After enduring a brutal six-year malaise following the dot-com implosion, venture capitalists are back on the prowl, investing billions in all types of software companies in the hopes of landing the next VMware.

For the first time in more than a year, software companies garnered more start-up cash than any other industry sector in the second quarter, according to survey findings from the MoneyTree Report issued by PricewaterhouseCoopers and the National Venture Capital Association. Biotechnology investments checked in second at $1.17 billion during the quarter, followed by medical devices and equipment and telecommunications at $995 million and $476 million, respectively.

Before you quit your job to start a software company, however, it's important to understand that the VC environment is far more restrained than it had been during the dot-com boom. In fact, today's renewed enthusiasm among VCs pales in comparison to staggering cash infusions that accompanied the peak of the dot-com frenzy.

While it's true that venture capital firms invested more than $1.5 billion in software companies in the second quarter this year, total venture capital spending in the past year totaled a respectable $27.4 billion -- still about $1 billion less than companies received in the first quarter of 2000 alone.

"We're coming out of an environment where software had been fully funded from about 1990 through 2002," Mark Sherman, general partner at Menlo Park, Calif.-based Battery Ventures, said in an interview with InternetNews.com. "Software companies just continued to be aggressively funded by lots and lots of companies. But that all came to an end when the bubble burst, mainly because there were so many enterprises that suddenly had to rationalize the technology investments they made."

Whether VCs can maintain their present level of moderation will be seen during the next few years. That's because a flurry of innovation in the software industry is expected to transform not just the way companies access and share data, but how venture capitalists evaluate the short- and long-term prospects of companies eager to find their niche in the Web 2.0 landscape.

Sherman said seminal events like VMware's blockbuster initial public offering in August and BladeLogic's promising debut in July may spark VC firms to again loosen their purse strings and spread their investments over a larger number of software and data-management upstarts.

"I think that's one of the reasons [VCs] are so interested in software right now," he said. "There's a lot of liquidity in those deals and that encourages people to start looking for other investments."

Battery Ventures is currently investing in about 10 fledgling software companies, including Bazaarvoice, an SaaS-based social commerce platform, and Applimation, a developer of enterprise data management software.

"We don't really have a fixed number in terms of companies or how much we'll invest in software," Sherman said. "It moves around. We're definitely interested in infrastructure and, personally, I think there will be a bunch of new investments around the concept of data and what you can do with it. Data from places like Salary.com and Payscale.com could be very interesting.

Another key player in the area, Lightspeed Venture Partners, has significant investments in a wide range of software and datacenter management companies. Its portfolio includes Calista Technologies, which develops virtualization software for the desktop; Pivot 3, a storage software provider; and OpTier, which makes systems management software for virtualized datacenters.

"Part of it is just the old technology cycle," Ravi Mhatre, general partner at Menlo Park, Calif.-based Lightspeed Venture Partners, told InternetNews.com. "Many of the key innovations of what we call the first generation of the Web are reaching the end of their lives and getting long of tooth. We're now very much into the second generation of the Web, and software is leading the way."

Ah, but where is the next VMware or BladeLogic to be found?

Not surprisingly, venture capitalists are sticking with a proven formula and focusing most of their attention on software, appliances and platforms that address either data management or the datacenter itself.

...

Read the rest of this great article from InternetNews, here.