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C L E A R S T O N EV E N T U R E P A R T N E R
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1. The Hot Sectors!
2. The Facts About Exits
3. Sentiment in Ventureland
4. Thoughts on Three Rising Trends
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Where’s The Biggest Investment Where’s The Biggest Investment Opportunity Today?Opportunity Today?
GreentechGreentech
Internet B2BInternet B2B
Mobile/WirelessMobile/Wireless
Media & EntertainmentMedia & Entertainment
SecuritySecurity
55%55%
23%23%
11%11%
7%7%
4%4%Poll conducted at AlwaysOn Conference Summer 2007
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Anything Else Worth Anything Else Worth Investing In?Investing In?
• Enterprise equipment
• Telecom services
• Healthcare services
• Biometrics
• Semiconductors
• Financial services
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Exits: Facts and Myths
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Private Equity: A Potent Private Equity: A Potent Force 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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Field of Acquirers Has Field of Acquirers Has ShrunkShrunk
• 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 fewEnormous buying power in hands of a few
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Myth #1Myth #1
The IPO market is back!
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Tech IPOs Have Become Tech IPOs Have Become RarerRarer
1990’s2001-2003
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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VC Exits above $50M VC Exits above $50M
Past 4 years
1990’s
M&AIPO
60% 40%
10% 90%
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Significant “IPO Premium”Significant “IPO Premium”
Technology
IPO Premium 26% 37% 43%
…and investors enjoy continued upside potential
Business Services
Healthcare Services
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2007 versus 19972007 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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Implications?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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A Shrinking Buyer BaseA 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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Myth #2Myth #2
The bar is incredibly high for taking a company public….easier to sell the business
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Public Market FactsPublic Market Facts
• 2/3 of names on NASDAQ are < $500M market cap– 80% < $1 Billion Market Cap
• Vaunted NYSE?– Nearly 40% < $1 Billion market cap
• 25% < $500M market cap
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Non Bulge Bracket RelevantNon Bulge Bracket Relevant
• Bulge Bracket Firms did 25% of Tech IPOs during 80’s and 90’s– 40 to 60 deals/Year– Today do 80% of Tech IPO’s
• ~ 40 deals/Year
• What about the other 100 deals?– Many are not getting done…but could
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Small Cap IPOs…Not Just For Small Cap IPOs…Not Just For Jeffries & Co; et.al….Jeffries & Co; et.al….
• 1990-1998
• Avg market cap?
• Avg raise?
65 tech IPOs
$197M
$37M
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Half the IPOs Raise <$100M Half the IPOs Raise <$100M
Note: IPOs from QI 2004 - Q2 2007. Source: Dealogic
>$100M
$50 - $100M
<$50M
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Clearly Not Just Tech….Clearly Not Just Tech….
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IPO vs. Sale of BusinessIPO vs. Sale of Business
Business Business ServicesServices
Health Health CareCare TechnologyTechnology ConsumerConsumer
Financial Financial ServicesServices TOTALTOTAL
Number of IPOs 14 44 23 10 16 107
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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Implied EBITDA?Implied EBITDA?
$15.7M
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Moderate Revenue Bar…Moderate Revenue Bar…
Acme Packet
Allot Comm
Riverbed Networks
ShoreTel Comm
Pre-IPO LTM Revenue $58M $32M $49M $71M
PeopleSupport = $37M…..Compellent = $38M
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Not Just Web Companies Not Just Web Companies Going Public…..Going Public…..
• Other Tech IPOs in past 12 months….
–Aruba, Bigband Networks, Infinera, Starent Networks, Veraz, Airvana, Mitel….
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What If…..What If…..
…..AT&T bought Cisco for $250M in 1991
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Instead….Instead….
• Sequoia chose to take public at a $225M market cap
• Good Decision?
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Conclusion?Conclusion?
Let’s get smart about the Small Cap IPO market……
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Data Analytics:Attractive Economics
For Customers and Investors
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Thinking by NumbersThinking 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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Analytics Coming of AgeAnalytics 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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Vintage Wine Price Vintage Wine Price PredictorPredictor
• Princeton economics professor wondered…..– what factors determine wine
prices?
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Don’t Need to Drink It….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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““Expert” Backlash….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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Still Some Work To DoStill 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
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Managed Services:
A Trend To Bet On
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Services….Upheaval in the Services….Upheaval in the Equipment SpaceEquipment 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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Services….More Acceptance Services….More Acceptance From ResellersFrom Resellers
• VAR margins down to 10% to 20%
• Finally learning to sell services
• Europe as a model
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Services = Customer Lock-Services = Customer Lock-inin
• 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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Operational Benefits of Operational Benefits of Managed Services ModelManaged Services Model
• No legacy platforms to maintain• 3000 Microsoft developers maintain Windows
2000
• Upgrades pushed out daily
• Birds eye view of customer behavior
• Land and expand
• Much shorter sale-to-revenue cycle
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Service Provider = Service Provider = More Valuable CompanyMore Valuable Company
• Acquirers gain immediate leverage– customers are readily accessible
versus behind the firewall
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Salesforce.comSalesforce.com
35,000 Customers
1,000,000 Users
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Software Tools:
Not Entirely a Shitty Business
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Two Honorable MentionsTwo 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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Worth a Second Look?Worth a Second Look?
• Consumer auction site
• Job boards
• Services targeting the aging population
• Virus protection
• Online banking
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New Fixes to Age Old New Fixes to Age Old Problems….Rarely workProblems….Rarely work
• Verifiable Email
• Better local Search
• Improving marketing response rates
• Targeting the “under-served” SMB
• Fuel Additives?
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VC Sentiment 2007:
What Are We Thinking?
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Current Beliefs in Venture Current Beliefs in Venture LandLand
• 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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Indeed….Search is KingIndeed….Search is King
1800 contacts 8.7% 68%
The Street.com 5.1% 64%WebMD 8.6% 63%1800 Flowers 8.5% 62%Blue Nile 6.6% 60%The Knot 7.6% 55%Move.com 4.1% 53%Netflix 13.0% 50%FTD Group 7.2% 48%DrugStore 10.1% 48%Overstock 10.5% 47%CNET 5.9% 46%Monster 7.7% 45%RealNetworks 23.0% 36%
Direct Access Big 5 Search
As of August 25, 2007
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Positive (but weak) Relationship Positive (but weak) Relationship Between Ad $ and Non Search Between Ad $ and Non Search
TrafficTraffic
Percentage of Visitors from a Nonsearch-Engine Source
Sal
es a
nd M
arke
ting
Spe
ndin
gas
Pct
of
FY
06 R
even
ue
35% 40% 55% 65% 70%
0%
15%
25%
30%
35%
40%
5%
10%
20%
45%
50%30% 45% 60%
RNWK
TSCM
WBMD
FLWS
NILE
KNOT
NFLX
MOVE
DSCM
OSTK
FTD
MNSTCNET
PCLN
REDE
CTAC
Trend line
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P&G….The Gold Standard of P&G….The Gold Standard of Advertising Efficiency Advertising Efficiency
Advertising as a % of Sales
Org
anic
Sal
es G
row
th
9.0%
R-Squared = .84
9.5% 10.0% 10.5% 11.0%
0.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2.0%
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Strong Opinions in Web 2.0 Strong Opinions in Web 2.0 Land…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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Have E-Tailers Learned Have E-Tailers Learned Something Since the Bubble?Something Since the Bubble?
Blue Nile 129% $1.3BOverstock 36% $510M1800 Contacts 42% $312M
1800 Flowers 61% $620M
2007 YTD Performance
Market Cap
As of August 25, 2007
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……And Mobile as Well…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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Opinions Formed About Opinions Formed About Software….Software….
• SaaS is a superior model in enterprise software
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Heathcare Services…..Heathcare Services…..
Athena Health = $1.1B Market Cap
Trailing Revenues = $75M
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and yet…..
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Just a Few Years Ago….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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You Can’t Lose With….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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You Can’t Win…. 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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Parting thoughts…
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VCs and Entrepreneurs VCs and Entrepreneurs Seeing StarsSeeing 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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Top 5 Internet Market Cap Top 5 Internet Market Cap LeadersLeaders
Google + Yahoo + eBay + Yahoo!Japan + Amazon
$32B = Nasdaq trough
$325B = market value – 2007
Source: Morgan Stanley
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2007…….Greed > Fear2007…….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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Risky to Redline ANY sector….even lowly optical, storage, comm, healthcare services….
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Perseverance Pays….Perseverance Pays….
1982-20011982-2001 Compound Annual ReturnCompound Annual Return
•All trading days 11.8%
•Minus 10 best days 9.0%
•Minus 30 best days 5.3%
•Minus 50 best days 2.4%
Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar.
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Following The Crowd Doesn’t…
Net Inflow into Real Estate Mutual Funds 2006
$9.4 billion
2007 Return of Real Estate Funds
- 8.5%
Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar.
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