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'Unsexy' Enterprise Start-ups Attract Big Dollars

NEW YORK ( TheStreet) -- While buzzy consumer-focused companies like Facebook and Zynga may be grabbing headlines with their massive funding rounds and multi-billion dollar valuations, the start-ups that power these fast growing businesses have recently been making inroads with investors, too.

Start-ups providing storage, analytics and networking capabilities to companies are attracting investors who are banking on these players grabbing market share from incumbents like IBM (IBM - Get Report), Microsoft (MSFT - Get Report) and SAP (SAP - Get Report).

In the first half of 2011, these companies -- known as enterprise start-ups -- raised more than $2 billion in 251 deals, a 17% increase in capital invested and an 8% uptick in deals over the same period last year, according to Dow Jones VentureSource.

"Enterprise start-ups don't have the hallucinogenic qualities that a Facebook or a Twitter have, but there are companies getting really good valuations who are taking commanding positions in their spaces," said Larry Bohn, a managing director with General Catalyst Partners.

Although many enterprise-focused companies in the past have struggled to woo investors who instead flocked to Web start-ups in search of the next Amazon (AMZN) or eBay (EBAY), several macro factors have altered this trend.

The first is the so-called "consumerization of the enterprise," in which business customers are demanding technologies in the workplace that look and feel more like the consumer products they might use at home.

This shift is particularly prevalent in the mobile space where companies are increasingly letting employees bring their personal smartphones and tablets into the workplace but must look for new ways to support these devices.

A move towards cloud-based computing is also transforming the traditional enterprise space. Rather than accessing data via on-site servers, cloud computing allows users to pull up applications through the Web. This approach is less expensive to implement and can lead to faster product development and flexibility, according to cloud proponents.

These trends are helping to pique interest in enterprise-startups, whose technologies are largely considered more innovative than those of entrenched tech players.

"[Historical tech giants] are all at a stage where they're mining profit from their old customers but aren't producing new innovations that are taking their customers to the future," said Aaron Levie, the CEO of Palo Alto, Calif.-based storage start-up, which has raised over $90 million in venture funding and reportedly turned down a $550 million acquisition offer this month. "Start-ups can take advantage of that."
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