By Deborah Gage
More and more software is being delivered to businesses through the cloud. But despite Silicon Valley?s reputation as the world epicenter of technology, the Bay Area is losing out on these newer software companies, according to one East Coast investor.
OpenView Venture Partners Managing Director Adam Marcus, whose firm is in Boston, pulled together a list of 96 public companies that deliver business software as a Web service and found that two-thirds of them were founded and continue to be headquartered outside the Bay Area, in places ranging from Weston, Fla., to Tulsa, Okla., to Israel and Beijing.
Founders of business software companies tend to be older?in their 30s and 40s?with families who are already established in their communities, Mr. Marcus says. ?They don?t feel this juvenile need to be in San Francisco.?
Also, the Bay Area is an expensive place to do business and to invest. Mr. Marcus says company valuations in San Francisco are 50% to 100% higher than anywhere in the U.S., and it?s an unstable environment for young companies.
?The biggest problem in San Francisco is an employee base that?s massively transient. They?re constantly looking for the next great opportunity, and people are poached all the time?Many of our companies have zero unforced attrition, but there?s not a company in San Francisco that can claim anything close to that,? Mr. Marcus says.
A closer look at OpenView?s data shows a less dire picture for the Bay Area than Mr. Marcus claims. Most of the companies on the list have offices in the Bay Area even if they?re not headquartered there, and four of them have been acquired by Bay Area companies since he pulled the list together.
(Two companies also moved to the Bay Area?although one moved out?and one acquired a Bay Area company whose offices remain intact).
Emergence Capital Partners General Partner Brian Jacobs, whose firm invests in business software companies out of San Mateo, Calif., about 20 miles south of San Francisco, says the total equity value of the Bay Area companies on the list is higher than for the non-Bay Area companies ($180 billion versus $169 billion), even though the Bay Area companies are outnumbered 2 to 1.
The list also omits some significant Bay Area companies, Mr. Jacobs says?including Workday Inc., SuccessFactors Inc., Ariba Inc. and Taleo Corp.?three of which were acquired by other Bay Area companies for more than $1 billion each.
Mr. Jacobs agrees that Bay Area valuations are high, and he says the area also lacks expertise in vertical markets such as automotive, energy and health care that are now critical for software companies trying to sell to those markets.
Still, companies that are built in the Bay Area can compete against the best, he says, because they have access to the best software company talent in the world, and it?s the only place where technology remained important to the local economy after the dot-com bust.
?During the bubble I was with (St. Paul Venture Capital) in Minnesota, and everybody was excited about Minnesota being the next Silicon Valley. That went away,? Mr. Jacobs says.
Non-Bay Area software companies continue to attract big investments. TOA Technologies Inc., whose software is used by companies to manage field service workers, raised $66 million last month from Technology Crossover Ventures and is staying put in Beachwood, Ohio, near Cleveland, according to co-founder and Chief Executive Yuval Brisker.
?I think the beauty of what you?re seeing now is the emergence of creativity everywhere. Where in the past you had to travel to the centers of finance and technology to get things done, now you don?t have to,? says Mr. Brisker, who adds that it?s easier to compete for talented people in Cleveland, too.
OpenView doesn?t invest in San Francisco companies, Mr. Marcus says. ?We?re concerned that prices are getting ahead of performance.?
Write to Deborah Gage at deborah.gage@wsj.com. Follow her on Twitter at @deborahgage
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