can spread like wildfire world wide. This Summit was sold out with an estimated 2,900 attendees, representing a 40% growth from the prior year and based on the number of small vendors, and entrepreneurial pitches, seems to resemble the Wild Wild west.
Previously, I posted about the success many internet businesses have enjoyed by adopting affiliate sales as a component to their sales strategy. The ability to instantly track sales, customer conversion rates, and gather demographic information enables companies to minimize the % of marketing/sales expenses that are inevitably wasted. With 50-60% of a company's expenses devoted to sales and marketing, leverage here is probably the most significant area for a CEO to concentrate.
Significantly, affiliates are compensated only if customers perform a desired activity (click through or purchase via CPA, CPC or CPA agreements). This capital efficient model is somewhat balanced with the velocity of turnover as high traffic affiliates will likely drop vendors rapidly if the real estate they lend for a particular action does not generate sufficient returns. Think of it as a compression of time in today's retail department store where a vendor's products need to produce instantly, as a 'season' can be as short as a few weeks, to earn continued shelf space.
Vendors often choose to recruit hundreds of affiliates either directly or through one of the popular affiliate networks such as Commission Junction or Linkshare. An emerging market is developing around efficiently paying these affiliates. It is not straightforward when often payments have many, if not all, of the following attributes:
* micro sizes
* international (often third world)
* they are made to a non-US bank account
* live customer support is required
Historically, payments were made via direct deposit or via Paypal. However, a proper vigilant regulatory environment, coupled with the efficiencies of debit cards has enabled a more effective payment method, specifically adopted to the affiliate world to take hold. Payoneer, a fast growing vendor (where I am an investor) epitomizes the opportunity that entrepreneurial companies have to fill a market vacuum.
The Company offers a co-branded MasterCard that adheres to compliance procedures, for customers who regularly pay affiliates; many of whom are located around the globe. With more than 175,00 outstanding cards, hundreds of companies participating, and tens of millions of dollars transacted per month, Payoneer is emerging as an early market leader.
I suspect that the affiliate channel will attract a host of other entrepreneurial offerings besides its own trade show (and magazine), networks and payments, to support its dynamic growth.
Monday, January 12, 2009
A 'permacheap' winner and a new contender
The same week that analysts cut expectations for MSFT, Red Hat announced strong performance for its fiscal Q3 (revenues up 27% when taking into account currency fluctuations) and guidance that Q4 should be within the range previously communicated to analysts.
As many of you know, Red Hat is best known as a Linux distributor, and has expanded up the software stack into middleware. The stock has doubled since mid-November and its financial metrics are a throwback to what we became familiar with during the heyday of software/internet growth; trailing P/E 38x, Price/sales 4.7x.
The New York Times on Sunday profiled Ubuntu and their version of Linux too. With more than 10% of computers sold by IBM, HP and Dell shipping with Linux installed, it is logical that other suites of Open Source Software, not as widely known, will follow the trend. Expect vendors/organizations, such as the following to accelerate market share capture:
Drupal
Firefox/Thunderbird
Asterisk
Clamwin
It's interesting that so many of the Open Source articles highlight how satisfied users are with the code, and the community support is lauded. Price seems to be something that gets the software in the door, and quality and low(er) cost of ownership keeps them there. I suppose there's a bit of self-selection inherent in early adopters taking an extra dose of pain, but it's clear that this is exactly the environment where mainstream customers are open to trying new things; especially, when vendors of the ilk of IBM, HP, and Dell lend their brands/trust to the effort.
It's a well trodden path that application vendors follow the success of OS and middleware vendors, so folk, such as SugarCRM. would logically see positive momentum too.
These subjects have been widely followed in the press for the past few years. What is now different and to me significant, however, is the ability to discover, materialize and assemble the various components that developers use to build applications suited to particular needs of organizations.
The open source movement has been conservatively embraced by hundreds of thousands of programmers who have developed countless components that are embedded in applications and systems throughout the world. In a similar way that end users now customize their home pages, organizations will demand the same flexibility, at reasonable cost of ownership to do the same with their applications. To achieve the dual objective of flexibility and cost savings, it's critical that engineers have ready access to leverage the work of others. They need to understand what components are available, what's their quality, and are there any dependencies in the underlying code. These, and many more questions underlie trust.....'if I use this code, rather than developing my own, or buying a proprietary system, will it work?'
Systems such as Krugle or Google's Code Search address the 'find' part of the issue. A second generation of companies, such as Cloudsmith, where I am an investor, delves more deeply into the aforementioned elements that build trust (community ratings, popularity, dependencies, etc). Grab a look at one of the posts by fellow investor, Chris Horn, founder of Iona, who speaks eloquently on the topic.
As many of you know, Red Hat is best known as a Linux distributor, and has expanded up the software stack into middleware. The stock has doubled since mid-November and its financial metrics are a throwback to what we became familiar with during the heyday of software/internet growth; trailing P/E 38x, Price/sales 4.7x.
The New York Times on Sunday profiled Ubuntu and their version of Linux too. With more than 10% of computers sold by IBM, HP and Dell shipping with Linux installed, it is logical that other suites of Open Source Software, not as widely known, will follow the trend. Expect vendors/organizations, such as the following to accelerate market share capture:
Drupal
Firefox/Thunderbird
Asterisk
Clamwin
It's interesting that so many of the Open Source articles highlight how satisfied users are with the code, and the community support is lauded. Price seems to be something that gets the software in the door, and quality and low(er) cost of ownership keeps them there. I suppose there's a bit of self-selection inherent in early adopters taking an extra dose of pain, but it's clear that this is exactly the environment where mainstream customers are open to trying new things; especially, when vendors of the ilk of IBM, HP, and Dell lend their brands/trust to the effort.
It's a well trodden path that application vendors follow the success of OS and middleware vendors, so folk, such as SugarCRM. would logically see positive momentum too.
These subjects have been widely followed in the press for the past few years. What is now different and to me significant, however, is the ability to discover, materialize and assemble the various components that developers use to build applications suited to particular needs of organizations.
The open source movement has been conservatively embraced by hundreds of thousands of programmers who have developed countless components that are embedded in applications and systems throughout the world. In a similar way that end users now customize their home pages, organizations will demand the same flexibility, at reasonable cost of ownership to do the same with their applications. To achieve the dual objective of flexibility and cost savings, it's critical that engineers have ready access to leverage the work of others. They need to understand what components are available, what's their quality, and are there any dependencies in the underlying code. These, and many more questions underlie trust.....'if I use this code, rather than developing my own, or buying a proprietary system, will it work?'
Systems such as Krugle or Google's Code Search address the 'find' part of the issue. A second generation of companies, such as Cloudsmith, where I am an investor, delves more deeply into the aforementioned elements that build trust (community ratings, popularity, dependencies, etc). Grab a look at one of the posts by fellow investor, Chris Horn, founder of Iona, who speaks eloquently on the topic.
Friday, January 9, 2009
Twilight or Dawn?
Bill Stensrud blogged an interesting piece using a speech given by Steven Chu, a Nobel prize winner, as its foundation. It's about innovation and venture capital in the technology area.
In essence, he explains that the doldrums in the VC world are tied to the lack of fundamental innovation we have seen in the last decade; he sees the age of the transistor as having run its course. Drawing an analogy with Stephen Jay Gould's evolutionary theory of 'punctuated equilibrium', where change does not happen in a linear manner, but in fits and starts (looking more like a staircase), he sees us past the apex of innovation and entering a stagnant trough.
He then goes on to make an argument towards the efficacy of smaller venture funds, with better GP/LP alignment, being best positioned to prosper in such an era.
Interesting reading, but I am not in full agreement. Looking at the technology industry, we have really seen its success rest on innovations in not one, but three distinct, yet related arenas; hardware (transistors), communications (optics), and software (compilers). These have never moved in lock-step. Advances in at lease one of these areas have always opened new frontiers for the others. The laggard today, represents the best investment opportunity for those focused on tomorrow.
Today, the typical user has way extra computing power and is on the way to having their bandwidth requirements more than satisfied. When this happens, we should have enough kindling to ignite another wave of software/internet innovations (perhaps around a new UI metaphor?)
Thanks again to my smart friend Larry for sending it over. If other readers see interesting things, please don't hesitate to send them over too.
In essence, he explains that the doldrums in the VC world are tied to the lack of fundamental innovation we have seen in the last decade; he sees the age of the transistor as having run its course. Drawing an analogy with Stephen Jay Gould's evolutionary theory of 'punctuated equilibrium', where change does not happen in a linear manner, but in fits and starts (looking more like a staircase), he sees us past the apex of innovation and entering a stagnant trough.
He then goes on to make an argument towards the efficacy of smaller venture funds, with better GP/LP alignment, being best positioned to prosper in such an era.
Interesting reading, but I am not in full agreement. Looking at the technology industry, we have really seen its success rest on innovations in not one, but three distinct, yet related arenas; hardware (transistors), communications (optics), and software (compilers). These have never moved in lock-step. Advances in at lease one of these areas have always opened new frontiers for the others. The laggard today, represents the best investment opportunity for those focused on tomorrow.
Today, the typical user has way extra computing power and is on the way to having their bandwidth requirements more than satisfied. When this happens, we should have enough kindling to ignite another wave of software/internet innovations (perhaps around a new UI metaphor?)
Thanks again to my smart friend Larry for sending it over. If other readers see interesting things, please don't hesitate to send them over too.
Goldman's view on Software "the year of the ROI"
In an environment where they forecast IT spending to be down 4% in '09, Goldman anticipates software spending to be flat with '08.
Though spending will be flat, there will be winners as customer spending should consolidate towards larger companies. Expect Suite providers to continue to gain share at the expense of 'best-of-breed'. Moreover, 'must-have' software segments including security, storage, and tangible ROI technologies (e.g. virtualization) should garner increases at the expense of 'nice-to'have applications (e.g. SFA).
They are bullish on CA as they see continued margin expansion due to their leveraging their deep product suite, coupled with 60% of revenues derived from maintenance. In addition, they like Citrix's product suite and cost discipline.
Though concerned about MSFT and the 'anemic' PC environment Goldman expects a MSFT RIF in the 10% range to reign in expenses. The stock is trading at a P/E of 9x '09 earnings...a deep discount to the Software peer group. If the RIF happens, they like the value of the stock at today's prices.
Similarly, they like Oracle, BMC and Symantec as they offer mission critical products and have disciplined management that is showing expense sensitivity (maintenance revenue of 46%, 55% and 47% help too) in a difficult environment.
Goldman has a SELL rating on Salesforce.com as they view their products as not being mission critical. Moreover, an intensifying competitive environment augers potential price erosion that may hinder growth. The other sells are on CommVault (concerned about management discipline) and Akamai (pricing pressure).
My take-aways were:
1. It was revealing that the most innovative, and potentially disruptive, technology discussed was virtualization.
2. An industry average P/E of 12x is at historic lows
3. The reliance these vendors have on maintenance revenues highlights that leading software vendors really are operating SaaS business models. The predictability is great, though it's amazingly difficult, absent large M&A deals (did anyone say Yahoo) to deliver growth above the mid-teens.
Though spending will be flat, there will be winners as customer spending should consolidate towards larger companies. Expect Suite providers to continue to gain share at the expense of 'best-of-breed'. Moreover, 'must-have' software segments including security, storage, and tangible ROI technologies (e.g. virtualization) should garner increases at the expense of 'nice-to'have applications (e.g. SFA).
They are bullish on CA as they see continued margin expansion due to their leveraging their deep product suite, coupled with 60% of revenues derived from maintenance. In addition, they like Citrix's product suite and cost discipline.
Though concerned about MSFT and the 'anemic' PC environment Goldman expects a MSFT RIF in the 10% range to reign in expenses. The stock is trading at a P/E of 9x '09 earnings...a deep discount to the Software peer group. If the RIF happens, they like the value of the stock at today's prices.
Similarly, they like Oracle, BMC and Symantec as they offer mission critical products and have disciplined management that is showing expense sensitivity (maintenance revenue of 46%, 55% and 47% help too) in a difficult environment.
Goldman has a SELL rating on Salesforce.com as they view their products as not being mission critical. Moreover, an intensifying competitive environment augers potential price erosion that may hinder growth. The other sells are on CommVault (concerned about management discipline) and Akamai (pricing pressure).
My take-aways were:
1. It was revealing that the most innovative, and potentially disruptive, technology discussed was virtualization.
2. An industry average P/E of 12x is at historic lows
3. The reliance these vendors have on maintenance revenues highlights that leading software vendors really are operating SaaS business models. The predictability is great, though it's amazingly difficult, absent large M&A deals (did anyone say Yahoo) to deliver growth above the mid-teens.
Thursday, January 8, 2009
'The Tyranny of Dead Ideas'
This recently introduced book by Matt Miller deals with macro issues such as school funding, merit pay, etc. On these pages I have chosen not to address such grand issues, though the title set me to thinking about the tyranny of dead ideas, within the technology industry, that when confronted with business or technology innovation, seem to crumble. Here's some examples that come to mind in the software/technology space:
1. John Moores and Rick Hosely of BMC fame proved the accepted wisdom that you can never sell software over the phone that cost more than $25,000 was nothing more than a shibboleth.
2. Microsoft proved showed CIO's that they can indeed be fired for only buying from IBM (and not innovating fast enough)
3. Linus Torvalds showed us that the wisdom of the 'Catherdral and the Bazaar' was not academic and that open source software can be more reliable and better supported than proprietary code.
4. Remember the thought that MSFT bundling its browser into the OS would kill the software industry and stifle innovation? In many ways, it accelerated the adoption of the content side of the internet and gave rise to Google's foray into the browser based OS world via Chrome.
5. After watching Hill Street Blues on my 18" monitor, streamed via Hulu, that tyranny of thought that the internet is the 'lean forward medium' and the TV is the lean back medium went up in smoke. Hasta la vista to Cablevision?...the thought just sends shivers down my spine.
6. A non-technology example of tyranny against ideas (yes, I altered the title because it seems the tyranny we have to be sensitive to in recessionary times of is the tyranny towards the status quo, and against innovation), is that no one would spend $2 for a cup of coffee; when alternatives are available for 75 cents per cup. Regardless of your taste for Starbucks, you gotta love Howard Shultz
I have no doubt that we are holding fast to a number of ideas that are rapidly 'dying' or should have never been accepted in the first place. The companies that debunk them first, or most completely, should have great futures.
1. John Moores and Rick Hosely of BMC fame proved the accepted wisdom that you can never sell software over the phone that cost more than $25,000 was nothing more than a shibboleth.
2. Microsoft proved showed CIO's that they can indeed be fired for only buying from IBM (and not innovating fast enough)
3. Linus Torvalds showed us that the wisdom of the 'Catherdral and the Bazaar' was not academic and that open source software can be more reliable and better supported than proprietary code.
4. Remember the thought that MSFT bundling its browser into the OS would kill the software industry and stifle innovation? In many ways, it accelerated the adoption of the content side of the internet and gave rise to Google's foray into the browser based OS world via Chrome.
5. After watching Hill Street Blues on my 18" monitor, streamed via Hulu, that tyranny of thought that the internet is the 'lean forward medium' and the TV is the lean back medium went up in smoke. Hasta la vista to Cablevision?...the thought just sends shivers down my spine.
6. A non-technology example of tyranny against ideas (yes, I altered the title because it seems the tyranny we have to be sensitive to in recessionary times of is the tyranny towards the status quo, and against innovation), is that no one would spend $2 for a cup of coffee; when alternatives are available for 75 cents per cup. Regardless of your taste for Starbucks, you gotta love Howard Shultz
I have no doubt that we are holding fast to a number of ideas that are rapidly 'dying' or should have never been accepted in the first place. The companies that debunk them first, or most completely, should have great futures.
Wednesday, January 7, 2009
The 20 VC's most exposed to Web 2.0
Despite its alarmist titile, this piece in Silicon Valley Insider, does a good job outlining the 'exposure' of some of the notable venture firms to the Web 2.0 'mischief'. From my perspective, it's heartening to read the article as it highlights that the capital efficiency of internet companies seems, for the most part, to be a core differentiator between the Internet bubble, and the economy bubble we now face.
If this is the worst of it, then the venture community seems to have done a good job at harnessing capital to properly diversify into the myriad of technology arenas, or to hold capital to invest more deeply in winners. Of course, the big test will come in '09 when tough decisions will be made on which portfolio companies to support and which will be left for an inglorious demise.
If this is the worst of it, then the venture community seems to have done a good job at harnessing capital to properly diversify into the myriad of technology arenas, or to hold capital to invest more deeply in winners. Of course, the big test will come in '09 when tough decisions will be made on which portfolio companies to support and which will be left for an inglorious demise.
Oracle Corporation's M&A strategy, presented at SIIA PE forum
The Software & Information Industry Association sponsored a presentation with Vishal Bhagwati, VP Corporate Development of Oracle, to discuss Oracle's Acquisition and Integration strategy. Given the spotlight on venture exits, the topic, part of an ongoing series of events the SIIA is sponsoring for its Venture Capital members, was especially relevant.
Here are some quick Oracle facts that highlights its scale:
$22.6B Revenue for FY '08
320,000 global customers
20,000 Partners
80,000 employees
They are the second largest Saas vendor in the world where they think of it as yet another deployment option to make their products available via purchase or subscription.
Oracle Strategy:
To offer the most complete industry portfolio around standards-based architectures that are integrated to work together. They view IBM, SAP and MSFT as their key competitors and try to differentiate their position as follows:
IBM is not in applications
SAP is not in the database or in the application management field
MSFT is totally proprietary
M&A background
50+ acquisitions aggregating $45B in value. Now at the pace of completing 3-4 transactions (not including IP based deals) per quarter.
View M&A as a tool for growth, not a strategy in its own right. Post transaction, having someone accountable for the metrics is critical to bringing planned value.
Their focus is on the following value components (note to self...re-read before presenting any portfolio company considering M&A with Oracle):
* Providing customers with broader and better product capabilities
* As a vehicle to meaningfully enter complementary industries
* Accelerate core product innovation
* Lower cost of customer ownership, through pre-packaged integration (drive towards permacheap).
Oracle has seen successes in their vertical industry offerings where markets such as Communications, Retail and Manufacturing have seen multiple transactions to boost organic growth. They have not yet completed any transactions in the Health care or the Public sector but, given these market sizes, it's logical they are looking deeply in these markets.
The current environment is intensifying their interest in transactions as they have currency and see an opportunity to fill in areas of interest at attractive values. Note that he stressed that Oracle deeply discounts prospective synergies in valuing their transactions.
Integration strategy
Capture hearts and minds of employees and customers
Rapid back-office integration
Track results on a weekly basis
Role of Bankers
He was asked (by me) where bankers bring the most value, introduction or deal structure. He was polite, but it seemed as if his answer was neither. They have an active industry touch program and tend to know many of the people who would be board members of acquisition targets, so approaches are easy and, if a Company is for sale, they inevitably get a call from someone (whether its a banker or board member). On structuring transactions, while they don't need assistance, a professional can readily assist the target's management team/board.
One area, where I have seen bankers greatly assist, is when the board/shareholders/management do not have aligned interests due to a 'funky' capital structure resulting from multiple funding rounds. In these instances, a professional ostensibly hired for their outside expertise can be invaluable when dealing with insiders.
Final thought
Over the years, we have seen a number of companies (best personified by Computer Associates) embark on aggressive acquisition strategies. Notwithstanding the accounting 'mischief' CA really used M&A as an effective means to emerge as a market leader. Their key flaw was abandoning innovation, therefore, when the company grew so large as to run out of meaningful acquisitions as a means to bolster growth, the deck chairs toppled into the ocean. I am not sure how much of Oracle's growth is tied to its thus far successful M&A integration, though I suspect they have the opportunity, to complement their very public transactions with some potential game changing technology based transactions (like Cisco and Citrix have so successfully done).
Here are some quick Oracle facts that highlights its scale:
$22.6B Revenue for FY '08
320,000 global customers
20,000 Partners
80,000 employees
They are the second largest Saas vendor in the world where they think of it as yet another deployment option to make their products available via purchase or subscription.
Oracle Strategy:
To offer the most complete industry portfolio around standards-based architectures that are integrated to work together. They view IBM, SAP and MSFT as their key competitors and try to differentiate their position as follows:
IBM is not in applications
SAP is not in the database or in the application management field
MSFT is totally proprietary
M&A background
50+ acquisitions aggregating $45B in value. Now at the pace of completing 3-4 transactions (not including IP based deals) per quarter.
View M&A as a tool for growth, not a strategy in its own right. Post transaction, having someone accountable for the metrics is critical to bringing planned value.
Their focus is on the following value components (note to self...re-read before presenting any portfolio company considering M&A with Oracle):
* Providing customers with broader and better product capabilities
* As a vehicle to meaningfully enter complementary industries
* Accelerate core product innovation
* Lower cost of customer ownership, through pre-packaged integration (drive towards permacheap).
Oracle has seen successes in their vertical industry offerings where markets such as Communications, Retail and Manufacturing have seen multiple transactions to boost organic growth. They have not yet completed any transactions in the Health care or the Public sector but, given these market sizes, it's logical they are looking deeply in these markets.
The current environment is intensifying their interest in transactions as they have currency and see an opportunity to fill in areas of interest at attractive values. Note that he stressed that Oracle deeply discounts prospective synergies in valuing their transactions.
Integration strategy
Capture hearts and minds of employees and customers
Rapid back-office integration
Track results on a weekly basis
Role of Bankers
He was asked (by me) where bankers bring the most value, introduction or deal structure. He was polite, but it seemed as if his answer was neither. They have an active industry touch program and tend to know many of the people who would be board members of acquisition targets, so approaches are easy and, if a Company is for sale, they inevitably get a call from someone (whether its a banker or board member). On structuring transactions, while they don't need assistance, a professional can readily assist the target's management team/board.
One area, where I have seen bankers greatly assist, is when the board/shareholders/management do not have aligned interests due to a 'funky' capital structure resulting from multiple funding rounds. In these instances, a professional ostensibly hired for their outside expertise can be invaluable when dealing with insiders.
Final thought
Over the years, we have seen a number of companies (best personified by Computer Associates) embark on aggressive acquisition strategies. Notwithstanding the accounting 'mischief' CA really used M&A as an effective means to emerge as a market leader. Their key flaw was abandoning innovation, therefore, when the company grew so large as to run out of meaningful acquisitions as a means to bolster growth, the deck chairs toppled into the ocean. I am not sure how much of Oracle's growth is tied to its thus far successful M&A integration, though I suspect they have the opportunity, to complement their very public transactions with some potential game changing technology based transactions (like Cisco and Citrix have so successfully done).
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