It's hard for entrepreneurs not to be mesmerized by dazzling, highly visible start-up successes in the consumer Internet space, such as the acquisition of the 13-employee Instagram by Facebook for $1.1 billion.

With these outsized expectations, entrepreneurs and investors alike have rushed into the consumer segment. Venture capital funding in consumer start-ups tripled between 2006 and 2010. Even as recently as the third quarter of last year, venture capital invested in consumer-oriented start-ups was almost two times that of the enterprise-software segment. 

However, a cool-headed look at the numbers shows that start-ups developing solutions for enterprises may offer a much better opportunity for high returns to both entrepreneurs--and their investors. Here's my evidence:

The Numbers Don't Lie

The facts are clear: Financial returns on enterprise-oriented start-ups exceed consumer investments in both IPOs and acquisition transactions.

Among IPOs with at least 60 days of trading history in 2011 and 2012, the average enterprise software company IPO was up more than 37 percent while the average consumer IPO was down nearly 25 percent. That is more than a 50-point spread!

Lest you think the numbers were temporarily skewed by the Facebook flop, the same analysis pre-Facebook still showed a greater-than 50-point spread. In the first half of 2012, the average enterprise IPO was up 50.4 percent while the average consumer IPO was down 6.5 percent from its original offering price.

Similar performance differences exist in merger-and-acquisition outcomes for consumer versus enterprise companies.

A comparison of the top 100 acquisition transactions with published revenue multiples in consumer and enterprise over the past two years shows that enterprise-oriented outcomes were realized at significantly higher revenue multiples than their consumer counterparts--typically two times higher or more. The same pattern of enterprise outperformance is evident when looking at the total transaction values.  Business merger-or-acquisition deal sizes are typically 2.5 times that of the consumer segment, across the sample set.

This differential in M&A outcomes is due, in part, to the fact that enterprise-focused companies are commonly building deep technology and thus have intellectual property that is of intrinsic value to corporate acquirers who are cash-rich and R&D poor in many cases.

Recognizing that business-buyers are shifting toward using cloud-based applications (as many established organizations are looking for ways to rapidly reinvent themselves) to move quickly into the world of SaaS, cloud computing, and mobile enablement. Realistically, most companies simply do not have the internal resources or skill sets to make this happen quickly and so choose to be proactive in bringing both new products and the associated talent into their companies via acquisition. Even at the low end of an M&A exit, these corporate acquirers take an "acqui-hire" view of an acquisition--frequently paying a premium for a company that brings them a team with the deep and relevant skills they lack. 

Perhaps more important than any of the other factors influencing the higher M&A revenue-multiples and better post IPO performance is the fact that the subscription SaaS business models of most enterprise software start-ups create more stable companies: They have much more predictable recurring revenue streams than consumer-oriented companies that face the fickle whims of consumer sentiment.

The Pace of Enterprise Start-up Adoption is Accellerating 

So with all of these facts why has it taken so long to see an acceleration of start-up and investing activity in the enterprise versus consumer space?  Perhaps there has been a "lemming effect," where even after the sharks have obviously arrived, the poor penguins at the back of the pack continue to follow their brethren into the consumer Internet waters. 

It may also be that the slower transition to a focus on enterprise start-up investment is also due the structure of the funding world: many current angel investors and the majority of micro VCs come from a consumer Internet background, so they have understandably been investing in what they know best and where they can add value.

Our firm, Illuminate Ventures, is one of the only micro VC firms to focus entirely on enterprise cloud computing, but we are increasingly syndicating our investments with other traditionally consumer-oriented VCs as consumer technologies are being rapidly retrofitted for and adopted within the enterprise. It makes for great collaboration opportunities. The concept of "enterprise consumer" solutions is the marriage of business software with the best of technologies and business models first deployed in the consumer market.

For example, one of Illuminate's portfolio companies, Hoopla, is successfully demonstrating how gaming techniques and technologies originally developed for consumer video games are now finding their way into the "enterprise gamification" market. (Hoopla helps companies improve performance by steering actions and behaviors of employees through visualization and game mechanics. It also provides the analytics that help identify and implement best-practices.) 

Entrepreneurs should definitely continue to "look to the cloud" for great business opportunities, but they need to look at the bottom line as well--with all the facts pointing toward lower risk and better average outcomes.