Silicon Valley: "What's Next?"

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Silicon Valley is buzzing. Deal flow is up. Seasoned entrepreneurs are giving it a go again. Startups abound with new ideas, from the truly innovative to the boringly mundane. The energy is back, and those who predicted Silicon Valley's decline as a center of tech activity and innovation may want to take a second look.

Although my evidence is still anecdotal, it doesn't take many conversations with venture capitalists (VCs), nor meetings with entrepreneurs, to impart a sense the environment has changed significantly over the past 12 months.

A recent holiday party for a leading Sand Hill Road VC firm was packed to the point where moving was difficult. Champagne greeted guests at the door. An abundance of sushi, mushroom risotto, entrec,te and chocolate pôt de crème followed. Wines at the bar were not bottom-shelf.

Nobody was talking about the dot-com bubble or bust, a distant memory. The VCs (quite a few of them), angel investors, lawyers, Stanford professors, friends of the firm, consultants, a few large-company executives, portfolio company CEOs and founders, and entrepreneurs; everyone's looking to the future. "The next Google" is the topic du jour. Who will be the next Google?

Will one of the big guys stumble, creating an opportunity for hoards of small companies waiting in the wings to rush in and gain a foothold with new innovations? Maybe they can even take a market lead. The answer is presumptively, yes. The problem, of course, is no one can predict who will stumble or when chinks will appear in the armor.

With little certainty about which established organizations and markets are vulnerable, you might think there's hand-wringing going on. That's not how it works in Silicon Valley. Either the spigots are on and the funding climate is good, or they're off and the climate's bad. At the moment, the spigots are on. Still, there are always favorites: favorite entrepreneurs, markets, and deal types. Some favorites this time around may surprise, especially as they look a lot like the ones that left huge craters behind just a few years ago.

Here are a few:

• Advertising and marketing are back. This honestly surprises me, but I'm hearing a lot of buzz and have seen a number of companies promising (again) to improve marketing and advertising with new products and services. Granted, my cynicism from having been an early email marketing entrepreneur may color my outlook, but many of the same ideas that floated around in the mid and late '90s seem to be resurfacing. I've heard of new ad networks; direct consumer marketing that circumvents email (can you say "push technology"?); marketing automation as an online application; and many other ideas. The logic is irrefutable: Hundreds of billions of dollars are spent annually in the U.S. alone on marketing and advertising. Surely, the Internet is as good a channel for direct marketing and advertising as any other. Eventually those with the big ad budgets will understand they must commit to online in greater numbers.
  
  
• Consumer applications are hot. Who would have thought investing in consumer plays would ever be in vogue again after the meltdown? Yet in the post-Google IPO quest for the next Google, the dog-food deals of dot-com yore are forgotten. Consumer plays are in again. A common refrain is the Internet has become too difficult to use, and a number of new consumer apps promise to fix that. "Better search" is another hot item on the consumer roster.
  
  
• It's OK to develop desktop software again. Not long ago, any business that required a desktop component was considered DOA. Microsoft owns the desktop -- game over! That was the prevailing wisdom. The browser would be the only hope to reach the desktop, so all application development moved to the server. No more. Though core application suites, such as Microsoft Office, aren't going away anytime soon, a host of applications, such as Google's search bar, Mozilla's Firefox and Thunderbird, and iTunes, are saying if you've got a good application, you can get it on the desktop. Perhaps most important is that the Internet has become a viable channel for marketing and distribution. It's not only possible, but common, to download software. Viral and word-of-mouth marketing, as well as electronic marketing, makes it easier to reach customers and sell software. Could it be the desktop wars were just battles, and a guerilla war is still being waged? Look for venture-backed companies making desktop plays.
  
  
• Computing as service is good. Salesforce.com proved the ASP (define) model can work. IBM has been promoted computing-on-demand for years now. The timing is good for companies that offer services where, in the past, there were only products. Expect to see more companies attempting to provide complex, enterprise-class applications with a variety of on-demand service models.
  
  
• Open source is shifting big money. This means disruption and opportunity. The promise of open source in business is it'll free resources currently tied up in proprietary solutions. The lower levels of the value pyramid are being commoditized, and money is being freed to solve actual business, as opposed to "plumbing," problems. There's no consensus on a single open source business model, but a lot of experimentation is going on. VCs are circling. Scalix, MySQL, JBoss, and SugarCRM are a few open source companies that have received venture funding. I mentioned Loyalty Matrix in a previous column, a San Francisco company I'm personally involved with that's building the first customer intelligence platform entirely in open source. Expect to see more venture capital funneled towards companies that understand how to leverage open source.

Champagne and risotto at a VC holiday party are hardly an indicator innovation and entrepreneurial gusto are back, but it sure tasted good to those of us who took a break from the real work -- trying to create the next new thing.