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After three years of reluctance to invest in new technology companies, venture capitalists have begun to emerge from their Sand Hill Road bunkers—and enterprise software is what they’ve set their sights on.

Companies offering customer-management software, systems-integration services or consulting are raking in one of every four dollars of new venture capital, according to Growthink Research Inc., a Venice, Calif.-based venture-capital consulting and market-research firm.

In 2003, startup software companies garnered close to $6 billion, or about 25% of all venture-capital dollars, and will likely meet or beat that dollar figure in 2004. Venture-capital firms invested about $24 billion last year overall with an increase between 3% and 5% in 2004. Still, that pales in comparison to 2000, when total venture-capital investments surged to a record high of more than $100 billion, more than four times what was invested this past year.

After a seven-year run as the top investment-capital segment, software relinquished that position last year to biotechnology investments which checked in with $6.3 billion in funding. Among the other favored types of software: Applications that provide security to corporate networks or help manage technology operations.

“We’re always looking for something completely new,” says Mark Sherman, general partner at Battery Ventures in San Mateo, Calif. “When we talk to CIOs, they almost universally say that security is at the top of their radar. But data analytics is another area we’re seeing a lot of interest.”

Firms that develop that kind of software, such as Addamark Technologies of San Francisco, promise to log and analyze several trillion bytes of data in seconds or efficiently sort through and index all the data in a company’s customer-relationship-management system.

Addamark has developed a new data-management and -analysis platform specifically for managing large volumes of electronic event-log data. It received $9 million in funding in 2003, up from $7 million in 2002, from Battery Ventures, Sierra Ventures and Canaan Partners.

Addamark’s software stores log data from a Web server, router or a firewall in compressed format that can easily be queried on clusters of desktop computers. The software gives systems managers the ability to find out inexpensively who has been accessing their databases and how they’ve done it.

Battery Ventures also has made multimillion-dollar investments in Bedford, Mass.-based BladeLogic Inc., a developer of data-center-automation software, and in San Mateo, Calif.-based DecisionPoint Applications, a maker of financial-performance-management software. DecisionPoint’s analytical metrics and utilities extract data from customers’ data warehouses.

“The economic climate is improving and we plan to make about the same amount of investments in software this year as we did last year,” Sherman says. “We’re looking at tens of millions of dollars for this year.”

But Battery Ventures’ approach to investment—along with that of the entire venture industry—has changed over the last several years. Venture capitalists say the double whammy of the dot-com implosion and the terrorist attacks of 9/11 necessitated a complete overhaul in how they evaluate prospective companies for investment. The days of throwing millions at unproven wunderkinds with an interesting idea but no concept of how to create a viable business plan appear to be over.

“We tend to focus on backing entrepreneurs with vision, passion, and, almost as important, a proven track record,” says Ravi Mhatre, general partner at Lightspeed Venture Partners in Menlo Park, Calif. “The entire VC community got away from those principles in 1999 and 2000.”

For software companies desperate for financing, it was a dark period. The good news? There’s pent-up demand for new software and services because technology budgets have been cut dramatically during the past three years.

“The world will not ever return to late 1999 or 2000,” says Ian Macleod, general partner at ABS Capital Partners in San Francisco. “But it might return to where it was in 1996 or 1997, when investments were prioritized against a reasonable budget and constrained by a realistic view of the potential return on investment.”

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