1. 2. 3. 4.
The Hot Sectors! The Facts About Exits Sentiment in Ventureland Thoughts on Three Rising Trends
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Where’s The Biggest Investment Opportunity Today?
Greentech
55%
Internet B2B
23%
Mobile/Wireless
11%
Media & Entertainment
7%
Security
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Poll conducted at AlwaysOn Conference Summer 2007 CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
4%
Anything Else Worth Investing In?
• • • • • •
3
Enterprise equipment Telecom services Healthcare services Biometrics Semiconductors Financial services
CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Exits: Facts and Myths
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Private Equity: A Potent Force
• 1st half of 2007
– 6 of 10 largest tech M&A done by Private Equity – Europe no exception
• 2 largest: Freescale, Philips Semi
– Pending PE debt issuance
• Jan 06 = $40B • June 07 = $250B
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Field of Acquirers Has Shrunk
• 2006
–40% of all tech M&A above $50M done by 10 companies –Average market cap of acquirers = $100B
Enormous buying power in hands of a few
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Myth #1
The IPO market is back!
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Tech IPOs Have Become Rarer
1990‟s
20012003
2004 2007
IPOs Per Year
130
20-25
55
Today we have less than half the IPOs of pre-bubble 1990’s
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
VC Exits above $50M
IPO 1990‟s Past 4 years 60% 10% M&A 40%
90%
CLEAR STO N E
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CONFIDENTIAL
V E N T U R E
P A R T N E R S
Significant “IPO Premium”
Technology Business Services Healthcare Services
IPO Premium
26%
37%
43%
…and investors enjoy continued upside potential
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
2007 versus 1997
• VCs deploying 2.5X more capital versus 10 years ago but…… Same # of exits above $100M 500% Increase in M&A exits 80% decline in IPO exits
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Implications?
• Buyer concentration = continual tough M&A market • No re-population of the buyer base
– Selling our best companies – Mortgaging our future?
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CLEAR STO N E
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V E N T U R E P A R T N E R S
A Shrinking Buyer Base
• 1640 public tech companies today
– Down 35% from Peak in 2000! – 7 straight years of fewer public tech companies
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Myth #2
The bar is incredibly high for taking a company public….easier to sell the business
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Public Market Facts
• 2/3 of names on NASDAQ are $100M
$50 - $100M
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Note: IPOs from QI 2004 - Q2 2007. Source: Dealogic
CLEAR STO N E
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V E N T U R E P A R T N E R S
Clearly Not Just Tech….
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CLEAR STO N E
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V E N T U R E P A R T N E R S
IPO vs. Sale of Business
Business Services
Number of IPOs 14
Health Care
44
Technology
23
Consumer
10
Financial Services
16
TOTAL
107
Average Enterprise Value
$224.9M
$212.5M
$274.4M
$270.3M
$325.5M
$236.1M
Average LTM EBITDA Multiple
16.8x
24.3x
17.4x
11.6x
17.3x
18.6x
All IPOs between January 1, 2006, and June 30, 2007, where the market cap was less than $300 million...
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Implied EBITDA?
$15.7M
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Moderate Revenue Bar…
Acme Allot Riverbed ShoreTel Packet Comm Networks Comm
Pre-IPO LTM Revenue
$58M
$32M
$49M
$71M
PeopleSupport = $37M…..Compellent = $38M
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Not Just Web Companies Going Public…..
• Other Tech IPOs in past 12 months…. –Aruba, Bigband Networks, Infinera, Starent Networks, Veraz, Airvana, Mitel….
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CLEAR STO N E
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V E N T U R E P A R T N E R S
What If…..
…..AT&T bought Cisco for $250M in 1991
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Instead…. • Sequoia chose to take public at a $225M market cap • Good Decision?
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Conclusion?
Let‟s get smart about the Small Cap IPO market……
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Data Analytics: Attractive Economics For Customers and Investors
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Thinking by Numbers
• Goal: turning data into profits • Intuitive and experiencial expertise losing out to number crunching • Still…..statistical analysis faces tremendous skepticism
– threatens information monopoly of experts
• Money Ball effect could help drive acceptance
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Analytics Coming of Age
• Retail
– Video to assess shopping patterns in stores
• Getting people to stay longer/spend more
– Data filtering to lower returns/avoid markdowns
• Web
– Too many to list….
• Consumer Marketing
– Modeling consumer buying proclivity
• Hospitality Industry
– Gary Loveman‟s majic at Harris Casino
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Vintage Wine Price Predictor
• Princeton economics professor wondered…..
– what factors determine wine prices?
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Don’t Need to Drink It….
• Professor speculated that tasters were unreliable • Modeling pinpointed important variables • Most important determinate of vintage quality?
– seasonal temperature – obvious but overlooked
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CLEAR STO N E
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V E N T U R E P A R T N E R S
“Expert” Backlash….
–Wine experts blasted approach • Convinced industry publications not to print it –Gauge has proven far more accurate than experts
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Still Some Work To Do
• Many failed attempts… • Companies burned by unfulfilled promises • Uphill battle to prove efficacy • But companies remain interested….
– Top line boosters > cost reduction tools
CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
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Managed Services: A Trend To Bet On
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Services….Upheaval in the Equipment Space
• New and more effective models emerging
– Department managers controlling more IT spending – IT organizations want to know less and less – Coupling managed service with purchase – Cisco leading charge
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Services….More Acceptance From Resellers
• VAR margins down to 10% to 20% • Finally learning to sell services • Europe as a model
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Services = Customer Lock-in
• Services keep customers loyal
– Nokia expects $500M in revenue from SoonR type service in 4 years
• Hopes service will keep users on Nokia platform
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Operational Benefits of Managed Services Model
• No legacy platforms to maintain
• 3000 Microsoft developers maintain Windows 2000
• • • •
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Upgrades pushed out daily Birds eye view of customer behavior Land and expand Much shorter sale-to-revenue cycle
CLEAR STO N E
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V E N T U R E P A R T N E R S
Service Provider = More Valuable Company
• Acquirers gain immediate leverage
– customers are readily accessible
versus behind the firewall
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Salesforce.com
35,000 Customers 1,000,000 Users
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Software Tools: Not Entirely a Shitty Business
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
Two Honorable Mentions
• Adobe = $25B market cap, 9x rev mult.
• Divx
= $0.5B market cap, 7x rev mult.
Stay clear of niche development environment tools Target consumer friendly apps (i.e Flash, MPEG 4)
Way of playing media & content trend
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Worth a Second Look?
• • • • • Consumer auction site Job boards Services targeting the aging population Virus protection Online banking
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CLEAR STO N E
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V E N T U R E P A R T N E R S
New Fixes to Age Old Problems….Rarely work
• • • • • Verifiable Email Better local Search Improving marketing response rates Targeting the “under-served” SMB Fuel Additives?
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CLEAR STO N E
CONFIDENTIAL
V E N T U R E P A R T N E R S
VC Sentiment 2007: What Are We Thinking?
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Current Beliefs in Venture Land
• Early stage has best return profile • Ad supported businesses scale the best
– Enormous $300 billion spend to tap into!
• Search is the driver of economic activity • Paying up for a hot company is smart • Emerging markets are hot
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Indeed….Search is King
Direct Access
1800 contacts The Street.com WebMD 1800 Flowers Blue Nile The Knot Move.com Netflix FTD Group DrugStore Overstock CNET Monster RealNetworks
As of August 25, 2007
Big 5 Search
68% 64% 63% 62% 60% 55% 53% 50% 48% 48% 47% 46% 45% C 36% R S T O N E LEA
V E N T U R E P A R T N E R S
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8.7% 5.1% 8.6% 8.5% 6.6% 7.6% 4.1% 13.0% 7.2% 10.1% 10.5% 5.9% 7.7% 23.0%
CONFIDENTIAL
Positive (but weak) Relationship Between Ad $ and Non Search Traffic
Sales and Marketing Spending as Pct of FY06 Revenue
45%
RNWK
40%
MOVE
35% 30% 25% 20% 15% 10% 5%
CTAC TSCM NILE FLWS WBMD
NFLX
KNOT
CNET MNST REDE FTD
Trend line
PCLN OSTK DSCM
0% 30% 35% 40% 45% 50% 55% 60% 65% 70%
Percentage of Visitors from a Nonsearch-Engine Source
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CLEAR STO N E
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V E N T U R E P A R T N E R S
P&G….The Gold Standard of Advertising Efficiency
12.0% Organic Sales Growth 10.0% 8.0% 6.0%
R-Squared = .84
4.0%
2.0% 0.0%
9.0%
9.5%
10.0%
10.5%
11.0%
Advertising as a % of Sales
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Strong Opinions in Web 2.0 Land…
• Web companies should create open platforms • Users should have access and control of their data • Social features are the future of all consumer web apps • E-tailing is not very interesting
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Have E-Tailers Learned Something Since the Bubble?
2007 YTD Performance Market Cap
Blue Nile Overstock 1800 Contacts 1800 Flowers
51 As of August 25, 2007
129% 36% 42% 61%
CONFIDENTIAL
$1.3B $510M $312M $620M
CLEAR STO N E
V E N T U R E P A R T N E R S
…And Mobile as Well…
• Mobile apps cannot be monetized with advertising • Mobile start-ups cannot succeed without a carrier deal …and yet ABI Research says mobile advertising will be a $19B business in 2011?
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Opinions Formed About Software….
• SaaS is a superior model in enterprise software
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Heathcare Services…..
Athena Health = $1.1B Market Cap
Trailing Revenues = $75M
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CLEAR STO N E
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V E N T U R E P A R T N E R S
and yet…..
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Just a Few Years Ago….
• You couldn‟t lose …..
– following what big company CIOs said – Landing a „blue chip‟ partner to peddle your products – Investing in „real technology companies‟
• Remember Nano?
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CLEAR STO N E
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V E N T U R E P A R T N E R S
You Can’t Lose With….
• Millions of users! • Successful founders doing it again!
– Mahalo, Joost, Clearwire
• Alternative energy deals! • Paying up for hot deals with traction! • Following Sequoia!
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CLEAR STO N E
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V E N T U R E P A R T N E R S
You Can’t Win….
• • • • In a web deal with limited user uptake Being a „dumb pipe‟ Backing uninspiring founders In the optical, home networking, or tools space • Taking on Ebay or Cisco or _______ • Selling voice services • Owning a small %
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Parting thoughts…
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CLEAR STO N E
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V E N T U R E P A R T N E R S
VCs and Entrepreneurs Seeing Stars
• Iconic examples used to justify lofty valuations in consumer space…
– – – – Facebook Skype YouTube Google
• Enterprise market now has a celebrity too!
– VMWare ~ $22B market cap
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Top 5 Internet Market Cap Leaders
Google + Yahoo + eBay + Yahoo!Japan + Amazon
$32B = Nasdaq trough $325B = market value – 2007
Source: Morgan Stanley
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CLEAR STO N E
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V E N T U R E P A R T N E R S
2007…….Greed > Fear
• Write-offs are rare these days • Mediocre companies getting funded • CVP portfolio no exception….
– Communicado and SoonR perhaps should not have been able to raise money
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CLEAR STO N E
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V E N T U R E P A R T N E R S
Risky to Redline ANY sector….even lowly optical, storage, comm, healthcare services….
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V E N T U R E P A R T N E R S
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Perseverance Pays….
1982-2001 Compound Annual Return
•All trading days •Minus 10 best days •Minus 30 best days •Minus 50 best days
11.8% 9.0% 5.3% 2.4%
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Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar. CONFIDENTIAL
CLEAR STO N E
V E N T U R E P A R T N E R S
Following The Crowd Doesn’t…
Net Inflow into Real Estate Mutual Funds 2006
$9.4 billion
2007 Return of Real Estate Funds
65
- 8.5%
Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar. CONFIDENTIAL
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V E N T U R E P A R T N E R S
Discussion
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V E N T U R E P A R T N E R S