In 2006: Consumers and business users will expect real-time information access. Compliance will be a driver of ROI. Hosted solutions will reduce risk and costs. Advertising dollars will continue to migrate to the Internet. Users will finally accept off-shoring and outsourcing as a standard element in any IT organization’s mix. Broadband is everywhere. Rich Internet applications.... Service-oriented architectures.... Appliance-based solutions.... Identity and fraud management techniques....

These are just a few of the business and technology trends that moved from murky waters onto solid ground last year. While many trends will influence investment opportunities in 2006, we at Outlook Ventures see a two key business trends with the potential to significantly impact a variety of technology sectors: small and mid-size business IT buyer growth and consumer-driven content production and distribution. On the technology side, we're really excited about a few tech trends that will impact opportunities in 2006 and beyond: next-generation social networking and search, mobilization of virtually everything, and convergence of technologies and devices.

SMB IT Buyer Growth

Representing a market opportunity of roughly 1 million companies, small- to mid-sized businesses (companies with 100 to 1,000 employees) are demonstrating phenomenal IT spending growth relative to other buying segments. Data from IDC and JMP Securities shows that spending is growing at a compounded annual rate of 8-10% year and currently represents 30-35% of total IT spending worldwide. This growth rate is twice that of large enterprises, suggesting that small- to mid-sized business will soon overtake large enterprise in IT spending, reaching 40-45% of the total in the near future. In response to this phenomena and further supporting it, many IT companies are developing purpose-built solutions for this market. It’s not about "lite" versions; "dumbing down" products never was a good answer for this market—today, it's simply unacceptable.

This growth in SMB IT spend is creating new opportunities for both new and established companies. For example, the software-as-a-service or hosted-solution model is gaining interest with this sector, as smaller businesses change focus to keep IT complexity at a minimum, while still providing enterprise-level services. Channel companies (VARs, resellers, and so on), particularly those that already have relationships with small- to mid-sized businesses, will benefit, as specific products become available for them to sell and support. Larger independent software vendors will sell pre-developed vertical services to smaller enterprise, without the high maintenance costs of larger offerings.

Lasso Logic, an Outlook Ventures funded company, recently acquired by SonicWall, delivers a continuous data-protection, appliance-based service for smaller enterprises that clearly illustrates this trend. Lasso Logic delivers its solution entirely through channels to mid-size customers who historically had to rely on undependable, non-real-time tape backup and costly, "hand-delivered" offsite storage. Companies with purpose-built solutions for small- to mid-sized business customers and channels will realize significant expansion in the coming years.

Consumers as Content Producers and Distributors

Control of content is shifting, and consumers are outpacing businesses in terms of early adoption. With the emergence of blogging, podcasting, videocasting, RSS, and other related technologies, virtually any individual can, for the first time, easily produce and syndicate his or her own content. Consumers are looking for and selecting content in fundamentally different ways—and progressive businesses are refocusing their marketing efforts. Major technology companies such as Oracle have already adopted podcasting to support self-serve communication of products and service information to their prospects and customers.

In addition, modified consumer content can be pushed (or pulled) to (or from) mobile devices such as phones and PDAs that are Wi-Fi or broadband enabled. New mobile applications and platforms are beginning to gain momentum. Look for ClairMail in the business application space and companies like Vindigo and Enpocket in the consumer space to be innovating here.

Any publisher will tell you that one of its biggest concerns regarding future viability is the consumer content revolution. This brave new world of individual control of content delivery will inevitably lead to some interesting challenges at both the individual and enterprise level. New products must be developed to ensure that the new content delivery options do not overpower networks that are required to deliver critical information and that privacy and security policies are applied to this material. Without these tools, wide adoption of these technologies at the enterprise level will not be achieved.

Social Networks

Social networks continue to grow as vehicles for linking people to people (LinkedIn), content with content (Wikipedia), or files and people (iTunes). Their success may have significant impact on corporate infrastructures or e-commerce, depending on what communication method is used. Infrastructure is struggling to keep up with the demand generated by these systems, creating opportunities for innovative new solutions—such as automated approaches to meta-tagging records, user profiling, and real-time activity monitoring—to better understand individuals and their needs. This information has demonstrated value from an advertising or add-on sales perspective. Long term, the real business issue for many portals will boil down to how to analyze, manage, leverage, and maintain the data generated by these networks over time to generate incremental revenue. Networks with strong analysis tools will succeed here.

Next-Generation Search

The search market is moving quickly in managing unstructured content from the desktop to the web. Vendors like Google, Microsoft, X1, and Copernic are designing search engines that will search all document types from the desktop on out through a single user interface. Next-generation front-ends, such as Watson from Intellext, will monitor user interactions with their systems and proactively “bubble up” contextually relevant search results based on current documents and user activities in real time without the user ever having to write a single query. Specialized search solutions are being developed to optimize a variety of different tasks—from finding the best priced items in virtually any shopping category to retrieving location-specific information from mobile devices. There is no shortage of companies trying to "build a better Google" for markets where a one-size-fits-most approach does not really satisfy users' needs. It is quite interesting to see this continued innovation in search technologies at the same time that consolidation is taking place amongst the old-line players, such as Autonomy’s recently announced acquisition of Verity.

Convergence

Convergence is everywhere. Both enterprise and consumer technologies are witnessing significant convergence of devices, functions, communications, and other capabilities. We have seen Wi-Fi merge with broadband; local networks in routers; and phone, camera, and PDA functions meld into smartphones. This trend will continue with VoIP phones and Wi-Fi; iPod’s with podcasting, videocasting, and calendaring services; and a whole new generation of edge devices on networks focused on application throughput, quality of service management, and flow control. Web 2.0 is becoming a reality and is the convergence of presence, collaboration, and a variety of social aspects of communication.

A current example of convergence in enterprise communications can be seen in companies with strong network infrastructures. VoIP over LANs provides a strong cost reduction model over traditional PBX style networks, reducing complexity, consolidating support, and reducing overall operational costs. VoIP over Wi-Fi is the integration of traditional wireless network access with phone services, letting traveling business people access inexpensive VoIP services using standard mobile phone. Linking these together provides a strong seamless voice network for business users, whether in the office or at Starbucks.

Home network convergence is also happening. Skype, Vonage, and other VoIP providers have driven interest in converged home networks in which consumers are combining Wi-Fi, broadband, VoIP, and VPNs into a single environment—in many cases eliminating local carriers. With localized consumer grids, data distribution (of any type) will become simple, potentially opening up new markets in content management, distribution control, and identity management. We are just beginning to see people who can think about the advanced applications that will drive adoption.

Some of this convergence, such as in the security space, will happen as users demand more integrated solutions that simplify or consolidate fundamental business processes, making them easier to implement and manage. In other cases, new disruptive technologies will become "natural aggregators" of functionality that may have been initially designed as a stand-alone product, but gains significant value when offered or delivered in a combined product.

The Future's So Bright...

Outlook Venture doesn't have a crystal ball, but based on systematic research and analysis, we see a world where business applications will continue to grow more slowly overall than spending on IT infrastructure and tools—and where mobile and Internet solutions will lead the way in innovation. We envision a world where users with always-on access to communication devices will be willing to experiment with a variety of new technologies to share information with others, improve their lifestyles, save money, and just have fun. We’re excited to be an active participant in this broad array of investment opportunities.

About the author: Cindy Padnos is a venture partner at Outlook Ventures. She has been involved in Outlook’s investment in Optena. Prior to Outlook, Cindy held CEO and senior management positions at a number of technology companies. Outlook Ventures is an early-stage technology venture capital firm investing in West-Coast companies.