Innovative software is leading the high tech industry's recovery, according to Sand Hill Group, the San Francisco venture consultancy.

And so, "Powered by Innovation" is the theme of the organization's conference this year, Software 2007.

Opening the show today, Sand Hill Group managing director and show host M.R. Rangaswami ran through the organisation's recent survey of software firms, which links vendor success with expanding to new markets. A focus on innovation and new product areas took higher priority with software companies (with 30 per cent giving it priority) than product ease of use (24 per cent) and customer service (23 per cent).

According to the study, high tech respondents who ranked innovation as "very important" or "the most important" showed significantly higher revenue growth and profitability than those who ranked it less important.

The focus on innovation has replaced concerns to cut costs, which dominated industry minds in Sand Hill surveys conducted in the wake of the collapse of the dotcom bubble in 2000.

But consumers aren't necessarily looking for innovation to come from the mega-corporations. Sixty per cent of customers expect innovative software to come from small companies, Rangaswami said. Only 19 per cent believes large vendors will deliver it.

And neither is much of the industry. The trend for large corporations is to monitor start-ups for new, disruptive software, and being ready to swoop in.

"The industry has gone from depression to consolidation," Rangaswami said.

Of course, there are concerns about mega corps eating all the young — but these concerns are not at the vendor-end, the audience which Rangaswami is playing to.

Regardless of what the consumer wants, vendors are frothing to be the fastest to incorporate small company innovation into their businesses.

The Sand Hill Group is here (PDF).®