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Software's Eve of Destruction

Updated from 10:24 a.m. EST

Remember creative destruction? The brainchild of economist Joseph Schumpeter was an unavoidable buzz word in the bubble years. But a few years later came the actual destruction -- of wealth, of companies, and of aging or half-baked business models -- and the term fell out of favor.

A Factiva search of the phrase found it in 433 news stories in 1998, peaking at 724 in 2000 before dropping back to 494 mentions in 2003. This is odd because 2003 was exactly the point at which Schumpeter's idea -- that innovation spurs long-term growth by tearing down the established order -- was especially relevant.

So, a shrewd investor would have spent his time in 2003 searching for new innovations that would create the next wave of disruptive technologies. One venture capital firm -- Burlingame, Calif.-based Emergence Capital Partners -- took this contrarian approach, and the partners set up shop in the darkest hours of a bear market. They decided to focus on an area -- services -- that other venture firms had long shunned.

VCs generally favor companies that can grow quickly without a lot of overhead. Traditionally, a service company like a call center or a business-outsourcing outfit would involve a lot of capital to take care of the necessary labor. Much-better returns came from investing in a couple of entrepreneurs who created a new software product that could be sold off after a few years.

Salesforce.com (CRM - Get Report) challenged that thinking by presenting software not as a product but as a service. Its trick was, as the company is fond of saying, to make customer-relationship management software as easy and accessible as buying a book on Amazon.com (AMZN - Get Report).

Anyone who has ever had to enter or retrieve data from a proprietary CRM software program -- or worse, who's had to install and maintain it -- can imagine the need for easier software.

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