During the past year I have been somewhat negative about the ability for young companies to build serious stakeholder value in the segment of internet video space so visibly pioneered by YouTube. My concern is that, despite plummeting costs, the value-add of recycling someone's proprietary content, or running adds against yet another silly pet trick was limited in an era of surging page inventory and limited innovation.
Yesterday, at Techaviv a gathering of Israeli entrepreneurs heard 3 companies present their offerings to a physical audience of nearly 50 people, plus a global audience of Techaviv members. One of the firms, Boxee, recently funded by Spark Ventures and Union Square Ventures, (HQ in NY and R&D in Israel) presented an innovative approach that automatically merges your personal digital assets with content available over the internet to present on your TV a greatly enhanced user experience. Complementing the merging of your data with external content is a social aspect where you are able to invite/follow your friends' media experiences.
The user experience seems neat in the demo (I have signed up for the alpha but not yet installed the service, so can't say for sure), but what really attracts me are three other attributes that are integral to building a wonderful business. The IP is built on top of the XBMC active open source community that minimizes core development expense, so they can devote their resources towards the application and UI (and license agreements with MP3 and other folk). Second, the company seems to be executing quite well on a low-cost viral seeding strategy hitting many influencer's and speaking at industry forums large and small. Finally, the small team seems totally driven and comes highly recommended.
I am not sure if this company will ultimately be successful. However, for a relatively modest amount of capital deployed against quite a large market opportunity, that interests many deep pocketed companies, it seems to be just the type of venture bet that the asset class should make.
One company is not enough to reform a skeptic; two though gives great pause. SundaySky is two year old company which has just released its initial product (company also started in Israel, and is moving HQ to NY), an infrastructure platform that enables a site to generate dynamic video on the fly. The promise is that professional quality video can be created for your site with no human intervention(other than professional services when you deploy the platform)...if this works, it will enable sites to substantially increase monetization of content or conversion rates for commerce; while lowering the costs associated with doing this. I am not yet sure if the business behind SundaySky will conform to the capital efficient model that is core to giving customers a true disruptive value proposition that I'm convinced will be embraced by true disruptor's, but at the next Techaviv session, the team will be presenting their solution and answering questions. SundaySky is funded by my friends over at Globespan Capital Partners and Carmel Ventures.
Tuesday, January 6, 2009
Venture backed exit statistics
One of the major publications that follow the venture market, PEhub, recently published their recap of '08. As expected, the numbers were not pretty with:
M&A deal value was down 54% to $23B, representing 325 venture-backed transactions (down 29%).
The median consideration amount was down nearly 50% to $45mm; something to think about when these acquired firms raised a median $22.6mm
Seven IPO's generated a scant $551mm in liquidity.
Significantly, it took a median 6.5 years for a Company to reach liquidity via M&A and 8.3 years for an IPO.
No doubt these numbers were skewed by the financial downturn but I also sense something more significant that portends short-term bad news, and longer-term good news is happening, at least in the software and internet sector.
First the bad news.
Many of the investments in consumer facing applications that are dependent upon advertising dollars to support their businesses will be in for far tougher times than anticipated. The combination of a steep downturn in CPC and PPC rates, coupled with rising inventories will leave their backers with an unenviable choice of putting more capital to work in troubled companies (hoping for a short-term market rebound), or withdrawing support and allocating funds towards new investments or supporting the firms with positive momentum. While this Darwinian process is expected, and encouraged, in the venture business, it's happening earlier in the company life cycle than anticipated.
Investments in companies selling to the SMB's and Enterprise arenas are also seeing slower revenue momentum than anticipated, but all indications are that business spending is not as impacted as much as advertising budgets. The issue in this arena is crafting a value proposition that is so compelling that it overcomes the steepening conservatism seen in the early days of a recession.
The bigger market issue, in my mind, is that the dearth of IPO's has left the software and internet arenas with a large imbalance between the number of sellers (large increase) and the count of willing and able buyers (steady decrease). As a consequence, unless there is a rapid pruning of investments, I expect the 'time to liquidity' metrics to worsen over the next few years as many companies, lacking the growth story for a positive IPO, and having raised too much capital to show a positive liquidity event (but respectable businesses who have reached a critical mass to be self-sustaining), continue on their private path.
The good news is that these numbers do not reflect the intense move towards capital efficiency that many entrepreneurs, and their venture backers, have been preaching over the past 3 years. Harnessing instant information from the internet to optimize sales and marketing, and running their businesses based on 'just in time' infrastructure creates situations where less capital translates into better businesses that are equipped to pass these efficiencies onto their customers. Thereby, creating greater opportunities for all stakeholders.
Venture firms, which were formed in the past 5 years, seem to have the DNA to focus on these trends. In the NY area, we see firms such as First Round Capital and Union Square Ventures to be two examples of firms that vigorously practice the capital efficiency mantra; while focusing on high growth market opportunities. It is still premature to label these firms as institutions with the foresight of Kleiner or Accel; but their investing and portfolio maintenance styles bear watching.
M&A deal value was down 54% to $23B, representing 325 venture-backed transactions (down 29%).
The median consideration amount was down nearly 50% to $45mm; something to think about when these acquired firms raised a median $22.6mm
Seven IPO's generated a scant $551mm in liquidity.
Significantly, it took a median 6.5 years for a Company to reach liquidity via M&A and 8.3 years for an IPO.
No doubt these numbers were skewed by the financial downturn but I also sense something more significant that portends short-term bad news, and longer-term good news is happening, at least in the software and internet sector.
First the bad news.
Many of the investments in consumer facing applications that are dependent upon advertising dollars to support their businesses will be in for far tougher times than anticipated. The combination of a steep downturn in CPC and PPC rates, coupled with rising inventories will leave their backers with an unenviable choice of putting more capital to work in troubled companies (hoping for a short-term market rebound), or withdrawing support and allocating funds towards new investments or supporting the firms with positive momentum. While this Darwinian process is expected, and encouraged, in the venture business, it's happening earlier in the company life cycle than anticipated.
Investments in companies selling to the SMB's and Enterprise arenas are also seeing slower revenue momentum than anticipated, but all indications are that business spending is not as impacted as much as advertising budgets. The issue in this arena is crafting a value proposition that is so compelling that it overcomes the steepening conservatism seen in the early days of a recession.
The bigger market issue, in my mind, is that the dearth of IPO's has left the software and internet arenas with a large imbalance between the number of sellers (large increase) and the count of willing and able buyers (steady decrease). As a consequence, unless there is a rapid pruning of investments, I expect the 'time to liquidity' metrics to worsen over the next few years as many companies, lacking the growth story for a positive IPO, and having raised too much capital to show a positive liquidity event (but respectable businesses who have reached a critical mass to be self-sustaining), continue on their private path.
The good news is that these numbers do not reflect the intense move towards capital efficiency that many entrepreneurs, and their venture backers, have been preaching over the past 3 years. Harnessing instant information from the internet to optimize sales and marketing, and running their businesses based on 'just in time' infrastructure creates situations where less capital translates into better businesses that are equipped to pass these efficiencies onto their customers. Thereby, creating greater opportunities for all stakeholders.
Venture firms, which were formed in the past 5 years, seem to have the DNA to focus on these trends. In the NY area, we see firms such as First Round Capital and Union Square Ventures to be two examples of firms that vigorously practice the capital efficiency mantra; while focusing on high growth market opportunities. It is still premature to label these firms as institutions with the foresight of Kleiner or Accel; but their investing and portfolio maintenance styles bear watching.
Monday, January 5, 2009
Marissa Mayer blog post- Google's VP search and UI (click here)
As Google is the de facto user interface to content published on the internet, understanding the thinking behind where they think innovation in Search is required is important. Following are my key takeaways from her post:
1. The latest generation of smart phones, encumbered by network speed and coverage, only scratches the surface of user demand for fast data access when you want it.
2. Natural language (always one of Bill Gates' key interest areas) input, with voice and image awareness, has the potential to advance the search paradigm from today's limitation on 'key word' selection as your search kick-off.
3. Search results ought to be 'universal'. Meaning an inclusion and prioritization of images, video, maps, etc. would greatly enhance the user experience. Here's a link to the Google blog post from May 07, that describes what they are up to in this area.
4. Dealing with ambiguity of search terms, and personalization of results, are important. Recognizing that one person's Jaguar is a football team, and another is an automobile, highlights that the more a search engine knows about your preferences, and even location (hello privacy concerns), the better your search result will be.
5. In a nod to the 'implicit web' where non-obvious relationships are harnessed to gather information, mining relationships to assist in getting the right content can be a great booster. I suspect that doing this in a non-obtrusive manner will be a huge challenge/opportunity.
6. Recognizing that today's internet users speak a myriad of languages, and more importantly, generate content in these languages, having reliable cross-language information access will greatly improve access to the 'best' content.
For some time, my personal experience with internet commerce and looking for specific content has led me to an interest in vertical search. For example, a lifetime of entering key words into Google, to buy a handmade birthday present for my wife, will never give me the same experience that Etsy provides. Likewise, iMedix provides a great amalgamation of medical related information that's optimized for the health arena.
You would not necessarily think of either of these companies being in the search business, though their concentration on specific markets enables them to harness search, in a specific way, that obviates my temptation to use Google in these arenas. As markets get larger, they tend to create sub-markets that, with maturity become markets in their own right. Coupled with the Ms Meyer's thoughts, this should represent many entrepreneurial and venture opportunities.
1. The latest generation of smart phones, encumbered by network speed and coverage, only scratches the surface of user demand for fast data access when you want it.
2. Natural language (always one of Bill Gates' key interest areas) input, with voice and image awareness, has the potential to advance the search paradigm from today's limitation on 'key word' selection as your search kick-off.
3. Search results ought to be 'universal'. Meaning an inclusion and prioritization of images, video, maps, etc. would greatly enhance the user experience. Here's a link to the Google blog post from May 07, that describes what they are up to in this area.
4. Dealing with ambiguity of search terms, and personalization of results, are important. Recognizing that one person's Jaguar is a football team, and another is an automobile, highlights that the more a search engine knows about your preferences, and even location (hello privacy concerns), the better your search result will be.
5. In a nod to the 'implicit web' where non-obvious relationships are harnessed to gather information, mining relationships to assist in getting the right content can be a great booster. I suspect that doing this in a non-obtrusive manner will be a huge challenge/opportunity.
6. Recognizing that today's internet users speak a myriad of languages, and more importantly, generate content in these languages, having reliable cross-language information access will greatly improve access to the 'best' content.
For some time, my personal experience with internet commerce and looking for specific content has led me to an interest in vertical search. For example, a lifetime of entering key words into Google, to buy a handmade birthday present for my wife, will never give me the same experience that Etsy provides. Likewise, iMedix provides a great amalgamation of medical related information that's optimized for the health arena.
You would not necessarily think of either of these companies being in the search business, though their concentration on specific markets enables them to harness search, in a specific way, that obviates my temptation to use Google in these arenas. As markets get larger, they tend to create sub-markets that, with maturity become markets in their own right. Coupled with the Ms Meyer's thoughts, this should represent many entrepreneurial and venture opportunities.
Saturday, January 3, 2009
Permacheap
Jeff is one of my tennis playing buddies and a far better athlete than I ever was but what I really admire is that he's also one of these guys who really knows financial markets; far better than I ever will, and has a simple yet powerful way of explaining things.
He's never satisfied just beating me in tennis and always has decimation in his eyes and on his mind. Aiding him is a wonderful ability to distract me with some pre-game business related chatter. Today's distraction was around a trend he calls 'permacheap'. He sees asset values being fundamentally reset for the foreseeable future and advises his people against holding assets just because they are so cheap today. According to him, cheap is an absolute expression and if you think of it relatively and start comparing values to yesterday you are chasing fools gold. The market today is just different. He's not optimistic or pessimistic, just a realist who is adjusting his game to market realities.
Between sets he took a new distracting tact. 'Charlie, did you know that US Government is now the largest mattress company in the world?' People are giving them money, for 30-90 days and asking for zero return. It's like stuffing money in a virtual giant mattress.
That's how much trust has left the market and why companies that embrace permacheap, (like at Pando where the selling proposition is 25% of the cost and the same or better SLA as competitive alternatives) resonates well in the market.
Back to tennis, my revenge is to lend him rackets whose strings are just about to break. When he calls me out on it, I calmly explain that restringing tomorrow will be much cheaper than restringing today. Bring it on, 'just bring it on Charlie', so he says.
He's never satisfied just beating me in tennis and always has decimation in his eyes and on his mind. Aiding him is a wonderful ability to distract me with some pre-game business related chatter. Today's distraction was around a trend he calls 'permacheap'. He sees asset values being fundamentally reset for the foreseeable future and advises his people against holding assets just because they are so cheap today. According to him, cheap is an absolute expression and if you think of it relatively and start comparing values to yesterday you are chasing fools gold. The market today is just different. He's not optimistic or pessimistic, just a realist who is adjusting his game to market realities.
Between sets he took a new distracting tact. 'Charlie, did you know that US Government is now the largest mattress company in the world?' People are giving them money, for 30-90 days and asking for zero return. It's like stuffing money in a virtual giant mattress.
That's how much trust has left the market and why companies that embrace permacheap, (like at Pando where the selling proposition is 25% of the cost and the same or better SLA as competitive alternatives) resonates well in the market.
Back to tennis, my revenge is to lend him rackets whose strings are just about to break. When he calls me out on it, I calmly explain that restringing tomorrow will be much cheaper than restringing today. Bring it on, 'just bring it on Charlie', so he says.
MSFT and market share...looking like GM in the 80's?
For nearly two decades the foundation of MSFT's success has been the interplay between its successful operating system and application franchises. Each reinforced each other to provide a superior customer experience as an alternative to the cackle of thousands of vendors; each with a unique perspective that brought us 2 pound user manuals. Unfortunately for MSFT, its Vista misstep, coupled with a stunning lack of innovation in their applications, and lack of market share in the fastest growing arenas puts their ongoing dominant role into question.
According to market research firm Net Applications, Apple's OS X operating system reached a market share of nearly 10% in December. Though significant in numbers, the % alone shows a distant number 2, till you see it represents a stunning increase from 7.3% in 2007. Early in the cycle of a new OS, Windows lost more than 3% of market share last year. In the context of a market move towards thin(ner) applications and the emergence of smart mobile devices (iPhone and Blackberry), at no time in the last 10 years (since vanquishing Netscape) was Microsoft's market share mantra under greater assault than in '08; or more fragile in '09
Looking at the market trend towards 'thin' computing, where the browser rules the User Interface, Firefox exceeded a 20% share for the first time in November, while IE fell to below 70%. From a market share perspective, Google's Chrome is still mostly irrelevant. BUT if, as widely reported, its Android OS is shortly deployed in the fastest growing segment of the PC market, Netbooks, the combination could represent a powerful combination embracing two critical market trends; cheaper computing and thin client applications where MSFT surely lacks momentum. Search, which one can think of as the information browser for the internet, today is probably the most prevalent thin client application. Google's share now exceeds 81%, while MSFT (MSN and Live) continues their downward share trend to a paltry 4.5%.
Along with thin computing (aka cloud computing), smart mobile devices represents the other critical fast growing computing platform. According to market research firm Canalys , the market grew 28% for the 12 months ending Sept 30th. Here, market share leader Nokia is in steep decline seeing share plummet from 51% to 39%. Apple and RIM were the chief beneficiaries surging to 17 and 15% respectively. Recent 3G shipments by Apple and RIM should reinforce their share capture for, at least 1H '09.
Looking at smart phones, from an OS perspective, Symbian is a troubled market leader seeing their share plummet from 68% to 47% in the last year. Here, 4th place OS vendor MSFT saw share rise from 12 to 13%. Though, given the innovative products shipped by RIM and Apple and the significant embrace of Android by Motorola, it seems as if MSFT will be hard pressed to maintain its momentum.
Microsoft has incredible assets ranging from brand, to market share to great people. Nevertheless, it's clear that its leadership, or even relevance in the most important computing trends is lacking. For customers, this will create a vacuum that will both confuse and serve as the impetus for innovating. For entrepreneurs, and the venture community, it presages a Spring Awakening.
According to market research firm Net Applications, Apple's OS X operating system reached a market share of nearly 10% in December. Though significant in numbers, the % alone shows a distant number 2, till you see it represents a stunning increase from 7.3% in 2007. Early in the cycle of a new OS, Windows lost more than 3% of market share last year. In the context of a market move towards thin(ner) applications and the emergence of smart mobile devices (iPhone and Blackberry), at no time in the last 10 years (since vanquishing Netscape) was Microsoft's market share mantra under greater assault than in '08; or more fragile in '09
Looking at the market trend towards 'thin' computing, where the browser rules the User Interface, Firefox exceeded a 20% share for the first time in November, while IE fell to below 70%. From a market share perspective, Google's Chrome is still mostly irrelevant. BUT if, as widely reported, its Android OS is shortly deployed in the fastest growing segment of the PC market, Netbooks, the combination could represent a powerful combination embracing two critical market trends; cheaper computing and thin client applications where MSFT surely lacks momentum. Search, which one can think of as the information browser for the internet, today is probably the most prevalent thin client application. Google's share now exceeds 81%, while MSFT (MSN and Live) continues their downward share trend to a paltry 4.5%.
Along with thin computing (aka cloud computing), smart mobile devices represents the other critical fast growing computing platform. According to market research firm Canalys , the market grew 28% for the 12 months ending Sept 30th. Here, market share leader Nokia is in steep decline seeing share plummet from 51% to 39%. Apple and RIM were the chief beneficiaries surging to 17 and 15% respectively. Recent 3G shipments by Apple and RIM should reinforce their share capture for, at least 1H '09.
Looking at smart phones, from an OS perspective, Symbian is a troubled market leader seeing their share plummet from 68% to 47% in the last year. Here, 4th place OS vendor MSFT saw share rise from 12 to 13%. Though, given the innovative products shipped by RIM and Apple and the significant embrace of Android by Motorola, it seems as if MSFT will be hard pressed to maintain its momentum.
Microsoft has incredible assets ranging from brand, to market share to great people. Nevertheless, it's clear that its leadership, or even relevance in the most important computing trends is lacking. For customers, this will create a vacuum that will both confuse and serve as the impetus for innovating. For entrepreneurs, and the venture community, it presages a Spring Awakening.
Friday, January 2, 2009
2008 Public Internet M&A: Year In Review
Bill Burnham, an ex-Wall Street analyst and current hedge fund manager posted reviews on Public Internet M&A, Software IPO, and Internet IPO activity for 2008. As expected, all showed a dearth (understatement) of activity.
Looking at the M&A statistics, it seems to me that the lack of actviity is related to two factors; one short term and the other industry structural. Addressing the short term issue is that it's hard to place a value on a company when it's stock (and yours) is melting down an average 41% in a six month time frame. We have seen spastic run-ups and run-downs and they just about always freeze buying and selling.
The larger issue is the lack of IPO's. This multi-year freeze seems to be turning the software/internet market structure from a classic triangle (with the largest number of companies at the top and the greatest on the bottom), to more of an hourglass where the middle-market public companies, which historically account for an outsized % of transactions, are disappearing. The disappearance of these firms, not replaced by new ones, is limiting M&A volume. Three related factors ought to be in alignment to bring back the software/internet middle market; company performance, ready equity buyers, and Wall Street firms willing to bet their balance sheets.
We are in the midst of some tidal changes that will undoubtedly give us great opportunities, but just not the same one's we saw for the past 10 years. For many investors, as Warren Buffet once said, 'the shifting tides will expose those of us who were skinny dipping'.
Looking at the M&A statistics, it seems to me that the lack of actviity is related to two factors; one short term and the other industry structural. Addressing the short term issue is that it's hard to place a value on a company when it's stock (and yours) is melting down an average 41% in a six month time frame. We have seen spastic run-ups and run-downs and they just about always freeze buying and selling.
The larger issue is the lack of IPO's. This multi-year freeze seems to be turning the software/internet market structure from a classic triangle (with the largest number of companies at the top and the greatest on the bottom), to more of an hourglass where the middle-market public companies, which historically account for an outsized % of transactions, are disappearing. The disappearance of these firms, not replaced by new ones, is limiting M&A volume. Three related factors ought to be in alignment to bring back the software/internet middle market; company performance, ready equity buyers, and Wall Street firms willing to bet their balance sheets.
We are in the midst of some tidal changes that will undoubtedly give us great opportunities, but just not the same one's we saw for the past 10 years. For many investors, as Warren Buffet once said, 'the shifting tides will expose those of us who were skinny dipping'.
Thursday, January 1, 2009
It's the numbers
One of the Companies that I have invested in, Reimage, has been experiencing torrid growth (off a relatively small base). The goal of the Company is to ensure, via a remote automated service, that your Windows based PC works like new; everyday.
It's a great vision, but the execution of the business is something that I would like to share with you. The CEO has deep technical talent and strong product opinions, yet the product decisions are made via live A/B testing with near instant results. With daily traffic in the low/mid tens of thousands, new features, site designs and promotions are being constantly tested and adopted or discarded within days, or even hours, based on quantified customer or channel partner results. Product debates rage for minutes, not days.
Much has been justifiably written about the capital efficiency brought to the development process for software and internet companies. A great deal of attention is being placed on the virality of internet distribution too. All are important, but having the right product is the foundation of all great technology companies. Mitch Kapor once said it well when he was asked to comment about a potential competitor with a great demo 'you're not worth spit without a great working product'. With relatively low barriers to competition, he's even more right now than when he was running Lotus.
The integration of rapid development, testing, and distribution, taken together are the foundations of the capital efficiency touted by entrepreneurs and investors. Rapid is the key word here and, counter-intuitively, adding capital often mitigates 'rapid' as a company's culture is quick to ossify when more people are added and financial plans are solidified. Today, independent of the market's 'mischief', many of us in the venture community are seeing a reduced demand for capital from entrepreneurs embracing 'rapid'. This bottom-up trend, affects the structure of the venture community where fund success often predates raising larger funds.
I expect the foreseeable future will bring us less funds....as well as smaller funds. Could be good news for entrepreneurs and LP's alike.
It's a great vision, but the execution of the business is something that I would like to share with you. The CEO has deep technical talent and strong product opinions, yet the product decisions are made via live A/B testing with near instant results. With daily traffic in the low/mid tens of thousands, new features, site designs and promotions are being constantly tested and adopted or discarded within days, or even hours, based on quantified customer or channel partner results. Product debates rage for minutes, not days.
Much has been justifiably written about the capital efficiency brought to the development process for software and internet companies. A great deal of attention is being placed on the virality of internet distribution too. All are important, but having the right product is the foundation of all great technology companies. Mitch Kapor once said it well when he was asked to comment about a potential competitor with a great demo 'you're not worth spit without a great working product'. With relatively low barriers to competition, he's even more right now than when he was running Lotus.
The integration of rapid development, testing, and distribution, taken together are the foundations of the capital efficiency touted by entrepreneurs and investors. Rapid is the key word here and, counter-intuitively, adding capital often mitigates 'rapid' as a company's culture is quick to ossify when more people are added and financial plans are solidified. Today, independent of the market's 'mischief', many of us in the venture community are seeing a reduced demand for capital from entrepreneurs embracing 'rapid'. This bottom-up trend, affects the structure of the venture community where fund success often predates raising larger funds.
I expect the foreseeable future will bring us less funds....as well as smaller funds. Could be good news for entrepreneurs and LP's alike.
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