VCs: Be Careful About Partnering With Venture-Backed Software Firms

(NOTE: This story was originally posted to Dec. 8.)

Want to partner with a venture-backed software company? Think hard, a panel of venture capitalists said this week.

The venture capitalists, who spoke at a panel at the NexGen Cloud Conference, hosted by CRN parent The Channel Company, in Anaheim, Calif., warned solution providers that some venture-backed software companies may soon be the victim of a market dominated by cloud giants like Amazon Web Services, Google and Microsoft.

“I would say, you need to be very careful about who you’re partnering with that is venture-backed, even if they are growth stage and they have raised a lot of money. And that’s because a ton of companies have raised a lot of money and they are now, many software companies, running up against AWS and Microsoft and Google,” said Ben Black, managing director and co-founder of Akkadian Ventures.

“A lot of these companies, from the outside, may look successful, but there are core trends that are moving against them,” he said. “Now that means that you really have to understand the impact that Google and AWS are having on them.”

Alex Rosen, managing director at IDG Ventures, said partnering with these companies may prove perilous because of how inexpensive it is to start a software company these days.

 “You can launch a company for a couple hundred thousands dollars,” Rosen said.

But that doesn’t mean those companies are built to last.

“What has also become true is that it’s become even more expensive to scale a business and to get to real revenue traction and lots of customers, and build out your product suite, and amass a big enough business that you can defend yourself,” he said.

Cliff Boro, general partner, Entry Ventures Group, said that solution provider companies should look for the silver lining in a company that may not be able to scale on its own.

“I actually think there’s an opportunity for folks like you who know how to run profitable businesses,” Boro said.

Boro explained that many early investors see seed investments as a means to bigger money, not an entrance to the business’s actual operations.

“They don’t take board seats. They become really passive,” he said.

“If you find innovation, you may be in a position to acquire teams and platforms,” he added.