And you have to ask yourself, 'Why?'"
Established software vendors "need to figure out what's going to give customers that kind of step-function change in their environments and deliver them in a way that's disruptive rather than just incremental," he added.
In the meantime, the third-quarter MoneyTree Report will be released Oct. 22, and there's every reason to believe software will maintain its top ranking.
"Software is a very, very hot space right now," Laura McCaughey, managing director of AMR Research's investment research strategies group, said in an interview with InternetNews.com. "As people try to take their businesses to the next level, they've found that implementing terrific software and processes has a direct correlation to improved profitability."
McCaughey said venture capitalists closed 247 deals with software firms last quarter, the most since 2001.
Of course, today's more restrained investing environment means that few are pegging software investments as a get-rich-quick scheme, compared to the dot-com heyday. Chances are, the next VMware or BladeLogic won't realize an IPO or acquisition until sometime in 2010 at the earliest.
"You have to have a vision," Mhatre said. "The idea is to find a company that can demonstrate where it will be in a three- to five-year timeframe. If they can execute and be dominant, like a VMware, they'll create a huge amount of shareholders and stakeholder value."
This article was first published on InternetNews.com.