Listen up, investors: The software industry is growing quickly -- and in unexpected places

Photo Illustration: Eric Blattberg



The software industry is exhibiting sustained growth in some unexpected places NOV. 12 - 13, 2013


San Francisco, CA



Agile software development company Rally Software employs about 400 people, supports 168,000 paid users, and raised $84 million this April.



So where is this fast-growing company based? Not the Bay Area or Boston, but Boulder, Colorado.



The U.S. software industry is growing quickly: small- to mid-sized private companies experienced a median 30 percent revenue growth rate from 2011 to 2012, while private software-as-a-service companies achieved an even higher growth rate of 35.1 percent, according to an upcoming report from benchmarking companyand the .



But it's no huge surprise that the software industry is thriving post-recession - where it's growing is much more valuable information.



West coast companies demonstrated the highest median revenue growth rates, at 53 percent, followed by 30 percent for east coast firms and 25 percent for companies in the midwestern and mountain regions. But over that same period, west coast firms took an average of $53.3 million in venture funding, compared to $37.3 million for east coast companies and just $11.4 million for central companies.



Have you done the math yet? There's a disproportionate gap, determined by location, between companies' revenue growth and funding. In other words, there's a sizable opportunity for software investors who look beyond the traditional tech hubs.



This isn't news to Lars Leckie, managing director at Hummer Winblad Venture Partners in San Francisco. Hummer Winblad, which has invested exclusively in software since its inception 25 years ago, rarely backs Bay Area companies.



"We have long prided ourselves on not being a Silicon Valley firm," he said in a conversation with VentureBeat Tuesday. "We've invested in 15 or 16 software-as-a-service companies, and only one of them is in the Valley, one is in San Francisco, and the rest are elsewhere."



Leckie is bullish on the SaaS space, which he called a big, cresting wave. But waves break, I noted. Are SaaS companies with ballooning growth rates but similar products in for trouble ahead? Leckie doesn't think so.



"Good categories support more than one winner," he said. "So if you have companies in the SaaS space that are growing at a 100 percent growth rate, I think that's more an indication of a good category than risk ahead."



The category as a whole continues to mature as companies fine-tune the model, improving efficiencies in sales and marketing as they become increasingly metric-driven. And some of these small- to mid-sized SaaS companies have their eyes on major enterprise players -- SAP, Oracle, and IBM -- which leaves a lot of room for growth.



Lauren Kelley, founder and CEO of OPEXEngine, thinks we'll continue to see positive performance from SaaS and cloud-based companies outside the major tech hubs.



"It's amazing to seethe growth and strength of companies in-between Boston and Silicon Valley," said Kelley. "Because of cloud-based services, you don't have to cluster companies together in the major tech centers anymore. You can hire remotely, use remote services for different parts of the business."



The venture capital, presumably, will follow.
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