It's reputed that Josef Stalin once said 'the murder of one person is a tragedy, and the death of one million is merely a statistic'. He highlighted that it's so hard to understand and relate to great events, whether positive or negative, as they are beyond our scope of relating what this really means to an individual.
Madoff's reputed swindle of such a broad swath of good and great people is a tragedy that has taken the breath away from so many of us; even most of us individuals who lack the visceral feeling for great events. A letter to the editor of Newsweek, written by Rabbi Marc Gellman goes a long way towards capturing the betrayal of so many. So says the Rabbi, 'it's an abomination'.... es verdad.
We've had our share of 'learning experiences' in '08. Wishing you a happy and healthy '09 and special joy to my dear friends Robert and Yanni on the birth of their first child.
Charlie
Wednesday, December 31, 2008
Virtual real estate (domain names)
Over the past couple of years, while plying me with sardines and onions, my buddy Igal has been educating me about the domain name space. Arguing that domain names, due to their uniqueness ('Charlie, there are 4 corners on 42nd and 5th, but only one domain name 42nd and 5th') have more potential value, and far less holding costs than physical real estate; he's had me intrigued enough to bring the family together and build a modest (er, tiny) portfolio. Other folk with interest in this market include the multi-billion dollar PE fund Oak Investment Partners, with their large investment in Demand Media and Summit Partners and Highland Capital leading the investment in Name Media (mentioned later).
Rather than hiring folk to design the sites, build the graphics and sell the advertising, I parked them with a couple of companies where you contract with them (easily terminated at any time) to put up content and sell advertising on my behalf, and splitting revenues. It's really a no hassle arrangement and we anxiously sit back as the various checks, some as much as $1.28 :-) come rolling in. Each of the parked domains have a 'for sale' sign on them and we did sell two that netted enough returns to pay for the entire portfolio.
Looking at the current state of the domain parking business, it will come as no surprise that, consistent with the downturn in advertising rates for display advertising and PPC rates, many participants are reporting revenue declines, on a same property basis, in the 30% range. Expectations are that Q1 '09 will continue the downward trend, though 'premium'/high traffic names should fare far better than generic names which only qualify for 'remainder' revenues.
Similar to physical real estate, but with a far lower cost of entry, domain names have intrinsic 'location' value, as well as a more tangible value based on a function of cash flows. This market has seen its share of speculation driving prices to levels only justified by intrinsic value (e.g. hopes and prayers). I suspect we are now beginning to see the whiplash in valuations as domain current income plummets and intrinsic value clouds. It's always difficult to measure intrinsic value as its beauty is in the value of the beholder. DN Journal is one of the leading trade magazines covering the space. In the two links below, you will find a summary of the valuations for the top 100 domain sales for 2007 and 2008.
2008
2007
As businesses are only as healthy as their customers, we should expect that the scores of domain parking and optimization companies that comprise the heretofore growing ecosystem will also be negatively affected. One quality company, NameMedia has withdrawn its IPO (probably due to a combination of market conditions as well as a softening P&L outlook), and already public, Marchex has seen its market cap plummet 45% in the past 60 days.
Due to the scarcity value of physical real estate, as well as the intrinsic value of many names that are not yet developed (e.g. can't you see intrinsic value for J&J owning the parked, and obviously not optimized sneeze.com?) all supported by innovation in the ecosystem, I have no doubts about the long-term health of domain names and their supporting cast (see Sendori as an example.
Rather than hiring folk to design the sites, build the graphics and sell the advertising, I parked them with a couple of companies where you contract with them (easily terminated at any time) to put up content and sell advertising on my behalf, and splitting revenues. It's really a no hassle arrangement and we anxiously sit back as the various checks, some as much as $1.28 :-) come rolling in. Each of the parked domains have a 'for sale' sign on them and we did sell two that netted enough returns to pay for the entire portfolio.
Looking at the current state of the domain parking business, it will come as no surprise that, consistent with the downturn in advertising rates for display advertising and PPC rates, many participants are reporting revenue declines, on a same property basis, in the 30% range. Expectations are that Q1 '09 will continue the downward trend, though 'premium'/high traffic names should fare far better than generic names which only qualify for 'remainder' revenues.
Similar to physical real estate, but with a far lower cost of entry, domain names have intrinsic 'location' value, as well as a more tangible value based on a function of cash flows. This market has seen its share of speculation driving prices to levels only justified by intrinsic value (e.g. hopes and prayers). I suspect we are now beginning to see the whiplash in valuations as domain current income plummets and intrinsic value clouds. It's always difficult to measure intrinsic value as its beauty is in the value of the beholder. DN Journal is one of the leading trade magazines covering the space. In the two links below, you will find a summary of the valuations for the top 100 domain sales for 2007 and 2008.
2008
2007
As businesses are only as healthy as their customers, we should expect that the scores of domain parking and optimization companies that comprise the heretofore growing ecosystem will also be negatively affected. One quality company, NameMedia has withdrawn its IPO (probably due to a combination of market conditions as well as a softening P&L outlook), and already public, Marchex has seen its market cap plummet 45% in the past 60 days.
Due to the scarcity value of physical real estate, as well as the intrinsic value of many names that are not yet developed (e.g. can't you see intrinsic value for J&J owning the parked, and obviously not optimized sneeze.com?) all supported by innovation in the ecosystem, I have no doubts about the long-term health of domain names and their supporting cast (see Sendori as an example.
Tuesday, December 30, 2008
A positive perspective on public software companies
Michael Guptan of the Stanford Financial Group recently published a bullish analysis of the public software sector (with some internet companies mentioned too). Taking a balance sheet approach, he sees an industry that has such a strong cash position, little debt, and a relatively attractive PE ratio, that it should see upside when it's generally recognized by the market as a defensive sector.
The analysis does not concentrate on expected growth in earnings as a measure for value (I am a PE/growth advocate), but does make a good case that the industry's financial dynamics should make it an attractive investment area, in a time when many people are concerned about over leveraged companies/industries.
He shows interesting data and some tidbits include:
Oracle EBITDA margin of 44% (followed by MSFT at 42%,Oracle at 36% and CA at 33%)
Amazon's EBITDA margin is 6%, while GOOG's is 37% (followed by Ebay at 34%)
For those interested in exits, and M&A in particular, he lists an interesting summary of activity, noting the following activity:
MSFT 14 transactions
IBM 9 transactions
EMC 9 transactions
GOOG 3 transactions
Oracle 6 transactions
Amazon 6 transactions
CA 1 transaction
The total number of M&A deals seems to be down around 10% to just over 1100, while the deal value is down a staggering 50% to just shy of $600B. The data does not show how the mean/median is affected, and may be skewed by an absence of mega transactions.
Looking at the margins, and balance sheet data, I would expect M&A activity by the larger industry players to continue unababted, nevertheless, the withdrawal of the Eyeblaster and NameMedia IPO's, highlight the shrinking of the public 'middle' market that is an important exit source for venture backed companies. It will take a decent time interval for the mess on Wall Street to subside before such firms will again risk capital taking young companies public again. Until then, most people in the venture sector will concentrate on advising CEO's of portfolio companies to reach early profitability, so they may be self-sustaining. This will enable the venture firms to allocate capital across a historically broad arena of prospects (getting the benefit of diversity).
At times, I wonder if this perspective is ripe for a change....
The analysis does not concentrate on expected growth in earnings as a measure for value (I am a PE/growth advocate), but does make a good case that the industry's financial dynamics should make it an attractive investment area, in a time when many people are concerned about over leveraged companies/industries.
He shows interesting data and some tidbits include:
Oracle EBITDA margin of 44% (followed by MSFT at 42%,Oracle at 36% and CA at 33%)
Amazon's EBITDA margin is 6%, while GOOG's is 37% (followed by Ebay at 34%)
For those interested in exits, and M&A in particular, he lists an interesting summary of activity, noting the following activity:
MSFT 14 transactions
IBM 9 transactions
EMC 9 transactions
GOOG 3 transactions
Oracle 6 transactions
Amazon 6 transactions
CA 1 transaction
The total number of M&A deals seems to be down around 10% to just over 1100, while the deal value is down a staggering 50% to just shy of $600B. The data does not show how the mean/median is affected, and may be skewed by an absence of mega transactions.
Looking at the margins, and balance sheet data, I would expect M&A activity by the larger industry players to continue unababted, nevertheless, the withdrawal of the Eyeblaster and NameMedia IPO's, highlight the shrinking of the public 'middle' market that is an important exit source for venture backed companies. It will take a decent time interval for the mess on Wall Street to subside before such firms will again risk capital taking young companies public again. Until then, most people in the venture sector will concentrate on advising CEO's of portfolio companies to reach early profitability, so they may be self-sustaining. This will enable the venture firms to allocate capital across a historically broad arena of prospects (getting the benefit of diversity).
At times, I wonder if this perspective is ripe for a change....
Monday, December 29, 2008
Online sales numbers
Underscoring the maturing of the overall online commerce segment of the Internet, The Wall Street Journal is reporting that online sales were off by 2% from Nov 1 through Christmas Eve. Relatively, this was not so bad as overall, retail was down 6-8%. The sheer numbers of US shoppers who visit each of the major sites highlights a maturing US channel (per Quantcast):
Ebay 64mm
Amazon 54mm
Walmart 37mm
Bestbuy.com 20mm
It seems to me that the 'advantage' to the consumer of shopping online vs physically is narrowing. Hand held smart devices going mainstream now gives instant access to verify pricing 'fairness' and the well known pro's and con's of physical vs online shopping seem to be heading towards a market share balance.
Overall, I sense a feeling, excepting Amazon, that innovation in online selling seems to have stalled. Looking at leading sites that included AAPL, Best Buy and eBay, I was struck by how little improved was the shopping experience. Moreover, the price advantage inherent in a business model where efficiencies in labor and real estate ought to translate into better pricing seems to have disappeared.
In my view, absent new innovation in the online experience/value, the halcyon growth days of explosive commerce growth are behind us.
Ebay 64mm
Amazon 54mm
Walmart 37mm
Bestbuy.com 20mm
It seems to me that the 'advantage' to the consumer of shopping online vs physically is narrowing. Hand held smart devices going mainstream now gives instant access to verify pricing 'fairness' and the well known pro's and con's of physical vs online shopping seem to be heading towards a market share balance.
Overall, I sense a feeling, excepting Amazon, that innovation in online selling seems to have stalled. Looking at leading sites that included AAPL, Best Buy and eBay, I was struck by how little improved was the shopping experience. Moreover, the price advantage inherent in a business model where efficiencies in labor and real estate ought to translate into better pricing seems to have disappeared.
In my view, absent new innovation in the online experience/value, the halcyon growth days of explosive commerce growth are behind us.
Wednesday, December 24, 2008
Fun and creative video...from Truveo (click here)
Improv Everywhere also have a spoof where they filled a subway car with scores of identical twins...
Monday, December 22, 2008
Morgan Stanley's 08 Internet and Economy report (click here)
Mary Meeker, et al, recently published their year-end report for the state of the Internet...and the economy. Over the years, I have looked forward to reviewing the report as the data and perspective have been invaluable. Often, they showed a perspective that was unpopular, and right on. It's a long document and, surprisingly, I have not been able to find any real nuggets of gold that would add to or modify my venture investment thoughts...yet.
For those that want a guide, suggest you jump to:
p24 for a macro guide to US Advertising spending by Medium. Q2 Internet growth slowed to 10%, but was nicely ahead of all other major arenas which dipped into negative territory.
p26 highlights a regression analysis showing the 3x correlation of Ad spending growith to real GDP growth (not a good sign in a recession).
p38-43 is a major theme of the report. Relative to time on site, video and social are way undermonetized. Many slides highlight the value for users, no mention of the value for advertisers (who are the real customers).
p69 shows the growth of advertising inventory, and the slowing CPM's as inventory is greater than supply. They call this a short term issue...until the pace of new inventory slows dramatically, or engagement with viewers rapidly improves, I doubt they are right.
p78 details Mobile Internet growth (smart phones). With 5B page views, it's a dynamic 325+% growth rate! Expecting 3G critical mass in '10 (p81)
p93 presents the global trends for internet usage; 10 largest emerging markets surpass 10 largest developed markets in terms of number of users....not revenue.
p 105 their closing thoughts "Companies with cogent business models that provide
consumer value should survive / thrive – consumers need
value more than they have needed it in a long time"...as do the shareholders for many of these consumer facing companies.
For those that want a guide, suggest you jump to:
p24 for a macro guide to US Advertising spending by Medium. Q2 Internet growth slowed to 10%, but was nicely ahead of all other major arenas which dipped into negative territory.
p26 highlights a regression analysis showing the 3x correlation of Ad spending growith to real GDP growth (not a good sign in a recession).
p38-43 is a major theme of the report. Relative to time on site, video and social are way undermonetized. Many slides highlight the value for users, no mention of the value for advertisers (who are the real customers).
p69 shows the growth of advertising inventory, and the slowing CPM's as inventory is greater than supply. They call this a short term issue...until the pace of new inventory slows dramatically, or engagement with viewers rapidly improves, I doubt they are right.
p78 details Mobile Internet growth (smart phones). With 5B page views, it's a dynamic 325+% growth rate! Expecting 3G critical mass in '10 (p81)
p93 presents the global trends for internet usage; 10 largest emerging markets surpass 10 largest developed markets in terms of number of users....not revenue.
p 105 their closing thoughts "Companies with cogent business models that provide
consumer value should survive / thrive – consumers need
value more than they have needed it in a long time"...as do the shareholders for many of these consumer facing companies.
Friday, December 19, 2008
The Rosenberg case (Click here)
Thanks to my smart friend Larry, who forwarded a report by David A. Rosenberg, an economist with Merrill Lynch. He shares a historical perspective of today's recession, followed by my thoughts on how this affects an investment perspective in the software/internet arena. His case:
1. Unlike each of the past 32 US recessions since the Civil War, this one is a 'balance sheet' variety, where households are rapidly reducing debt($29b in Q3)
2. Past recessions were influenced by the Fed tightening credit, inflation, and excess inventories. Leading up to this recession, each of these metrics were behaving in an anti-recessionary way
3. We are seeing a fundamental demographic shift with the average baby boomer nearing 50 years and in the natural life mode to delever liabilities. Therefore, it is not realistic to expect the consumer spending to cushion any downfall
4. The repeal of Glass-Steagall in the mid-80's fueled great competition by financial institutions to gain market share in the consumer sector. With the household debt/income ratio at 140%, and with the demographics noted above, we should expect deflationary times as consumers focus on debt reduction and not spending. Deflation is his major theme driven by (demographics, excess inventory, excess labor (unemployment), and reduced credit affecting CAPEX).
5. Expect the Federal government to jump in and try to fill the gap, to avoid deflation, with at least $600b of incremental spending. Especially in light of the Q3 numbers where household net worth contracted by an astounding $2.8 TRILLION! This far exceeds the $1.9 trillion loss seen during the break of the Internet bubble in Q3 '01.
What does this mean for Internet/software venture investing?
If the case he makes about deflation and reduced consumer spending is true, then the sector of investments that are advertising supported will suffer for the duration as the customers for these services will be balanced sheet constrained.
It seems to me that a more promising arena would be one where vendors offer product/services that EXACERBATE a deflationary outlook by enabling net short-term spending reductions, or a longer-term strategic cost saving shift gained by a shift in basic infrastructure that addresses labor or operating costs.
In the Enterprise and SMB environment, the combination of tight credit, and deflation should accelerate the move to SaaS and open source based solutions. For the consumer, where more $ is spent fixing PC's than purchasing them, look for outsourced support (iYogi or Reimage (I am on the board)), as well as a a shift away from premium priced brands....the premium for cool is moving away from the average Joe. Speaking of Joe, Frappacino's ain't so cool no more.
1. Unlike each of the past 32 US recessions since the Civil War, this one is a 'balance sheet' variety, where households are rapidly reducing debt($29b in Q3)
2. Past recessions were influenced by the Fed tightening credit, inflation, and excess inventories. Leading up to this recession, each of these metrics were behaving in an anti-recessionary way
3. We are seeing a fundamental demographic shift with the average baby boomer nearing 50 years and in the natural life mode to delever liabilities. Therefore, it is not realistic to expect the consumer spending to cushion any downfall
4. The repeal of Glass-Steagall in the mid-80's fueled great competition by financial institutions to gain market share in the consumer sector. With the household debt/income ratio at 140%, and with the demographics noted above, we should expect deflationary times as consumers focus on debt reduction and not spending. Deflation is his major theme driven by (demographics, excess inventory, excess labor (unemployment), and reduced credit affecting CAPEX).
5. Expect the Federal government to jump in and try to fill the gap, to avoid deflation, with at least $600b of incremental spending. Especially in light of the Q3 numbers where household net worth contracted by an astounding $2.8 TRILLION! This far exceeds the $1.9 trillion loss seen during the break of the Internet bubble in Q3 '01.
What does this mean for Internet/software venture investing?
If the case he makes about deflation and reduced consumer spending is true, then the sector of investments that are advertising supported will suffer for the duration as the customers for these services will be balanced sheet constrained.
It seems to me that a more promising arena would be one where vendors offer product/services that EXACERBATE a deflationary outlook by enabling net short-term spending reductions, or a longer-term strategic cost saving shift gained by a shift in basic infrastructure that addresses labor or operating costs.
In the Enterprise and SMB environment, the combination of tight credit, and deflation should accelerate the move to SaaS and open source based solutions. For the consumer, where more $ is spent fixing PC's than purchasing them, look for outsourced support (iYogi or Reimage (I am on the board)), as well as a a shift away from premium priced brands....the premium for cool is moving away from the average Joe. Speaking of Joe, Frappacino's ain't so cool no more.
Wednesday, December 17, 2008
Lux et veritas- Light and truth
Yale University announced yesterday that the value of its liquid securities within its endowment dropped 13% during Q3 + October. More meaningful, the overall endowment, that includes 'Alternatives' such as Venture Capital investments, LBO's and Real Estate dropped by 25%. As the market continued to punish investors, and the Alternative category tends to report write-downs later than public valuations are reported, the news for the full year, will surely be worse.
It's clear that the primary source of funding for venture firms; endowments, family offices (hello Mr. Madoff), and pension plans are under tremendous pressure to meet current obligations. The TRUTH is that the private equity community, (including the fund of funds) will see a rapid trickle down effect from these mark-downs that will include sales to secondary funds who will continue funding LP obligations (best case), defaults of current obligations (worst case), and a shut-down of funding new groups (certainty).
Companies are only as healthy as their customers. The customers for venture funds are their LP's that entrust their precious capital to firms in an effort to mitigate risk and seek healthy returns. If the customers (LP's) are not healthy, there is less funding, and a contraction of fund sizes, coupled with the gross number of firms who receive capital.
Unlike real estate and the LBO world, in the venture business, this may ultimately be good news as the thirst for capital, from a per company perspective, from early to mid-stage companies, appears to be diminishing as the recipients of their capital harness capital efficiency garnered from just in time infrastructure (Amazon's EC2), just in time sales, and just in time development.
Similar to the secular alignment during '01-'03, when many funds reduced their size and raised smaller successor funds, we may be at the verge of a similar, but horizontal shift throughout the industry. The TRUTH is that this painful ecosystem environment may align the business models of mainstream venture with the trend for capital demand by its constituency. If so, all this pain will give us a healthier ecosystem.
A return to 'little game' venture, coupled with the entrepreneurial spirit of self-exploitation by building equity through working insane hours at below market rates, is what brought us MSFT, AMAZON, Ebay, LINUX, ORACLE, DELL, etc. The foundation of the venture industry has been paradigm shifts started by small disparate groups of entrepreneurs, and initially supported by no or little capital, often disparaged by large organizations and too small for large venture to properly deploy capital 'efficiently' for their business model (notable exception is Kleiner Perkins).
I believe the Grateful Dead said it well; 'Once in a while you get shown the light in the strangest of places; if you look at it right'
It's clear that the primary source of funding for venture firms; endowments, family offices (hello Mr. Madoff), and pension plans are under tremendous pressure to meet current obligations. The TRUTH is that the private equity community, (including the fund of funds) will see a rapid trickle down effect from these mark-downs that will include sales to secondary funds who will continue funding LP obligations (best case), defaults of current obligations (worst case), and a shut-down of funding new groups (certainty).
Companies are only as healthy as their customers. The customers for venture funds are their LP's that entrust their precious capital to firms in an effort to mitigate risk and seek healthy returns. If the customers (LP's) are not healthy, there is less funding, and a contraction of fund sizes, coupled with the gross number of firms who receive capital.
Unlike real estate and the LBO world, in the venture business, this may ultimately be good news as the thirst for capital, from a per company perspective, from early to mid-stage companies, appears to be diminishing as the recipients of their capital harness capital efficiency garnered from just in time infrastructure (Amazon's EC2), just in time sales, and just in time development.
Similar to the secular alignment during '01-'03, when many funds reduced their size and raised smaller successor funds, we may be at the verge of a similar, but horizontal shift throughout the industry. The TRUTH is that this painful ecosystem environment may align the business models of mainstream venture with the trend for capital demand by its constituency. If so, all this pain will give us a healthier ecosystem.
A return to 'little game' venture, coupled with the entrepreneurial spirit of self-exploitation by building equity through working insane hours at below market rates, is what brought us MSFT, AMAZON, Ebay, LINUX, ORACLE, DELL, etc. The foundation of the venture industry has been paradigm shifts started by small disparate groups of entrepreneurs, and initially supported by no or little capital, often disparaged by large organizations and too small for large venture to properly deploy capital 'efficiently' for their business model (notable exception is Kleiner Perkins).
I believe the Grateful Dead said it well; 'Once in a while you get shown the light in the strangest of places; if you look at it right'
Tuesday, December 16, 2008
NY Angels investment details
I have been involved with a local group of Angel investors (New York Angels) led by its Chair David Rose, and Executive Director, Paul Sciabica. Mirroring the local deal flow, and general paucity of local early stage investors, the group has been an active investor in software/internet companies. It's 70+ members include savvy folk such as Gideon Gartner (Gartner Group), Scott Kurnit (about.com), Howard Morgan (First Round Capital and idealab), Alan Patricoff (Apax and Greycroft)and Esther Dyson.
During the past 5+ years, the group has been an active investor in NY with more than $35mm invested in 54 companies. This year looks to be similar to '07 with nearly $8mm invested (40% in add-on rounds). Different from VC's, and keeping with the pattern of many Angel investors, nearly 60% of the capital has been invested in the initial financing round, with 40% allocated in follow-on's (where, upon success, professional capital usually comes in to lead).
The deal flow seems strong with 10-15 new prospects screened each month, and 3-5 presented to the group for consideration. The NYA is primarily an early stage investor and has experienced 3 recent exits.
During the past 5+ years, the group has been an active investor in NY with more than $35mm invested in 54 companies. This year looks to be similar to '07 with nearly $8mm invested (40% in add-on rounds). Different from VC's, and keeping with the pattern of many Angel investors, nearly 60% of the capital has been invested in the initial financing round, with 40% allocated in follow-on's (where, upon success, professional capital usually comes in to lead).
The deal flow seems strong with 10-15 new prospects screened each month, and 3-5 presented to the group for consideration. The NYA is primarily an early stage investor and has experienced 3 recent exits.
Monday, December 15, 2008
Peer to peer pay to play paradigm
One of the greatest challenges for entrepreneurs and early stage investors is betting on an early paradigm shift; you never really know if it's a deep market, or a drip of water till you dive in. The venture business thrives on the turbulence and opportunities that paradigms offer entrepreneurs and their risk equity backers. But it's not a smooth line. Over the past 5 years we have seen a number of false paradigm waves that have consumed billions of dollars of capital and countless entrepreneurial cycles. Two of the largest faux paradigms that come to mind were RFID and WAP (mobile).
Moreover, despite great fanfare, it's still unclear whether stand-alone 'social' and 'video over the net transport/hosting' will prove to be faux or real self-sustaining markets too.
Another area that's received great attention is the great market disruption that can follow embracing peer to peer technology. BitTorrent was an incredible innovator that followed hard on the heals of Napster. Unfortunately, they also initially embraced the pirate aspect of Napster and, though attracting stalwart investors (Accel and DCM), they seem to have been unable to translate great download acceptance into a self-sustaining business.
Techcrunch posted a sad letter to shareholders from Bittorrent's CEO that details the terms of their most recent financing, which appears to be a rescission of their most recent $17mm financing round, replaced by a $7mm 'pay to play'...highlighting the desperation of the situation. The end of the post has the full term sheet.
The peer to peer paradigm has many niches (full disclosure that I am on the board of Pando ) that are performing well, though it's clear that eyeball aggregation, based on purloined content, though it worked at YouTube, is not working here.
Moreover, despite great fanfare, it's still unclear whether stand-alone 'social' and 'video over the net transport/hosting' will prove to be faux or real self-sustaining markets too.
Another area that's received great attention is the great market disruption that can follow embracing peer to peer technology. BitTorrent was an incredible innovator that followed hard on the heals of Napster. Unfortunately, they also initially embraced the pirate aspect of Napster and, though attracting stalwart investors (Accel and DCM), they seem to have been unable to translate great download acceptance into a self-sustaining business.
Techcrunch posted a sad letter to shareholders from Bittorrent's CEO that details the terms of their most recent financing, which appears to be a rescission of their most recent $17mm financing round, replaced by a $7mm 'pay to play'...highlighting the desperation of the situation. The end of the post has the full term sheet.
The peer to peer paradigm has many niches (full disclosure that I am on the board of Pando ) that are performing well, though it's clear that eyeball aggregation, based on purloined content, though it worked at YouTube, is not working here.
Friday, December 12, 2008
Q3 2008 Inernet advertising report (Click here)
Pubmatic, a company that specializes in Ad optimization for publishers, recently published their report on Q3 pricing trends in the Internet. Some highlights/comments below:
1. Social remains the lowest priced category coming in at 21 cents....with the continued explosion of pages and the reticence of brand advertisers to embrace this category, tough sailing is ahead.
2. Q1-Q3 saw an average display ad (CPM) drop 27%
3. Small sites, probably due to more effective targeting, enjoy a CPM nearly 3x that of large sites
I am not sure small companies can 'cut their way' to prosperity. Unless this negative trend is arrested, get ready for a wave of closures of venture backed companies....social firms leading the way, with video a close second.
With data such as this, probably no surprise that Eyeblaster just announced a RIF....
1. Social remains the lowest priced category coming in at 21 cents....with the continued explosion of pages and the reticence of brand advertisers to embrace this category, tough sailing is ahead.
2. Q1-Q3 saw an average display ad (CPM) drop 27%
3. Small sites, probably due to more effective targeting, enjoy a CPM nearly 3x that of large sites
I am not sure small companies can 'cut their way' to prosperity. Unless this negative trend is arrested, get ready for a wave of closures of venture backed companies....social firms leading the way, with video a close second.
With data such as this, probably no surprise that Eyeblaster just announced a RIF....
Thursday, December 11, 2008
Google expands its ecosystem (click here)
Previously, I commented about the difference in the MSFT and GOOG ecosystem. Thousands of companies support and enhance the Windows OS, and over at GOOG, thousands of companies try to break their foundation (SEO).
Domain Parking, where folk own domains with wonderful traffic, due to search engine optimization and wonderful names (chocolate.com comes to mind), primarily earn revenue, not by adding incremental value, but by referring this traffic to other sites; effectively exploiting a search loophole that adds clicks between users and their desired destination. Therefore, you can think of Parking, in part, as a bane of search engines with a continued cat and mouse battle between the sites and the engines. As you would expect, many of these sites are often masters at SEO to maximize rankings to capture first time surfers.
The other day, Google announced Adsense for Domains, to assist the parkers with maximizing their revenues. Historically, Yahoo has been the largest supporter of Parkers, who often go directly to parking aggregators such as Sedo, GoDaddyand DomainSpa.
It seems as if the contraction of GOOG's growth has them 'shining the light in the darkest of places'.
Domain Parking, where folk own domains with wonderful traffic, due to search engine optimization and wonderful names (chocolate.com comes to mind), primarily earn revenue, not by adding incremental value, but by referring this traffic to other sites; effectively exploiting a search loophole that adds clicks between users and their desired destination. Therefore, you can think of Parking, in part, as a bane of search engines with a continued cat and mouse battle between the sites and the engines. As you would expect, many of these sites are often masters at SEO to maximize rankings to capture first time surfers.
The other day, Google announced Adsense for Domains, to assist the parkers with maximizing their revenues. Historically, Yahoo has been the largest supporter of Parkers, who often go directly to parking aggregators such as Sedo, GoDaddyand DomainSpa.
It seems as if the contraction of GOOG's growth has them 'shining the light in the darkest of places'.
Wednesday, December 10, 2008
Where for thou exits? (click here)
Updata Advisors and Morrison & Foerster have just published a survey, conducted during Q3, of senior executives in the software, internet and related services industry about their M&A interests. The survey covered executives in the US, Asia and Europe.
This is a topic that keenly interests me as, over the past few years our industry (internet and software), has experienced an uneven exit environment; with windows opening and closing at an ephemeral pace. I have found that keeping current on the M$A environment is a critical element towards appreciating the window of opportunity to reap rewards for many years of hard work.
Key findings:
1. Buyers expect to remain active (45% expect M&A to increase or remain the same), as the economy gives many players the ability to grow global market share at more reasonable prices.
2. Large-cap buyers are expected to lead the way. Unfortunately, if true, this will probably continue the trend of reducing the number of public companies in the industry and, unless refreshed, result in a smaller universe of buyers.
3. In the Internet sector; security, e-commerce infrastructure and content providers are the most interesting to buyers. Interestingly, social and shopping sites were laggards. If the intentions of the survey bear out, it seems there's a mis-match between many of the internet investments over the past 3 years, and buyers intentions.
4. Nearly 70% of transactions are sourced from internal sources...not introduced by bankers. Again highlighting that effective Business Development/partnerships is the most reliable way to a positive exit.
This is a topic that keenly interests me as, over the past few years our industry (internet and software), has experienced an uneven exit environment; with windows opening and closing at an ephemeral pace. I have found that keeping current on the M$A environment is a critical element towards appreciating the window of opportunity to reap rewards for many years of hard work.
Key findings:
1. Buyers expect to remain active (45% expect M&A to increase or remain the same), as the economy gives many players the ability to grow global market share at more reasonable prices.
2. Large-cap buyers are expected to lead the way. Unfortunately, if true, this will probably continue the trend of reducing the number of public companies in the industry and, unless refreshed, result in a smaller universe of buyers.
3. In the Internet sector; security, e-commerce infrastructure and content providers are the most interesting to buyers. Interestingly, social and shopping sites were laggards. If the intentions of the survey bear out, it seems there's a mis-match between many of the internet investments over the past 3 years, and buyers intentions.
4. Nearly 70% of transactions are sourced from internal sources...not introduced by bankers. Again highlighting that effective Business Development/partnerships is the most reliable way to a positive exit.
Tuesday, December 9, 2008
What is the customer thinking?
In the Wall Street Journal, Peter Whatnell, CIO of Sunoco was interviewed about how the economic downturn is affecting his department and the company's use of technology.
Here's a link to the article
Though I have a great deal of respect for his comments, from a business perspective, I have been reticent about investing in companies that build direct sales forces to sell to organizations such as Peter's. The appeal of investing in companies that provision customers remotely, with salesfolk who can demonstrate the benefits of the product/service without SE's, or investing in consumer facing solutions, is much more appealing than the front loading of expenses to build, train, and support direct field sales efforts. Of course, selling to Enterprise customers via indirect channels, maintains some allure.
In the interview, Peter says that one should 'never waste a good crisis' to rethink your business and cites having 'interest' in looking at new applications if they offer 90% of the functionality at 10% of the cost......
Here's a link to the article
Though I have a great deal of respect for his comments, from a business perspective, I have been reticent about investing in companies that build direct sales forces to sell to organizations such as Peter's. The appeal of investing in companies that provision customers remotely, with salesfolk who can demonstrate the benefits of the product/service without SE's, or investing in consumer facing solutions, is much more appealing than the front loading of expenses to build, train, and support direct field sales efforts. Of course, selling to Enterprise customers via indirect channels, maintains some allure.
In the interview, Peter says that one should 'never waste a good crisis' to rethink your business and cites having 'interest' in looking at new applications if they offer 90% of the functionality at 10% of the cost......
Monday, December 8, 2008
Wonderful post from Redfin's CEO (click here)
Many jewels....of note:
1. Get a board you can connect with (not just one with connections). As a board's role is primarily provide advise and consent, it's essential for a CEO to have a trusted relationship with his board. They don't have to be best friends, but knowing that your board members are committed to the company's success, is a wonderful start.
2. Create simplicity. Cut through the long-winded discussions and make a decision.
3. The journey is the destination. Each and every day...bring it, you don't get do-over's.
Worth a read for entrepreneurs and VC's alike
1. Get a board you can connect with (not just one with connections). As a board's role is primarily provide advise and consent, it's essential for a CEO to have a trusted relationship with his board. They don't have to be best friends, but knowing that your board members are committed to the company's success, is a wonderful start.
2. Create simplicity. Cut through the long-winded discussions and make a decision.
3. The journey is the destination. Each and every day...bring it, you don't get do-over's.
Worth a read for entrepreneurs and VC's alike
Marketing...the Evil Empire vs MSFT?
In a recent board meeting a fascinating discussion took place where the ecosystem around MSFT and GOOG were contrasted.
MSFT built/attracted an ecosystem keenly interested in promoting, fixing, and supporting their OS. On the other hand, it seems as if the GOOG ecosystem (SEO) is keenly interested in breaking the 'OS' rather than supporting it.
Effective SEO breaks the user experience, and the cumulative damage to the ecosystem is tantamount to the anti-virus vendors encouraging folk to write viruses, thereby increasing their own revenues....but with huge unintended consequences.
The daily cat and mouse game between SEO and the GOOG (and other search players) highlights the frailty of the system. This could be a Black Swan in the making, with dramatic and unforeseen consequences.
MSFT built/attracted an ecosystem keenly interested in promoting, fixing, and supporting their OS. On the other hand, it seems as if the GOOG ecosystem (SEO) is keenly interested in breaking the 'OS' rather than supporting it.
Effective SEO breaks the user experience, and the cumulative damage to the ecosystem is tantamount to the anti-virus vendors encouraging folk to write viruses, thereby increasing their own revenues....but with huge unintended consequences.
The daily cat and mouse game between SEO and the GOOG (and other search players) highlights the frailty of the system. This could be a Black Swan in the making, with dramatic and unforeseen consequences.
B of A's latest Internet report (click here)
I think that one of the most useful metrics when looking at public valuations is the P/E to growth ratio. It just makes so much sense that faster growing companies would have higher P/E's and the contrary, as we see in recessionary times, is just as true.
Over the years, I have seen this ratio, on a normalized basis, approximate 1.2. As an illustration, if a company is projecting 20% growth, you would think the market would reward the firm with a P/E of around 24x.
The latest B of A Internet report has a some nice data (p 12-13) that looks at their coverage universe, segmented by large and mid-cap and advertising and commerce that shows which of the covered firms would be above the valuation line (more than fully valued), or below the line (less than fully valued). From the charts, it seems as if advertising is about fairly valued today, and with a limited universe, e-commerce is not significant enough to note.
From a macro industry view, unless we see a continued deterioration of expectations, it seems as if we have achieved a reasonable balance between valuation and growth.
Over the years, I have seen this ratio, on a normalized basis, approximate 1.2. As an illustration, if a company is projecting 20% growth, you would think the market would reward the firm with a P/E of around 24x.
The latest B of A Internet report has a some nice data (p 12-13) that looks at their coverage universe, segmented by large and mid-cap and advertising and commerce that shows which of the covered firms would be above the valuation line (more than fully valued), or below the line (less than fully valued). From the charts, it seems as if advertising is about fairly valued today, and with a limited universe, e-commerce is not significant enough to note.
From a macro industry view, unless we see a continued deterioration of expectations, it seems as if we have achieved a reasonable balance between valuation and growth.
Friday, December 5, 2008
Exactly not the way it was
I was speaking with a CEO yesterday about his perspective on the sales environment in his SaaS company today vs prior stressed economic environments. When he said 'today, it's exactly like selling software to the enterprise, but without the enterprise', it caught my attention.
While he mentioned elongated sales cycles, due to expense caution, as evidenced by contracts 'caught in legal' before PO's are issued, he also highlighted the fundamental difference in implementation of his SaaS service offering due to:
Zero customization and minimal integration and, little or no end-user training that substantially reduces the time to revenue/cash; while enabling him to much more effectively match expenses with cash.
When I thought he was done expressing himself, he then concentrated his thoughts around the capital efficiency promulgated during the firm's early adolescent stage that's now especially vivid in this down market where the real-time matching of sales and marketing expenses (SEO, PPM, CPA etc) limits the 'spend and pray' budgets where, paraphrasing John Wanamaker's view of bygone days where "Half the money I spend on advertising is wasted; the trouble is I don't know which half."
The consequences for this CEO is that he's more confident with spending more (or reducing less) than in previous downturns, because he has more instantaneous access to the knobs and levers to shift/reduce expenses when returns under perform expectations.
While he mentioned elongated sales cycles, due to expense caution, as evidenced by contracts 'caught in legal' before PO's are issued, he also highlighted the fundamental difference in implementation of his SaaS service offering due to:
Zero customization and minimal integration and, little or no end-user training that substantially reduces the time to revenue/cash; while enabling him to much more effectively match expenses with cash.
When I thought he was done expressing himself, he then concentrated his thoughts around the capital efficiency promulgated during the firm's early adolescent stage that's now especially vivid in this down market where the real-time matching of sales and marketing expenses (SEO, PPM, CPA etc) limits the 'spend and pray' budgets where, paraphrasing John Wanamaker's view of bygone days where "Half the money I spend on advertising is wasted; the trouble is I don't know which half."
The consequences for this CEO is that he's more confident with spending more (or reducing less) than in previous downturns, because he has more instantaneous access to the knobs and levers to shift/reduce expenses when returns under perform expectations.
Thursday, December 4, 2008
Angels marching along
University of New Hampshire's Center for Venture Research has posted its 2008 1H summary of Angel investing statistics. The key points for me were:
Angels, as an investing class, put more money to work in first and second round investments than VC's
At least during 1H of '08, Angels were investing more dollars than in '07
As expected, and quite different from the venture business, Angels do not invest deeply (multiple rounds) in companies they fund. Preferring to spread the dust wide, rather than deeply. I have not seen any studies showing returns for the Angel class, but suspect the unwillingness to pile capital into the winners (and having full exposure to the losers), greatly hinders overall returns.
Angels, as an investing class, put more money to work in first and second round investments than VC's
At least during 1H of '08, Angels were investing more dollars than in '07
As expected, and quite different from the venture business, Angels do not invest deeply (multiple rounds) in companies they fund. Preferring to spread the dust wide, rather than deeply. I have not seen any studies showing returns for the Angel class, but suspect the unwillingness to pile capital into the winners (and having full exposure to the losers), greatly hinders overall returns.
Call in the reserves
Jeff Bussgang, a Partner at Flybridge Capital Partners (and former co-founder of Upromise), wrote an interesting post about the thought process that many people in the venture community are going through right now regarding the level of reserves necessary to support existing investments.
The post highlights that the amount of capital in each fund is a definitive sum though the application of the dollars is shifting. It's simple math, if the capital held in reserve to support existing portfolio companies are greater than forecast, you make less investments....or change your model and invest lesser dollars in the same amount of companies. Given the uncertainty of add-on financing many firms are opting for the fewer investment perspective.
Recession usually means that company revenues will grow slower than planned and reducing expenses is usually less than half the equation to having a self-sustaining company. Critically, slowing spending usually means deferring the growth that leads to timely exits. The combination of slow growth and deferred exit translates to more capital required to support an existing portfolio, and less new investments.
Longer term, deferred exits will slow VC fund raising, cause more 'annex funds' to be raised to support companies in a capital starved environment and shift funding from 'A and B' rounds to later stage opportunities where the magnitude of capital required is more certain.
As this perspective seems to be emerging as the current 'wisdom of the crowd' in the VC community, it's also probably a recipe for great opportunistic early stage investors who should see great deal flow and pragmatic terms.
The post highlights that the amount of capital in each fund is a definitive sum though the application of the dollars is shifting. It's simple math, if the capital held in reserve to support existing portfolio companies are greater than forecast, you make less investments....or change your model and invest lesser dollars in the same amount of companies. Given the uncertainty of add-on financing many firms are opting for the fewer investment perspective.
Recession usually means that company revenues will grow slower than planned and reducing expenses is usually less than half the equation to having a self-sustaining company. Critically, slowing spending usually means deferring the growth that leads to timely exits. The combination of slow growth and deferred exit translates to more capital required to support an existing portfolio, and less new investments.
Longer term, deferred exits will slow VC fund raising, cause more 'annex funds' to be raised to support companies in a capital starved environment and shift funding from 'A and B' rounds to later stage opportunities where the magnitude of capital required is more certain.
As this perspective seems to be emerging as the current 'wisdom of the crowd' in the VC community, it's also probably a recipe for great opportunistic early stage investors who should see great deal flow and pragmatic terms.
Wednesday, December 3, 2008
Feeling social?
With all the talk about declining CPM's (and related metrics)... and a son who is taking High School economics, where he's been exposed to the dreaded supply/demand curve, I decided to look at the deal flow we have seen over the past 18 months (nearly 600 companies) and look at the % that were intending to build/grow companies that had banner/social advertising (supply of pages) at the core of their business models. With the sector's torrid growth, I suppose it was no surprise that nearly 60% of these reviewed companies had advertising based models that were reliant on CPM's or similar variants for revenues.
The industry has seen a massive expansion of inventory (pages) available for advertising, with some estimates touting that, in a scant 3 years, social pages now account for nearly 50% of all ad based inventory. With signs that, in a general sense, social inventory reached equilibrium with advertising spending sometime in late '07-early '08, it's not surprising that the unabated growth in pages, coupled with a stagnation (decline) in spending has shifted the CPM pricing curve for many of these firms in a negative way.
This is a natural supply/demand ebb and flow. But what I am watching is the impact the funding environment has on the success of these entrepreneurial ventures. Building social networks is a bit like building a proprietary information database where it often takes 2x the planned time and money to critical mass, but when you do, it's like owning gold mining rights into perpetuity. Today, building companies, such as Twitter, is akin to flying a plane and adding components in mid-air. You must have great faith, leading-edge innovation, or a serious safety net (capital) to achieve a critical mass substantially larger than originally planned to reach self-sufficiency or to build meaningful shareholder value. I think at least two of the above conditions are necessary for survival...three to prosper.
The natural outcome of this rationalization will be a reduction of inventory, via shuttering companies, to a level where we have market forces again in alignment with demand. From what I have seen, it will be a tall order for many companies to cross today's economic chasm. I am afraid the outcome for these businesses will be akin to the cold freeze when the 'dot bomb' imbroglio was mostly confined to the Internet. True the burn rates are lower, and management is more focused on sober business metrics, but it's a tall order to fight the broad economic tape.
M&A activity will not alone solve the economic equation shareholders find themselves in today, where they have the option to fund companies with declining asset values, hoping for a greater payback tomorrow. Chris DeWolfe, of MySpace, was quoted here that they are being approached by companies willing to sell themselves at a fraction of the value of a scant few months ago as capital to fund loss making operations is now scarce.
If past is prologue, many entrepreneurs are already making a 'left turn' and are busy building companies that leverage areas (like where end-user prices are inflated to support brick 'n mortar sales/marketing) where a great price reduction will encourage demand to outstrip available supply.
The industry has seen a massive expansion of inventory (pages) available for advertising, with some estimates touting that, in a scant 3 years, social pages now account for nearly 50% of all ad based inventory. With signs that, in a general sense, social inventory reached equilibrium with advertising spending sometime in late '07-early '08, it's not surprising that the unabated growth in pages, coupled with a stagnation (decline) in spending has shifted the CPM pricing curve for many of these firms in a negative way.
This is a natural supply/demand ebb and flow. But what I am watching is the impact the funding environment has on the success of these entrepreneurial ventures. Building social networks is a bit like building a proprietary information database where it often takes 2x the planned time and money to critical mass, but when you do, it's like owning gold mining rights into perpetuity. Today, building companies, such as Twitter, is akin to flying a plane and adding components in mid-air. You must have great faith, leading-edge innovation, or a serious safety net (capital) to achieve a critical mass substantially larger than originally planned to reach self-sufficiency or to build meaningful shareholder value. I think at least two of the above conditions are necessary for survival...three to prosper.
The natural outcome of this rationalization will be a reduction of inventory, via shuttering companies, to a level where we have market forces again in alignment with demand. From what I have seen, it will be a tall order for many companies to cross today's economic chasm. I am afraid the outcome for these businesses will be akin to the cold freeze when the 'dot bomb' imbroglio was mostly confined to the Internet. True the burn rates are lower, and management is more focused on sober business metrics, but it's a tall order to fight the broad economic tape.
M&A activity will not alone solve the economic equation shareholders find themselves in today, where they have the option to fund companies with declining asset values, hoping for a greater payback tomorrow. Chris DeWolfe, of MySpace, was quoted here that they are being approached by companies willing to sell themselves at a fraction of the value of a scant few months ago as capital to fund loss making operations is now scarce.
If past is prologue, many entrepreneurs are already making a 'left turn' and are busy building companies that leverage areas (like where end-user prices are inflated to support brick 'n mortar sales/marketing) where a great price reduction will encourage demand to outstrip available supply.
Grand Canyon University IPO
Well, there is a Father Christmas....
Grand Canyon University NASDAQ "LOPE" priced 10.5mm shares at $12/share day (vs. a filing range of $18-$20). The Company offers a blend of brick and mortar university level education, with a fast growing online component.
The combination of good comparables to price off, as well as strong top line growth of 50+%, with 20% margins are the honey that always attracts investors. Interestingly, most of the proceeds from the IPO went to shareholders.
Post offering, the stock is holding well around $15/share, which is around 2.75x next year's sales. Credit to Merrill Lynch and Credit Suisse for leading the effort in an environment where, according to Renaissance Capital, IPO's are off 75% from last year's pace.
Grand Canyon University NASDAQ "LOPE" priced 10.5mm shares at $12/share day (vs. a filing range of $18-$20). The Company offers a blend of brick and mortar university level education, with a fast growing online component.
The combination of good comparables to price off, as well as strong top line growth of 50+%, with 20% margins are the honey that always attracts investors. Interestingly, most of the proceeds from the IPO went to shareholders.
Post offering, the stock is holding well around $15/share, which is around 2.75x next year's sales. Credit to Merrill Lynch and Credit Suisse for leading the effort in an environment where, according to Renaissance Capital, IPO's are off 75% from last year's pace.
Monday, December 1, 2008
Minding your P's, Q's and insights into T's
One of the beauties of the Internet are the wonderful niche markets that rapidly develop into viable nationwide and global businesses due to the low cost of distribution and harnessing the creative talents from many corners. Often, many in the venture community only stumble upon these situations when they have reached a nice critical size that raises their visibility to the general public.
Recently, Wired Magazine had a nice article by Clive Thompson on: How T-Shirts Keep Online Content Free where he noted that a myriad of folk have set up companies to hawk T-Shirts with monikers from bands, politico's, TV characters, or other sundry sources.
CafePress , drives a reported $100mm of '07 revenues, with $20mm in profits and 60% growth by creating a community of nearly 7mm people who create, buy, and sell custom T's. Social, commerce and content all meet at CafePress. Below are numbers for CafePress, as well as one of the competitors, Zazzle, courtesy of Compete.com
Now that we have the T's covered, I am sure entrepreneurs will find great equity building opportunities in the P's and Q's.
Recently, Wired Magazine had a nice article by Clive Thompson on: How T-Shirts Keep Online Content Free where he noted that a myriad of folk have set up companies to hawk T-Shirts with monikers from bands, politico's, TV characters, or other sundry sources.
CafePress , drives a reported $100mm of '07 revenues, with $20mm in profits and 60% growth by creating a community of nearly 7mm people who create, buy, and sell custom T's. Social, commerce and content all meet at CafePress. Below are numbers for CafePress, as well as one of the competitors, Zazzle, courtesy of Compete.com
Now that we have the T's covered, I am sure entrepreneurs will find great equity building opportunities in the P's and Q's.
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