'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), Microsoft ( MSFT) and SAP ( SAP).

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 Box.net, 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."

Venture investors, in turn, are jockeying aggressively to fund enterprise-focused companies.

New York-based data analytics company Opera Solutions saw so much interest in its company that it was able to raise $84 million in its first funding round earlier this month, up from the $30 million to $40 million it had originally sought, according to CEO Arnab Gupta. The round was the largest ever for a private company in the big data space, Gupta said.

And Bromium, an enterprise-focused security company, drew attention from 9 different venture firms before deciding on three investors, including Andreessen Horowitz, for its $9.2 million Series A round in June, said CEO Gaurav Banga.

"In the last few months, we've shifted our investment focus to 80% enterprise startups, when before it was about half excluding angel investments ," said Frank Artale, a partner at Ignition Partners, which has invested in Bromium.

With enterprise startups attracting significant attention from venture firms, it's only natural that established tech players may too be taking a look for potential acquisitions, particularly as they cope with building cloud-related offerings within their own companies.

In April, VMware ( VMW) acquired cloud-based online presentation application Sliderocket as well as online back-up provider Mozy.

Cisco ( CSCO) also purchased cloud-based software company newScale in March.

There's also hope that these start-ups will follow in the footsteps of proven enterprise-focused businesses like Salesforce ( CRM) and Concur Technologies ( CNQR) and pursue an IPO.

But while enterprise start-ups may never command the same hype as their consumer counterparts, there's still plenty of room for growth, said Jason Green, general partner at Emergence Capital, who has invested in Box.net and SuccessFactors ( SFSF), a cloud-based software company.

"We think the space is a lot less risky and not as much of a 'winner-take-all market' as consumer," he said. "There are a trillion dollars a year spent on enterprise IT and many, many winners."

-- Written by Olivia Oran in New York.

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