Money loves Java

Outpouring of funds help Java mature as a development environment

San Mateo (02/13/98) -- The explosive use of Java in 1997 coupled with a dollar-rich venture-capital community have helped to catalyze a wave of high-tech startup innovation.

Analysts say this outpouring of cash and the flurry of new products have helped Java to rapidly mature as a development environment. And although Java was originally hyped to the skies, start-up companies say the industry momentum behind it has allowed them to tackle problems that they couldn't before, ranging from expense report applications to networking.

Last year, venture capital companies invested more than billion in high-tech companies, according to VentureOne, a San Francisco investment research company. In 1996, they invested .5 billion. That is a 76-percent increase over 1996. And, according to various partners at venture capital companies, 1998 doesn't show any signs of slowing down.

The dramatic increase in investment was due in part to the most talked about technology in the industry: Java.

Although Java has captured the hearts and minds of many developers, venture capitalists claim they are not enamored for technical reasons or because they are swept up by the hype of displacing Windows on the desktop. Java's contribution is how it helps entrepreneurs create innovative products.

"Java is just a language. It's not a market. We invest in market opportunities, not languages," said Andy Rachleff, general partner at Benchmark Capital, a venture capital company in Menlo Park, California, with 50 million in management.

Indeed, Java is hot but no venture capital company will risk its money solely based on a technology.

"We make decisions based upon the team, the market, the technology, and the potential," said Ted Schlein, a partner at Kleiner, Perkins, Caufield, and Byers (KPCB), who runs his company's Java Fund. "The fundamentals for a good investment have to be there, and we have to apply that to any company before we put money into them."

KPCB's Java Fund is an anomaly in the venture capital industry: It was designed to fund only Java-oriented start-up companies. Java Fund has been funded with 00 million by limited partners from the high-technology industry.

Included among the 22 limited partners in the fund are Sun Microsystems, Netscape, Oracle, IBM, US West, and Cisco Systems. The limited partners invest in the fund, and it is managed by KPCB corporate partners.

Despite its Java-centric name and the express purpose Java Fund has, Schlein insists that it is not Java that drives investments.

"They [companies looking to get money from Java Fund] should never have to talk about Java," Schlein said. "It's about what the product can do for the customer."

Other venture capitalists agree with Schlein's investment fundamentals but scoff at the Java Fund.

"Its a total marketing ploy," one venture capitalist said.

Perhaps. But among the 15 companies that already have made use of the monies from the Java Fund are Marimba, Extensity, and Wallop Software, all of which have made marks in their respective market areas.

The bottom line is that Java is growing up. Sun's JavaSoft division reports that the number of companies it has in its catalog of Java applications doubled from June 1997 to today. Last year, KPCB's Java Fund had more than 700 companies submit proposals for funding.

Most importantly, Java's capabilities are attractive to both venture capitalists and developers.

"It is the best tool to use when you want to create products that are fully distributed, cross-platform optimized," said Gill Cogan, general partner at Weiss, Peck & Greer Venture Partners, a venture capital company in San Francisco. Weiss, Peck & Greer has managed seven venture funds with 00 million of capital, and the company's most recent fund was capitalized at 00 million in early 1997.

Ariba Technologies, which has received 9.5 million in venture capital money since its inception in 1996, discovered the power of Java early on.

"It was a critical decision for us to go with Java. We tried to use WebObjects [from Next Inc.] first to build our product and it was taking us too long," explained Keith Krach, president and CEO of Ariba, in Sunnyvale, California. "We found Java to be an incredibly efficient product that allowed us to get our product developed and out the door in six months."

Ariba's product allows customers to manage their operating resources via electronic automation. Its biggest customers include Cisco, Advanced Micro Devices, and Visa. Krach said Ariba was able to capture these important customers because the product is fundamentally solid and subsequent upgrades of the product can be accomplished quickly due to Java's power.

Speed to market has been one of the biggest selling points of using Java technology.

"The bottom line is that Java gets applications to corporate users faster, and that's all that really matters," Schlein said. "They don't necessarily care that it's Java underneath. They just know that they are getting the best technology they can the fastest."

Investors point out that Java-based start-ups have been buoyed by the huge amount of money pouring into start-up companies in general.

"The returns on previous fund investments have been great in the last few years," Cogan said. "So there's lots of money to spend."

"Venture capital returns are analyzed by vintage, just like wine. For example, funds raised from 1983 to 1984 didn't get great returns, but funds raised from 1990 to 1993 did really well because of the stock market. So we're seeing that money being reinvested now," said Benchmark Capital's Rachleff.

There could be a drawback to this outpouring of money. According to several venture capitalists, history has shown that a lot of money in one area or technology can oversaturate a market and produce lower returns on investment.

"The problem is that venture capitalists get a bit less careful about making investments and what happens is that too many companies end up competing with one another in the same space. And we all know that doesn't work," said Weiss, Peck & Greer's Cogan.

Whether returns will be lower to the venture capitalists as a result of an outpouring of dollars to the high-tech industry seems to be moot at this point. Java has certainly reaped the benefits of venture capital money -- it has matured it, it has endorsed it, and it has made it a lot easier for companies to develop and use applications. Ultimately, start-up companies say that's what is important.

This story, "Money loves Java" was originally published by InfoWorld.