Andreessen Horowitz Still Sees Big Money In Enterprise Software

By Robert Hof for Forbes

With information technology budgets in falling, it looks for all the world like tech’s mainstay markets — computing hardware, software and networking gear — are irrevocably headed for irrelevance.

Even Martin Casado, who cofounded the networking software startup Nicira Networks in 2009 before selling to VMware VMW +0.08% in 2012 for $1.3 billion and becoming general manager of its networking and security portfolio, was “caught in this malaise for awhile,” he said last week at the OpenStack Days conference today in Mountain View, Calif. But not anymore, Casado, now a general partner at the venture capital firm Andreessen Horowitz, told the audience of software engineers, executives and tech infrastructure startups. Instead, he declared, “We’re at the cusp of one of the biggest renaissances in infrastructure.”

For one thing, he thinks the $220 billion market for public cloud services and software-as-a-service has lots of opportunity to take share from incumbents from Hewlett-Packard HPQ -0.14% Enterprise and Cisco Systems CSCO -0.29% toOracle ORCL -0.46% in the much larger $4 billion IT market.

Indeed, Casado thinks startups now have an advantage over the big guys. For one, the software-defined movement that Casado pioneered at Nicira means research and development costs a lot less.

What’s more, software itself can now be delivered as a service, avoiding the need to sell software packages and licenses to companies for them to install on computers on their own premises. That procurement process traditionally has taken much longer. Software delivered as a service has enabled the creation of a wide range of companies, from Amazon Web Services to GitHub to Databricks.

Third, software developers and IT folks inside organizations are increasingly turning to open-source software because it gives them more flexibility to go with a wider variety of supplier. That has considerably opened up the opportunity for the many startups built on open source to reach IT departments that once would never have considered startups, blunting the customer relationship edge of incumbents such as Oracle.

The result of all these changes is a “Cambrian explosion in developer-centric startups.” Even better for investors, at least, some viable open source business models are emerging beyond the one oft-cited example, Red Hat RHT-US +% Inc. Besides Red Hat’s selling support and maintenance, there’s also the open-source-as-a-service model, such as GitHub’s software development as a service and Databricks’ data analysis as a service.

Although there have been few initial public offerings amid continuing uncertainty about the sustainability of open source business models, investors such as Andreessen Horowitz are still interested in the market. “I don’t know what the next set of companies are,” he said. “But come talk to us.”

First appeared at Forbes