My posts of late have reminded me of the scene in Monty Python's "Holy Grail" when, despite being left as rubbish on the side of the road, the old man insists "I'm not dead yet." That's my mantra -- not dead yet. It may be a stretch to say "I feel like dancing." But we are definitely not dead yet.

In the tech world, the sector that has perhaps been most left for dead is enterprise software. For some time now the pundits have been declaring enterprise software moribund -- they argue that everything worth building has been built. And what little room there may be for innovation, will best be served by the existing behemoths, SAP and Oracle. Bring on the recession and, the conventional wisdom goes, those of us who have invested in enterprise software might as well close down the companies and recover what little cash we can.

I'm here to tell you that the pundits are wrong. Enterprise software is alive and well. But like all other things in this recession, only the truly strong will survive. And strong is pretty easily defined in this economy -- the strongest enterprise software companies deliver their customers the biggest Return on Investment.

For most companies today, ROI will be measured in total cost savings. Can I cut fat out of my technology budget? In many instances, the heros of the cost savings battle will be SaaS companies. By now it has been well documented that Software as a Service delivers significant savings in Total Cost of Ownership, let alone cheaper annual licenses. The overall savings are so great that enterprises are increasingly looking to SaaS companies to replace enterprise solutions that they were previously hosting behind the fire wall. And, while it is no insignificant task to grow an enterprise SaaS customer base, once that customer base has reached critical mass, it is the gift that keeps on giving -- each month's revenue starts with the previous month's revenue and grows from there. [1] Look no further than Salesforce, Workday, and the likes -- Strong SaaS solutions are going to continue to prosper in this economy.

SaaS companies aren't the only enterprise software solutions out there delivering great cost savings. There are a number of next-gen enterprise applications that do more for less. The sales pitch is easy -- for fewer dollars than you are paying for maintenance on your existing enterprise stack, you can purchase a modern application designed to address your problems using up to date technology. Take my portfolio company Splunk, for example. Rather than continue to pay the likes of SAP, Oracle, HP huge amounts of money for enterprise management, debugging, compliance and search tools, Splunk will deliver greater functionality and flexibility for a fraction of the cost. So it is not surprising that, despite the economic challenges enterprises are facing, Splunk's user-base and revenues are growing significantly quarter over quarter. The same story applies to the open source stack as well (mySQL, XenSource, etc. etc.). Companies will pay to save money. Even in a recession, those enterprise solutions that can credibly argue that they will save you more than they cost will continue to grow.

There is one other class of enterprise software that will fare well through the recession. That software is also sold with an ROI story. But the ROI isn't delivered with cost savings. The ROI is delivered with increased productivity. It's a hard story to sell in a down economy, but the best companies will manage to do it nonetheless. There is no question that those companies that continue to invest in technology through the down cycles will disproportionately benefit when the pendulum swings back the other way. Perhaps the easiest version of the productivity story is Price Optimization. If you can credibly argue that a customer's increased profits will exceed the price it will pay for the software, purchasing the software should be a no brainer. Supply Chain and CRM software were sold on a similar efficiency story in the late 90's and early 2000's and, in many instances, continue to drive significant ROI for those customers who adopted them early.

I don't want to sound too Pollyanna-ish as I continue to bang the drum for technology in this economic downturn. But the best companies will assuredly survive and thrive. And that goes for enterprise software as much as anything. I have no doubt that there are still huge enterprise software companies to be built and I am as anxious as ever to fund them.

[1] It is possible for a SaaS company's revenue to go down month over month, but that would require that its attrition rate be greater than its acquisition rate. For the best SaaS solutions, that is quite unlikely (given TCO, ease of use, etc.) -- they have proven wonderfully sticky. The biggest challenge for SaaS solutions is unquestionably user growth. Once acquired, SaaS customers tend to be in for the long haul.

When I first met with the team at Splunk, they were working away on building a system that could accurately track a transaction as it traversed the entire enterprise stack. If the transaction broke somewhere along the way, their software could help IT discover the cause of that failure. While it was clearly a pain point for some businesses, there was no clear customer and the value proposition was a relatively hard one to articulate. But the technology they were building created a whole lot of intelligence built on the fumes of the data center (namely the log files). I was interested in what they were doing, but not interested enough to fund them. One day I got a call from Michael Baum, CEO of Splunk. He told me that they had "figured it out" and that we should meet up. I was certainly game to hear what they had figured out and we got together again a short time later.

So what had Splunk figured out? They had figured out that if they could track, manage and correlate log files across the entire data center in near real time, that they could create the killer IT Search Engine that would allow an end user to see into their enterprise stack in a way never before possible. The Splunk guys showed me a very simple example using Voip data and how one could track all systems that touched a particular extension by simply searching for that extension in the Splunk engine. I was an instant believer -- it was clearly a better way to manage the massive amounts of IT data that exist in enterprises today. I invested in the Series A and the Splunk team got to building the software that they had envisioned.

A short time after investing in Splunk, I was meeting with a group of managers from one of August Capital's biggest Limited Partners (the folks who invest in our fund). I was describing for them what Splunk was planning to build and they asked me "so what's the market size for that?" I quickly answered as best I could -- "I have no idea." Needless to say, this was not the most satisfying answer they had ever received and they stared back at me with a look that suggested perhaps I should come up with a better answer. But the reality was that I didn't have a better answer. Not because it was unclear if there was any market for what Splunk was building. But, more importantly, because once Splunk had built their search engine, it was unclear what market they would go after. I explained to my investors that Splunk had a number of multi-billion dollar markets in which they might play (management, compliance, BI, security, capacity planning, development, etc.) and the only question was which ones they would choose to go after first.

That conversation with my Limited Partners was over two and a half years ago. And since that time, the Splunk team has built precisely what they promised -- a large-scale, high-speed search technology for your data center. But despite the fact that Splunk's software has been downloaded by over 100,000 users and despite the fact that there are now more than 350 paying enterprise customers (including 21st Century Insurance, BEA, British Telecom, Catholic Healthcare West, Chicago Mercantile Exchange, Comcast, Dow Jones, FedEx, Fiserv, GE Consumer Finance, LinkedIn, Mantech, Mozilla.org, NASA, Shopzilla, Telstra, U.S. Department of Energy, U.S. Department of Justice, U.S. Department of State, Vodafone and Yahoo!), I would still have a tough time answering the question posed by my Limited Partner.

Splunk has not built an application. Nor is Splunk merely selling software. Splunk has created a software enabled platform that continues to be extremely broadly applicable. Is Splunk mission critical when it comes to maintaining availability of large scale enterprise systems? Yes. Is Splunk invaluable in the fight to maintain the security of your data center? Yes. Does Splunk uniquely simplify the process of data compliance? Yes. Can Splunk help you dig into your data and analyze it like no other solution? Yes. But, frankly, that's just the tip of the iceberg -- once you are able to query individual pieces of data across your entire data center in real time, the applicability of the platform is limited only by the creativity of its end users. And those end users are driving value back into the platform, creating applications we hadn't thought of before.

So what is the market for Splunk? i still couldn't say for certain. But I can tell you one thing -- it is awfully big. And in the venture business, that's big enough.

I am a bit of a broken record when it comes to my "its all about the team" mantra. But I really believe it. Yes, it is important to have a good idea. Yes, it is important to be chasing a big market. But as important as both of those things are, they pale in comparison to the need for great entrepreneurs.

I've also written a fair bit about what it means to be a great entrepreneur. Some founders are incredibly good entrepreneurs by virtue of their sheer fanaticism and determination -- they thrive on the challenge of building a businesses out of whole cloth and hate to lose. Some founders are "serial entrepreneurs" and get the benefit of the doubt because they have done it before -- they have managed to run the startup gauntlet and make their investors a bunch of money. And other founders are incredible domain experts -- if anyone is going to figure out how to build an interesting business in their particular field, it will be them. If an entrepreneur falls into any one of these categories, you will do well to back them.

A few years ago I was approached about backing a company called Nomis Solutions. The idea behind Nomis was to apply modern price optimization techniques to the financial services sector. While banks and insurance companies do a great job of measuring and optimizing risk, they have historically done less well at measuring and optimizing pricing. As a result, the industry as a whole has left a lot of money on the table. The founders of Nomis intended to build a software solution to help financial institutions engage in profit-based pricing -- pricing that would create the greatest profitability on a product by product basis (auto finance, mortgage, home equity, personal lending, etc.).

Was it a good idea? You bet. Any time a piece of software can increase your profitability by 10 to 20%, it is a good idea. Was it a big market? Monstrous. Financial institutions are historically very difficult to sell software into, nonetheless, they are monumentally large accounts if you can find your way in. So my investment decision came down to the question of how was the team. While there were four fantastic entrepreneurs when I funded Nomis, and I do not in any way want to slight Nomis's other spectacular founders, I want to take a closer look at Nomis founder Dr. Robert Phillips.

Bob Phillips personifies the best characteristics of a great entrepreneur. He thrives on company creation and refuses to lose (when I made diligence calls on Bob, I was assured that he was a killer entrepreneur and that I would do well to back him but that I should never ever play him at Trivial Pursuit). Bob is also a serial entrepreneurs who has made a bunch of money for his investors in the past. As the founder and CEO of Talus Solution, Bob created the worlds largest price optimization company in its day, which he sold to Manugistics for hundreds of millions of dollars. And Bob is the guru of price optimization -- there is no bigger domain expert. If you have been annoyed by the fact that the guy sitting next to you on a plane paid significantly less for his ticket than you did, you have Bob Phillips to blame for that. He introduced revenue optimization to the airline industry many years ago. He literally wrote the price optimization text book and teaches it at Stanford and Columbia Business Schools.

It would be hard to find a better example of a fundable entrepreneur than Bob Phillips. So it will come as no surprise to you that Bob and his co-founders have managed to build an incredible company at Nomis. Their customers are literally a who's who of the banking industry, from Ford Motor Credit to HBoS to GE Consumer Finance to Washington Mutual. And their results have been nothing short of spectacular -- by installing Nomis's software, a bank can increase the profitability of its business by between ten and twenty percent. On a multi-billion dollar loan portfolio, that adds up to real money quickly. As a result, Nomis has been able to make great inroads into a really tough market.

I don't want to ignore the excellent work of Bob Phillips' co-founders. Nor do I want to understate the degree to which great hiring has helped make the company a market leader. But Bob Phillips remains the world's expert in revenue optimization and I would sooner bet with Bob than against him when it comes to price optimization. It truly is all about the team.