Technofile Europe

Don't be glum, shop!

This morning we announced an investment in BuyVIP, one of several fast-growing online shopping clubs in Europe.  This is one of those unusual, uniquely European business models -- basically the online equivalent of a fashion outlet mall. 

If you're a private shopping club virgin and want to try it out, you can find a membership referee or coupon code on a site like Retailmenot or Squidoo.

The private sales model was pioneered by Vente-Privee in France and quickly copied in pretty much every country in Europe.  BuyVIP is probably the biggest player after Vente-Privee, with 3.5m members in Spain, Italy and Germany.

It's fair to say that the companies in this sector have had revenue growth unlike anything we have ever seen in Europe.  In this volatile economic cycle, discount eCommerce is thriving as consumers flock online to find bargains. 

BuyVIP and its competitors basically operate similar models: they run frequent, short-duration online sales (70% off!) of surplus fashion goods.  The sales are only open to members of the club, a feature designed to protect the brands' image and keep the sales from being crawlable by price comparison engines.

What we like about this market in particular (apart from the explosive growth) is that private online outlets are becoming a key distribution channel for brands.  At €1bn+ in 2008 and growing, it's a channel that the fashion industry is starting to build into regular supply chain plans.  We're already seeing this concept evolve from a way to dispose of excess inventory into an incremental outlet for current-season goods. 

Picking the best business to back in this market seems difficult on the surface.  There are 3 or 4 European players that have shown great traction in their home territory, including Brand Alley (GB), Brands4Friends (DE), Privalia (ES), Private Outlet/Andrino Group (FR). Most have received hefty doses of growth financing from angels and VCs.  But we had to choose, and we're excited to back BuyVIP for several reasons:

• BuyVIP has the most experienced, solid management team of the lot, led by Gustavo Garcia Brusilovksy, and including serial entrepreneurs CFO Gerry Heydenreich and COO Luis Krug.
• Apart from Vente-Privee, BuyVIP has the most international footprint, with leadership in Spain and Italy and a growing presence in Germany (with more countries to come).
• BuyVIP has a very helpful board and shareholder base, including Bertelsmann (with great contacts in Germany and elsewhere) and Michael Kleindl (co-founder of AdLink). Media relationships are going to be an important way to gain members in this market.

So how does this deal fit with our stated strategy of backing mostly bootstrapped, founder-owned businesses, you might ask?  Well, for us the key question is always about capital efficiency.  We're happy to invest in companies that demonstrate an ability to create significant equity value with modest amounts of capital.  BuyVIP meets that test. And contrary to rumour, we do like working with existing investors, it just depends who they are ;-)

Congrats David -- I'm looking forward to seeing an evolution in your wardrobe... no excuses now!

Targeting video junkies with GoViral

You might be wondering why we're making investments at such a blistering pace at the moment, when many funds are slowing down and waiting for the markets to stabilise.  Part of the answer lies in our deal sourcing strategy.  Because we like profitable, founder-owned businesses in particular, we often build relationships with entrepreneurs over years before making an investment.

So as it happens, a number of those relationships came to fruition in the past 4 months, independently of the economic turmoil.  And so we closed investments in Schoolwires, Go Internet Media, Spreadshirt and GoViral (with another one to be announced next week) -- many of them companies we had known and courted for some time.

As promised in last week's post on Web cinema, here's an aside on commercial viral video.  My partner Michael Elias closed an investment this week in GoViral, an ad network for branded viral video.  GoViral is a Kennet 'sweet spot' deal -- bootstrapped, with an experienced management team (ex-Trade Doubler, Leo Burnett, Rawflow), strong commercial traction and growth, and a global market opportunity.

So what the heck is branded viral video?  You've all seen the funny, quirky videos that have made the rounds like wildfire, like Cadbury's gorilla advert and Levi's Moonwalker.   Well, there is some structure and strategy behind getting those videos to 'go viral'.  Brands have cottoned on to the fact that if their video is good enough, funny or edgy enough, it can get a lot of 'free' distribution by getting on to blogs, into emails, and onto social networks.  But to get that level of distribution, the videos need a solid kickstart.  That's where services like GoViral's come in.

GoViral built a global network of web publishers in 80 countries, where it can 'seed' its clients' videos to get the viral ball rolling.  GoViral's videos play in a YouTube-like player, directly within the content of the site.  Once consumers see the video, they can easily share it, blog it, rate it, etc.  The best videos get the most distribution and the most views.  GoViral tracks the video's voyage across the Web and delivers detailed performance reports back to the brand that originated it. 

The key is to work closely with brands to make sure only the best videos with viral potential make it onto the network.  That effort has produced gems like this one, a jam session of extreme street football in Mexico:

But this approach can also be applied to traditional high-quality commercials like this one for Nissan Qashqai:

Or they can be low-budget guerrilla projects like the dynamite surfers from Quicksilver:

When it works, the results can be astounding.  As reported by GigaOm, the Quicksilver video above got 20 million views and generated £68 in sales revenue for every £1 spent on the campaign.

Viral video seeding is in its infancy, but big brands are jumping on board (and not only with video, but also games and widgets).  Check out one of my favourite campaigns, Virgin Media's Right Music Wrongs. 

Express yourself with Spreadshirt

This morning we announced an investment in Spreadshirt, certainly the most fun business in my portfolio.  It’s all the more fun thanks to the whirlwind presence of the company’s talented and energetic CEO Jana Eggers, who blogs about the challenges of managing growth here.

Many of you will know Spreadshirt or some of its competitors already.  If you haven’t tried it, you’ll be amazed how easy it is to find a cool t-shirt and personalise it.  I've abused my position already by arranging for 20% off for my readers for the next 10 days: simply visit Spreadshirt US or Spreadshirt EU and enter EXPRESSYOURSELF in the coupon code field at checkout.

Back to the business:

Spreadshirt is different from the traditional enterprise software and Web services companies I’ve invested in over the years.  But that’s not because the company sells t-shirts rather than bytes.  Or even because they are organic cotton, high quality t-shirts, often delivered within 48 hours.  Its because Spreadshirt has a purpose.

The first chapter in the book Mavericks at Work shows why companies built around a cause, an original idea, are more successful than those built around a simple business objective.  Instead of “beat the competition” or “maximise cash flow”, these companies aim to “help people save” (INGDirect USA),  or “democratise the skies” (Southwest). 

Causes galvanise employees and customers alike, and give their companies room to innovate, to sidestep competitors, and to break the mould of traditional business models.

Jana Eggers was a computational chemist at Los Alamos National Laboratory, helped build supercomputers for Lycos, and developed a SaaS business before anyone had heard of SaaS.  So why is she so excited about making t-shirts with slogans?

What you quickly realise in talking to Jana and learning more about the quirky, hypergrowth world of mass customised apparel, is that it’s not about the clothes at all.  It’s about self-expression.  And everyone has something to say.  The clothes are a medium, a billboard, a door opener, a conversation starter.  The first time I met Jana, her t-shirt read:

I hate can't.

Giving an outlet to personal creativity is Spreadshirt’s cause, and the whole company has embraced it.  Every employee collects his favourite quotes or coolest drawings.  They share them in meetings, blog about them, twitter on them.  Production staff in Leipzig reward the most creative customers with a personal note of encouragement. 

The cause unites a company that straddles Germany, France the US and other countries.  And it opens up a market that is not constrained by traditional definitions.  This is not the t-shirt market, it’s the self-expression market.

Last week Jana’s shirt said:

Mean
people
suck

But the cause isn’t just good for company morale.  It drives a lot of business value.  When customers design a Spreadshirt they take on some of its production costs and create something valuable for themselves.  This means Spreadshirt benefits from twice the gross margin of a branded eCommerce site, and the consumer gets a product to wear “everytime it’s clean” (so say 75%).  Customer satisfaction runs high, with a Net Promoter Score above 50%.

Some time during our due diligence:

I know something you don’t know.

Focusing on the cause also allows Spreadshirt to distribute self-expression without being constrained by traditional channels for 'fashion'.  On Spreadshirt’s web sites, the message can be a one-off gift, a design shared with the community via Spreadshirt’s Marketplace, or a full range of apparel sold through one of 500,000 shops that people have set up –- be they bloggers, tattoo artists, graphic designers, cult martial arts heroes, cartoonists or pop-rock bands.

Be confident
but not certain

Enterprises have also cottoned on the potential.  CNN has thousands of walking billboards thanks to its wildly successful “headline on a t-shirt” offering.  Innovative ad agencies have helped brands like  Holiday Inn use Spreadshirts to launch new offerings. Warner Brothers used it to promote the last Harry Potter film, while Electronic Arts operates its Spore t-shirt shop on Spreadshirt.

Think of all the content that could be part of a personalised shirt or jacket: music lyrics, blog excerpts, film quotations, inside jokes.  In spite of what you hear these days, content does have value, but much more so if it has an emotional connection with the consumer.  Personalised apparel creates that connection, more effectively than an iPhone or a Web browser.  It’s an early market.

I like entrepreneurs who think like this:

I ♥ decisions

This blog is often about the growing quality of entrepeneurial leadership in Europe.  Jana Eggers is a good example of a manager –- who happens to be American –- running a trans-Atlantic business by harnessing its regional strengths.   She takes best practices from the US (marketing anyone?) and from Germany (quality control and production efficiency) and merges them into a coherent company culture.  The result is an organisation of impressive dynamism and resilience.  And a lot of air miles for Jana.

Laughter, the shortest distance between two people

Spreadshirt fits our investment model to a T (no pun intended) because it was founded by a couple of real bootstrappers, Lukasz Gadowski and Matthias Spiess.  They created the early momentum, built the business in Germany, and then took it global with funding from Accel Partners’ Harry Nelis.  And all this on a relatively small amount of capital.  Today, with over 300 people, Spreadshirt is market leader in Europe and a top contender in the US. 

What I’m wearing today:

Bootstrappers do it better.

I do like a chuckle in the morning

This email landed in my partner's in-box this morning:

Dear Michael:

I am CEO of ACME Corp in Cupertino, CA.

We are in mobile telephone switching network domain. We provide end-to-end solutions for telecoms. We have in hand PO from China and we are confident to get more POs from India, China before end of Q1 09.

We are seeking $100M in funding.

Regards,
John Doe, CEO
Tel 408 111 1111

To which my other partner suggested the following reply:

Dear John,

You are clearly a CEO blessed with extraordinary relationship building skills and a strong commercial sense! Send $10m now to cover our immediate DD costs - when can we start?
 
David Carratt
Managing Director

(Names have been changed to protect the daft innocent.)

It's education, stupid!

In the past few days we announced two new investments in the US: Schoolwires and Go Internet Media.  Both target the education market, albeit in very different ways:

• Schoolwires provides web-based content management and community management applications to the K-12 market.  Its SaaS product is used by over 4,000 US schools to manage their websites and Intranets, to enable collaboration among parents, students, teachers and administrators, and to manage administration taks and the distribution of learning materials. 

A renewed focus from the Obama administration on the modernisation of primary schools will benefit vendors like Schoolwires, whose on-demand solution is a low-cost way for a school to benefit from Internet-age technologies.

Schoolwires has a great management team, who've done it before as part of Sungard Systems' higher education software business.

• Go Internet Media is an online advertising network that specialises in delivering applicant leads to higher education institutions across the US.  The company operates information websites such as searchbydegree.com and freeeducationguide.com that help consumers find the right online or offline university and guides them through the application process.

In the current economic environment, demand for higher education is booming, as people decide to ride out the recession by returning to school, or look for new skills to adapt to changing markets.  The fastest growing segment is the new crop of for-profit universities (operating online and offline) which are expanding around the country and acquiring new students globally using the Web.

Both companies are good examples of the type of business we love to invest in: they are profitable, bootstrapped, founder-owned companies that have demonstrated an ability to grow rapidly using little or no external capital. That puts them in a strong position to accelerate growth with judicious use of our investment capital.

Congratulations Eric, Javier and Gus!

NetPro acquired by Quest Software

A couple of days ago, it was announced that one of our portfolio companies, NetPro Computing, was acquired by its main competitor, Quest Software, for $80m. 

What NetPro was good at is helping organisations get more (a LOT more) out of Microsoft Active Directory.  Its platform basically layers auditing, policy management, backup & recovery, and sophisticated analytics on top of AD -- useful stuff for frustrated IT managers trying to handle large AD implementations.

As a company, NetPro is a classic example of the kind of growth business we like: 

• Highly capital-efficient: the company had raised a total of $6m in the 1990s prior to our investment in 2004.
• Run by a management team with the right level of real, operational experience for this size of company, headed up by industry veteran Kevin Hickey.
• Not part of the Silicon Valley hype zone: NetPro is based in Phoenix, AZ.  By the way, the Southwest is home to many good tech companies, that are much underappreciated.
• Focused on continuous profitable growth: NetPro was profitable since before we invested in 2004, and gew revenues more than 4x during our holding period.

Congrats to my colleagues Eric Filipek and Javier Rojas on a great exit, and to the guys at JMI Equity, who made great co-investors.

FRSGlobal acquires IRIS

Among the few segments of the technology industry actually benefiting from the crisis roiling the financial markets are risk management and compliance.  As shareholders scrutinise banks' risk management practices and regulators debate new reporting requirements, financial institutions of all sizes are having to review how they assess and report on risk. 

Earlier this year I wrote about the need for a more comprehensive approach to risk management to take account of off-balance sheet assets and more correlated financial markets.  In particular, I made the point that the bank CFO needs to have a holistic view of risk that is independent from the risk management systems used by individual trading desks. 

In response to increasing demand for end-to-end risk systems under the CFO's control, we announced today the acquisition of IRIS Integrated Risk Management by our portfolio company FRSGlobal.  Iris is known for having one of the most sophisticated platforms for managing complex risks in a single, integrated application.  About 230 financial institutions worldwide use its products. 

FRSGlobal will combine Iris' financial analysis capabilty with its ability to generate regulatory reports in over 30 countries to become the world's only one-stop shop for risk management and regulatory reporting for banks.

As you can tell, I'm pretty excited about this deal, because it (a) makes a lot of strategic sense and has a the support of FRSGlobal's and Iris's existing customers; and (b) it's always satisfying to find a market segment that is counter-cyclical as we head into uncertain economic waters.

Picture credit: Van Gelder Insurance.

Growth equity round for SaaS leader NTRglobal

One of the hottest companies presenting at last week'ss SIIA OnDemand Conference in Amsterdam was on-demand remote IT management software vendor NTRglobal. 

Well, today we announced a significant equity investment in NTRglobal, intended to fuel the company's rapid growth and to fund the roll-out of a new IT management platform that has the potential to disrupt the traditional systems management market.  Our friends at Atlas Venture are investing alongside us and I'm happy to sit on a board with fellow blogger Fred Destin for the first time.

I'm particularly pumped up about this investment because NTRglobal:

1. has one of the best management teams I have come across;
2. is on the cutting edge of next-generation IT management and is aligned with market leaders like Salesforce.com (see AppExchange here); and,
3. exemplifies some of my favourite themes: software delivered as a service, capital efficiency, sales productivity and the maturation of European entrepreneurship.

NTRglobal is living proof that you can build a global software business with a modest amount of external capital.  They've even done it in a pure software-as-a-service (SaaS) model, which is doubly difficult since every customer contract signed means revenues deferred over a year or longer.  Today NTRglobal has a presence in 10 countries -- including Europe, the US and Asia -- and services 12,000 customers in 60 countries around the world.

They've done this by importing US best practice in sales managment, and by focusing on the SaaS metrics that count: monthly recurring revenues, deal size, upsell and churn rates.  NTRglobal emphatically disproves the notion that you can't build effective inside sales forces in Europe.  With the right product, and the right combination of lead generation and telesales, you can nearly match US levels of sales productivity on this side of the pond.

It's an exciting time to be investing in growth companies that started out in Europe.  The technology industry is maturing and we are seeing second- and third-time management teams of higher quality than ever before.  NTRglobal's management team combines the best of Silicon Valley experience with the best of European management and a completely global approach. 

I think we are going to see many more businesses in the coming years that are not rooted anywhere at all, but combine the best talent and pull together the right resources wherever they may be located.  It's not very original, but I've been calling this Globalisation 2.0.

Specific Media gets Europe with Adviva

Yesterday we announced the sale of our portfolio company Adviva to US-based online advertising network Specific Media.  The strategic rationale is straightforward: Adviva will be the European beachhead for Specific Media, the fastest-growing advertising network in the market (and probably the fastest-growing business I have ever come across). 

My M&A banking years have instilled a healthy skepticism about mergers between similar businesses (as opposed to acquisitions of point technologies), but in this case, the two companies really are a perfect fit.  Both run campaigns for top-end brand advertisers on small, high-quality networks of websites.  Both have been using innovative targeting technologies to generate outsized results for advertisers, whether on a CPA or CPM basis.  And while Specific Media's network is US-centric, Adviva's network is entirely European, so there is virtually no overlap.

The rapid rise of Specific Media and its move into the European market symptomise a new era for the online advertising industry.  This is an industry with issues.  Online advertising growth has been torrid but is slowing. The US is in recession, which will hit the overall advertising market hard.  The effectiveness of online ads is being questioned as click-through rates on banner ads decline, and consumer audiences are increasingly fragmented across social networks, blogs, etc.  The supposed 'next frontiers' of video advertising and mobile advertising remain immature and are simply not delivering results to the many investors who piled into those markets.

Many ad networks have grown fantastically on the back of this booming market. But the pace of growth camouflaged the fact that their offering was difficult for brand advertisers (BMW, P&G, et al) to buy -- the audience segmentation does not match what they are used to in the offline world (A-B-C, etc), and it was hard to measure true effectiveness in spite of (or because of) infinite volumes of data.

Many technology vendors and ad networks made things more difficult by barraging advertisers with fancy new products: behavioural targeting, contextual targeting, performance marketing, etc.  It has taken time for the two sides to learn to speak a common language. 

This is where Specific Media's approach really stands out.  The company makes it simple to advertise on the Web.  It boils down to this: tell us who you want to reach and we'll find them for you.  Rather than sell new targeting technologies, Specific Media sells the audience and uses all the available targeting technologies in the background to deliver.  The advertiser gets the audience he wants, and Specific Media gets a margin as good as its own opimisation technologies allow.  Thanks to the huge reach of its network (140m users, just behind Google, AOL and Yahoo), it has enough data on web surfers to deliver the most demanding, targeted campaigns -- always a struggle for the smaller networks.

These are interesting times: a new generation of online ad network is coming into the market just as contradictory macro trends buffet the industry (US recession, declining ad effectiveness vs better targeting technologies, continuing $$ shift from offline to online).  More on this later. 

Mashups go mainstream

We have a happy announcement to make from our US portfolio today.  Kapow Technologies has closed a round of financing with Steamboat Ventures (the VC arm of Walt Disney!) and Morgan Stanley's Strategic Investments Group.  See more detail here. 

The fact that two corporate venture firms led this financing is significant, because it proves that application mashups are now relevant to the enterprise.  What started out as a consumer Web 2.0 concept akin to a DJ mixing tunes into a new hit, has now become strategic.  Companies are using mashup technology to create new applications from data and features available on the wider Web.

I've commented a lot in this blog on the gradual adoption by enterprises of Web 2.0 technologies (Don Hinchcliffe's Enterprise 2.0, etc), but so far most publicized uses have been experimental. In the meantime, some 300 companies have adopted Kapow's Mashup Server, either to integrate legacy applications through their web interfaces, or to mash up internal and online data sources into new, useful applications.  Those companies that tend to be on the cutting edge of new technologies, such as banks (like Morgan Stanley) and the Department of Homeland Security, have been using mashups for some time.

Kapow's online mashup server remains available to anyone on its open community site, openkapow.  It's so easy to program Kapow robots that one of my colleagues is going to make one that pulls portfolio company newsfeeds into our revamped website, due out soon. [There's not getting out of it now Mike :-)]

In the same way that blog, wiki and social network features are finding their way into enterprise applications, mashups are now becoming mainstream.  The ability to pull together all data and the many little applications found on the Web in a standard way effectively turns the Internet into a huge database and a flexible programming platform.  It's not quite the Semantic Web Tim Berners-Lee dreams of because it still relies on humans to decide which sources to mash up, but it takes us one step closer by eliminating the technical barrier to web integration.

My predictions for 2008

A bit late, but nevertheless here they are and -- as promised -- a more 'committing' set of predictions than last year's:

1. A combination of US recession and the waning efficacy of online ads will hit the Internet advertising industry hard, although "hard" is clearly a relative term.  Offline advertising may actually shrink, while online advertising will grow slower, perhaps even low double digits.
2. The Structure of Networks -- social and otherwise -- will migrate to the core of the Web, replacing the Structure of Documents on which it was originally built (HTML and all that).  Someone will figure out that applying the Google PageRank concept to networks of people is even more interesting: if we can identify influencers and how information flows among them, we can really start targeting campaigns.
3. 2008 will the year of the Return of the ERP Vendor.  SAP, Oracle and the midmarket vendors will make progress with their own SaaS offerings and will shrink the valuation gap with the pure-play SaaS vendors.
4. The Web 2.0 financial bubble -- fuelled by VC cash being round-tripped between startups buying and selling ad space -- will pop as a result of the weaker ad market and the failure of 100s of undifferentiated 'feature' startups to gain traction.
5. The mobile web will continue to be stymied by the difficulty of discovering content on mobile devices, Vodafone's new image search engine notwithstanding.  iPhone and other large-screen devices will help commuters surf the old Web, but mobile browsing won't take off until someone invents a new search paradigm that works on mass market mobiles.
6. As a result the mobile advertising market will fail to take off... yet again.  Those networks and technology vendors that were acquired in the past 18 months (Nokia/Enpocket, Microsoft/ScreenTonic, et al) will disappoint their new parents.  And the next generation of mobile advertising companies will have to make do with much less VC funding.
7. What on earth is UWB?  Anyone remember? Anyone care?
8. The success of the Nintendo Wii will spark a whole host of new physical interactive video games, providing a boost to vendors of chips to the console companies.  Perhaps a Wii Lite is in store?  Look to Japan for inspiration: this year's Christmas hit, Guitar Hero, was really a copy of a Konami game popular among Japanese teens in the late 1990s!  So why not portable versions of a DJ game like Beatmania or a competitive coordination game like Super Bishi Bashi? 
9. Social networks will see huge monetisation efforts and some applications and ad networks will make a financial killing.  But their performance will be erratic and useage of networks will be highly volatile as consumers get tired of being poked, zombied and voted HOTorNOT.
10. Some element of Open Source or "free" distribution models will become part and parcel of every software vendors' go-to-market strategy.
11. [Bonus, more of a hope than a prediction]: 2008 will mark the return of the Basic Business Phone, and it will be a runaway bestseller.  Nokia or someone nimbler will launch a high-performance phone that makes phone calls, has a long battery life, global coverage, and a simple, fast interface.  And absolutely nothing more!  I so wish...

Stay tuned.

Tracking Europe's largest tech deals

Our friends over at Go4Venture recently sent out their 2007 Headline Transaction Index with some interesting historical stats about European tech investment activity.  Based on a comparison of the 2007 deal list with previous years, they conclude -- much as I recently commented anecdotally here -- that European tech investing has matured.  The main corroborating fact they point to is the number of €20m+ financings, which by their count topped 22 in 2007 (up from 15 in each of 2006 and 2005).

Go4Venture concludes: "This reflects European VCs growing taste for high risk/high reward transactions, which is closer to the behaviour of their Silicon Valley brethren."  I disagree.   There are really two trends here:

• Large, speculative investments in early-stage companies: Joost, DailyMotion, VideoJug, Viagogo for example.
• Growth financings of more mature companies: Jentro, FastBooking, PlasticLogic, Cordys, etc.

The latter predominate in the list of 22 deals, reflecting not a higher risk appetite by Euro VCs, but rather the availability of capital for companies in more advanced stages of development.  These deals were made possible by new growth equity-focused funds and the presence of tech buyout investors, and they represent the maturation of the investment industry I have been talking about.

As for the deals being tracked by Go4Venture, I would add a few non-traditional tech deals (including some buyouts) in order to really see the trend over the years.  Other "Landmark" (>€20m) financings include:

• 2007: Moneybookers (Investcorp), Human Inference (Iris, GIMV), Asset Control (Fidelity), Vente-Privee (Summit)
• 2006: FRSGLobal (Carlyle, Kennet), UC4 (Carlyle), GlobalMedia (Carlyle), IGEFI (Summit)
• 2005: Jagex (Insight), GFI (Insight), Control Break (Summit), Navigon (General Atlantic), Webpay (3i)
• 2004: Ubizen (Apax, Kennet), Web Reservations Int'l (Summit), Kingston Inmedia (Carlyle), P&I (Carlyle), Iris Software (HgCapital)

MSFT unsolicited bid for Yahoo

At $45bn, Microsoft's proposal to acquire Yahoo must look like a godsend for Yahoo's beleaguered shareholders.  And at a 62% premium to Yahoo's last close, Steve Ballmer is clearly hoping to deliver a 'knockout' bid that the board can't refuse.

Oh, and just in case Yahoo's 10-person board (all but one of whom are independents) think they might softpedal the approach, Microsoft released the full text of the offer letter sent by Ballmer to the board, which is definitely worth reading here.  The timing is perfect, cruel but fair. Yahoo will find it difficult to resist.

In Ballmer's passive-agressive letter to the board, he berates management for failing to deliver growth after rejecting a merger with Microsoft a year ago.  But what's really interesting is the extent to which this is so explicitly a defensive manoeuvre against Google and in particular its scale and capital spending capacity.  Ballmer writes:

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers.

For Yahoo's shareholders this is a great face-saving exit from a strategyless future.  But whether the combination will in fact create a viable competitor to Google in online advertising remains to be seen. 

I'm not dabbling in equities at the moment, but if I was I'd be long YHOO and short MSFT.

Scoring my 2007 predictions

Apologies for the long silence, which was mainly due to an extended holiday absence.  Before you feel envious, it was our first multi-stage international trip with:

and we really could use another whole vacation to recover from it...

But back to business: in early 2007 I made 10 tech market predictions, so here's a reckoning to see how I fared.  On reviewing these I realised that many of them were of the slightly cheeky, undoubtedly-true-but-difficult-to-prove variety, so I shall resolve to to be more specific for my 2008 predictions (to follow) to keep it interesting.

Here is a summary of last year's predictions & my grade:

1. Web 2.0 technologies will begin to appear in serious enterprise apps, as vendors incorporate wikis, blogs and RSS feeds into their applications, starting with CRM and other consumer-facing apps.  TRUE, BEGINNING WITH SAAS VENDORS.
2. There will be very few high-value exits of Web 2.0 companies, but probably many more investments, leading to an eventual VC bust (in 2008?) not unlike the dot-com bust of 2001 (but smaller). HALF TRUE, BUST YET TO COME.  But come it will.
3. Actual adoption of Microsoft's new Vista operating system will underwhelm and Microsoft's share price will begin to suffer.  MOSTLY FALSE. Vista sales have not been what Bill expected, but it hasn't affected the share price yet.  MSFT is up about 35% over 12 months and outperformed NASDAQ by 10% or so.
4. We will see the first serious cracks in the indomitable Googleplex -- how many wheels will in fact come off?  Investors beware.... FALSE. But I'm definitely rolling this one forward!
5. Multimedia content for mobile phones (3D games, video, etc) will start to come of age, but more slowly than anticipated.  It will take time to overcome the many usability hurdles. TRUE, STILL TRUE, BUT TOO EASY.
6. Business software for the SME market will get a major boost, as vendors attack the midmarket with new, scaled down applications.  TRUE for both new and old vendors. New SAAS vendors are springing up to make business-level functionality available to SMBs.  Client-server giants like SAP are investing heavily in midmarket offerings.
7. Offshore technology vendors -- not content to do pure services work -- will continue to push into Western markets with their own product sets.  TRUE-ISH: it's still early days for Indian packaged software. The largest firms, like Infosys and i-Flex are still the main examples.
8. Expect to see lots of new applications for small vertical markets.  The combination of SOA and Web 2.0 technologies makes it easy to build apps for the long tail of micro markets. TRUE.  Lower cost of development and delivery has led to an avalanche of niche apps. We've seen everything from employee feedback management software through to environmental data reporting suites.  Great news for users and investors alike, although picking large enough markets will be key for the latter.
9. Consolidation in the WiMAX market will begin as the large chip and equipment vendors jostle for a piece of the infrastructure build-out.  Still too early for actual services of any scale though... TRUE. Cisco launched the first consolidation shot in December with the acquisition of Navini.  Sprint/Clearwire remains the biggest WiMAX network project, and it has been on shaky ground (but seems to be going ahead) . 
10. The line between information services and software functionality will become increasingly blurred, as more managed services effectively bundle both.  VERY TRUE.  The most interesting SaaS businesses we see are those that collect customer and industry data which has value in its own right.  Combining a software and data service can be very profitable and very sticky.

There you have it.  I'll call that a 7/10 caveated with the promise that I'll make meatier, harder predictions for 2008!  Stay tuned....

Whither Garmin?

So the battle of GPS giants ended with a bit of a whimper.  Garmin withdrew from the bidding for TeleAtlas and simultaneously announced an extended deal with Navteq, who will continue providing maps to Garmin until 2015.  It makes you wonder how much say Nokia, who is in the process of buying Navteq, had in the negotiation of the Garmin contract extension.

In spite of Garmin's denials, rumour continues to swirl that the company is considering building out its own map-making network.  That would be a heavy, multi-year investment and one Garmin's shareholders ought to be interested to hear about.   But it may also be the only way to to de-risk a business whose main offering now depends on a large potential rival that wants to own the navigation and location-based services (LBS) market.

For now, the markets appear relieved that Garmin did not overpay for TeleAtlas, sending Garmin's share price up 14%. The kind view is that Garmin's bid was anyway just a gambit to force TomTom into paying an outlandish price (38 x 2007 EBITDA) for its own mapmaker.  But Garmin's future now contains a big hairy unknown, which has yet to be priced into the stock...

What price private sector diagnostics?

In spite of apparent hesitation by the Gordon Brown government in pushing ahead with Blair's healthcare reforms, a recent secondary buyout deal highlights investor expectations of continued private sector involvement in UK healthcare provision. 

Last week Bridgepoint announced the sale of Alliance Medical to Dubai International Capital (DIC) for a whopping £600m.   This crowns a very sucessful stewardship of the company by Bridgepoint, who bought the business for £86m in 2001 and led it through 16 acquisitions to build one of the largest diagnostic scanning services providers in Europe.  Today Alliance Medical runs 190 fixed and mobile scanners (MRI, CT, x-ray) for private clinics and public healthcare systems, benefiting from the increasing trend by hospitals to outsource imaging diagnostics.

The price paid by DIC represents 4.6 x 2006 revenues (£132m) or 16 x 2006 EBITDA (£37m), which is fairly rich for a business that is heavily exposed to the political flip-flops on reform that buffet the NHS on a regular basis.  DIC is clearly making a bet that the requirement by Western countries to improve diagnostic services and reduce patient waiting times will force them to involve the private sector in one guise or another. 

DIC is a new-ish guy on the block in the UK.  It is not technically a sovereign wealth fund like the China fund that recently took a stake in Blackstone, or the better known ones like Singapore's GIC or the Kuwait Investment Authority.  The DIC fund runs the personal wealth of Dubai's ruling emirs.  It has been active in the UK in the past 2 years and today owns Tussauds attractions group, Doncasters defence engineering group and the Travelodge hotels operator.

Whether there is any strategic interest by DIC to expand Alliance's services into the Gulf region remains to be seen.  But as a financial investment this deal rides continuing consolidation among pan-European providers of diagnostic and other healthcare services.  With or without the explicit consent of their health ministers, European hospitals are clearly finding ways to exploit private-sector solutions to their woes.

The battle for control of the GPS market comes to a head

 

This year's most exciting takeover battle in tech may be nearing a conclusion.  On Wednesday TomTom, maker of the ubiquitous GPS navigation devices, increased its bid for digital map-maker TeleAtlas by over 40% and snapped up 28% of the target's shares.  This follows an earlier hostile effort by archrival Garmin from the US to prevent TomTom from gaining control over the only remaining independent provider of maps.

This expensive bidding war caps a wave of consolidation in the industry which pits the two market leaders against each other and both against a new, gigantic entrant.  The opening shot of this set-piece was Nokia's agreement to acquire Navteq Corp, one of only two global providers of digital maps to the fast-growing GPS navigation industry.  Pretty much all the sat nav device and navigation software vendors depend on either Navteq or TeleAtlas for maps.  What Navteq and TeleAtlas do is expensive and time-consuming (hundreds of people driving around the world mapping roads), so they are not easily replaced. 

Garmin primarily uses Navteq and TomTom uses TeleAtlas.  In fact TomTom is TeleAtlas' largest customers, making up about 30% of revenues.  So when Nokia bid for Navteq (having already acquired navigation software vendor Gate5 last year), alarm bells must have gone off at Garmin's beach HQ in the Cayman Islands.  Nokia is gearing up to become a formidable competitor to the dedicated sat nav device market, planning to put GPS-absed navigation on both its high-end smartphones and mass market handsets.  To protect its own source of maps, TomTom made a heavily geared bid to acquire TeleAtlas for a whopping €2.1bn. 

The loser of this battle may well struggle to survive.  US anti-trust officials have not opposed the merger, but the European watchdog is still considering it.  They will of course require the winner to continue providing maps to the industry as a whole, including to the loser.  But for the ultimate winner there are many ways to make life difficult for rivals.  And huge margin benefits for itself -- saving TeleAtlas royalties could add as much as 15 or 20 points to TomTom's gross margin.

This is one fight TomTom cannot afford to lose.  Last week Garmin countered TomTom's initial bid with an unsolicited €2.4bn offer.  TomTom responded swiftly, raising its bid to €2.9bn this week.  At the same time it acquired 28% of TeleAtlas' shares from its leading shareholder and in the open market, effectively blocking any possibility of a Garmin victory. 

TomTom will surely win the day, but at what price?!  Its latest bid represents an 81% premium to TeleAtlas stock price before the bidding began.  TomTom will end up paying 9 x TeleAtlas' 2007 revenues or 38 x 2007 EBITDA.  For TomTom it's a choice between Winner's Curse or likely demise.  Meanwhile TeleAtlas' shareholders are laughing all the way to the bank.

From the sidelines, Microsoft and Google -- both of whom have a keen interest in mapping and navigation services for consumers -- are watching carefully...  If anyone could afford to fund the creation of a brand-new provider of global digital maps, it's them.  Watch this space.

This is the era of telemedicine

If I'm perfectly honest, most of the investments we make don't have a visible impact on peoples' lives.  Financial compliance software?  eSourcing services?  Online ad networks?  No doubt accountants, procurement directors and ad sales reps benefit from these innovations, but what about the man on the street?

This morning we announced an investment in a company that not only impacts your neighbours directly, but also benefits from some of the strongest industry growth drivers I've ever come across.  The company is Barcelona-based Telemedicine Clinic (TMC), a provider of teleradiology services to public hospitals and private healthcare providers across Europe. 

TMC is at the forefront of the changes technology is bringing to modern healthcare provision.  Today's medical imaging techniques -- including digital x-ray, MRI and CT/PET scans -- are increasingly powerful diagnostic tools.  In fact, the most complex 'modalities' like CT/PET are growing fastest.  The problem is that most Western healtcare systems (a) don't have enough scanners, and (b) aren't training enough radiologists to meet this demand. 

This has led to long waiting times for patients, and in some cases government intervention to reduce them.  In the UK, for example, it has been widely reported that NHS patients can wait more than half a year for an MRI. Now NHS is working toward an aggressive new diagnostic target of no more than 18 weeks (sic) from first GP visit to the beginning of treatment.

Quicker scans lead to earlier diagnosis which in turn improves the success (and reduces the cost) of treatment.  A no brainer.  But how to address the scanning bottlenecks?  In the UK, the NHS is contracting with private healthcare providers (ISTCs) like Alliance Medical and Inhealth to provide extra capacity in the form of mobile scanning units.  But the shortage of qualified radiologists persists and the private sector struggles to recruit them without stealing capacity from the NHS. 

Enter remote diagnostics, or teleradiology.  Most scanned images are now digital to begin with, and tend to be connected to the hospital IT system or PACS.  So it's easy to send them to a remote location for interpretation.  That is the technical infrastructure TMC exploits.  From a base in Barcelona and from reading centres in Europe and Australia, TMC's radiologists report on thousands of diagnostic images sent each month from UK and Scandinavian hospitals. 

Because TMC's radiologists are totally dedicated to reading, they are several times as efficient.  Since they can aggregate cases in higher volumes than any one hospital, they develop stronger sub-specialisations.  Because they are more productive, they can double-read images at lower cost than a hospital can.  With resources in other time zones such as Australia TMC can provide on-call (night-time) cover for hospitals. As a result TMC not only increases the capacity and responsiveness of its hospital clients, but it is also setting higher quality standards for radiological interpretation.

In the UK, the introduction of private healthcare provision to complement (some would say pressure) the NHS is controversial.  But the technology which enables teleradiology is here and is truly agnostic.  Public hospitals can as easily exploit this innovation to become more efficient as private health centres can.  But there are big differences within Europe in how free hospitals are to take advantage of outsourced services like this.  Scandinavia and the UK are at the forefront of experimentating with these types of public-private partnerships.  We are betting on their success triggering similar reform in other countries.

Teleradiology is only the beginning of how the Internet can revolutionise diagnostic medicine.  Telepathology allows doctors to send images of tissue samples to experts abroad.  Teleophtalmology can be used to screen patients for diabetic retinopathy, and teledermatologists can test patients for common skin ailments without having to be in the room.  Already countries like Australia and Sweden are using these concepts to provider specialist medical care to inaccessible parts of their countries.  In future, all patients could have access to the global pool of specialised medical knowledge this way.

There are huge research benefits of digitising and aggregating medical cases from multiple hospitals and regions.  In future, a lot of cutting-edge medical research is likely to take place where the most experience resides -- and that may well be in a virtual telemedicine clinic like TMC plans to become.

Free the speakers!

One of the surprising side effects of the digital music revolution and the accompanying proliferation of iPods has been our willingness to trade off sound quality for mobile convenience.  Most people I know are moving their CD collections onto a hard drive, media center or music player.  Even if you're a die-hard vinyl fan and part-time DJ, there is no longer an excuse to lug around those heavy silver boxes when you can digitise your collection with a $149 device like this.

But so far the speakers and headphones attached to all this music seem downright backward in comparison to the advances made in turning songs into bits and bytes.  We're putting our money on helping the speaker side of the equation catch up.

Ten days ago we announced an investment in wireless audio chipset vendor STS.  (Well done Michael and Eileen). I'm particularly excited about this investment because:

1. it actually makes something I could end up buying in a store (unlike the enterprise software vendors I typically invest in); and,
2. STS is firmly positioned at the birth of a second revolution in audio -- the wireless revolution.

Digital music is going totally mainstream, helped along by the continuing iPod rollercoaster, the iPhone and now Nokia's own digital music service.  Now people will want to stream that music anywhere and everywhere.  We want to be able to reconfigure our home audio set up without opening walls or snaking wires everywhere.  We want to consolidate music sources (the PC, stereo, satellite radio, HD TV, a guest's iPod) onto a single system, and listen to it anywhere in the house.

There have been some early wireless music streaming systems on the market, but most are cumbersome to deploy or expensive, like the Sonos system.  As it turns out, streaming music over wireless LAN (WiFi) is hard -- you may interfere with neighboring networks, and it's tricky to keep several sets of speakers in sync over the air.  STS has cracked these problems, and its chips are powering a new generation of wireless audio systems, like the Klipsch RoomGroove wireless speaker, X-Fi's wireless docking stations for iPods, and Philips' high-end home automation system.

STS solves both the WiFi factor (network interference) and the WiFe factor (in my case, girlwithoutawatch won't tolerate any more cables snaking along the walls...).  And the rollout of STS-enabled products should lead to a quick drop in prices, making wireless speakers available to the masses.  It's about time.

Not all eyeballs created equal

There is no let-up in online advertising deal activity this week, with AOL acquiring Tacoda for a rumoured $275m.  This follows hot on the heels of a series of ever larger acquisitions in this market, as I wrote about here and here.  The Tacoda deal is particularly interesting because it represents the mainstreaming of behavioural targeting, technology which allows advertisers to target consumers based on their Internet behaviour.

Both Tacoda and its competitor in the US, Revenue Science, began by developing technology and trying to licence it to websites and network owners.  This proved difficult and so each eventually set up an independent advertising network, both to prove the technology and to generate revenues.  In Europe, many of the existing ad networks use behavioural targeting techniques to some extent. 

The key to effective targeting is having enough data about user behaviour.  This can only be collected from within a network as the user travels across sites.  The more specific the network sites are the more they reveal about a user.  AOL should be able to get a very rapid boost in its ad conversion rates by applying Tacoda throughout its Web properties.

In Europe, Adviva Media [disclosure: Kennet portfolio company] combines behavioural and demographic targeting to deliver very narrowly targeted user groups for advertisers.  This reflects a broader trend in the market: advertisers' increasing search for highly specific traffic. 

In this week's VentureBeat, Jeremy Lieuw demonstrates how the value of some types of ad networks is increasing, at the expense of generic web traffic.  Underlying his analysis is a review of some lesser-known recent M&A deals, like Hachette Filipacchi buying automotive network Jumpstart, and BSkyB's purchase of Aura Sports.  This is the critical weakness in the business models of the large, volume-driven networks like Ad.com, whose CPM rates are destined to decline further and further unless they can effectively segment their users.  For content-driven networks -- like AOL and Yahoo -- and specialised networks like Adviva, it represents an opportunity to drive higher CPM rates and to deliver more effective campaigns.

My prediction is that the next wave of deals in this market will be all about acquiring specialised, targetable traffic.

A great day for tech buyouts

If ever we needed more proof that the technology industry is mature, we need look no further than today's announcement that HgCapital has sold two of its software companies for £500m in a secondary recap transaction.  When Hg acquired accounting software vendor Iris in 2004 in a head-turning £102m MBO, most observers thought they had overpaid. Just a few weeks ago (!), Iris announced the acquisition of publicly-listed diversified software group CSG for £100m and its merger with Iris. 

We don't have enough publicly available data to disaggregate Hg's financial returns in this deal, but we can speculate (what are blogs for? :-)).  Following the respective investments, Hg owned 62% of Iris and 86.5% of CSG.  Assuming a debt-equity ratio of 2:1, they would have used about £50m of equity to buy their positions and perhaps another £20-40m of equity to invest for growth.   From the sale price of £500m they would repay their debt (say, £100m), leaving £400m to the equity holders.  As a result Hg might have taken £280m for its investment of between £70m+, making a return of as much as 4x their capital.  And a very high IRR.  Not too bad.

On the buyside, Hellman & Friedman are clearly on a tear in technology, following their gutsy and highly successful flip of Doubleclick to Google, which I wrote about before.  What is interesting is that H&F are not only making bets on high-growth markets like Internet advertising, but also on consolidation in the more mundane parts of the software market (eg, accounting, legal and ERP software).

This maturing of the industry and the wide availability of debt financing for tech buyouts significantly broadens the scope of investment opportunities in technology beyond the traditional VC market.  It creates a large market for growth equity and buyout capital.  And it adds increasing depth to the exit markets for both venture and growth equity investors. Both are positive developments for technology entrepreneurs and investors.

Online ad market is smokin' (con't)

And the deals just keep on coming...  Having supposedly lost out in the bidding for both DoubleClick and 24/7 Real Media, Microsoft has agreed to acquire aQuantive for a cool $6bn, which represents a massive 85% premium to its Thursday closing price.  That's roughtly 12x 2006 revenues or 60x EBITDA.

This deal basically completes the elimination of independent ad-serving technologies with any market share.  Ad serving on the Internet is now controlled by Microsoft (Atlas), Google (Dart) and AOL (Ad-Tech).  It also brings Microsoft further into the digital marketing and advertising world than it perhaps wanted.  aQantive includes several digital marketing agencies (Avenue A, Razorfish, DNA), as well as two performance-based advertising networks, DrivePM and MediaBrokers in the UK.

The consolidation continues...

Online ad market is smokin'

With today's announcement that offline ad agency group WPP is acquiring 24/7 Real Media for $649m, or approximately 3x 2006 revenues (net of cash) it is becoming clear that the convergence of online and offline advertising is in full swing.  This deal is the latest in a string of acquisitions highlighting several competing trends:

1. Offline/online convergence -- It no longer makes sense for an ad agency NOT to have full, credible online capabilities, hence WPP/24-7 and Publicis/Digitas.
2. Consolidation in the ad serving technology market -- And then there were only three ad servers: aQuantive (acq Accipiter), DoubleClick (acq Falk eSolutions), AOL (acq Ad-Tech).  Except of course the open-source underdog...
3. Network scale plays -- This is where the really big bucks are made, by merging search and display ad networks (Google/DoubleClick), and by combining publisher inventory with a liquid market for ads and traffic (Yahoo/RightMedia).

Henry Blodget provides a handy summary of the recent deals in his blog here. 

This is good news for many of the technology and services companies that have lived through the lean years and built quality businesses.  I'm particularly glad to see a number of European companies among the acquired (Falk, Ad-Tech, Neue Digitale).  Because the European market of advertising networks and SEO/SEM firms remains very fragmented (and the US players have comparatively low penetration), expect to see more transatlantic acquisitions in the coming months.

GooTube a big mistake?

It's funny how the accelerated evolution of online video sites resembles a time-lapse view of the evolution of traditional media.  The lesson is probably not one GooTube wants to hear...

I've noticed that online video channels are fragmenting rapidly, much in the same way that offline media fragmented over decades.  YouTube was like the first TV channel with everything on it.  Now its traffic is being picked off by new specialist sites like:

• Funny or Die - comedy clips, funded by Sequoia, again. Good thing Mike Moritz resigned from the board of Google, just in time...
• VideoJug - brilliant collection of How-To videos on absolutely everything.  I wish I'd thought of this one!
• Travelistic - travel videos
• Gametrailers - trailers for video games
• StupidVideos - more AFHV than you can shake a stick at, on-demand

And many more -- think movie trailers, celebrity bloopers, sports clips, music videos, documentaries, animated shorts, etc.  By the end of 2007 there will be 100s of specialist sites attracting reasonable amounts of traffic and able to survive. 

[Bear with me here: the traffic numbers are still staggeringly in favour of YouTube, but growth has tapered off...:

Google's mistake in acquiring YouTube was to believe that YouTube could be universal, like search.  But YouTube is media, while search is horizontal functionality.  Media has to fragment to appeal to thousands of genres, cultures, classes and other affinity groups.

Google is great at search and at monetising traffic.  But YouTube is content and as such its traffic is highly vulnerable to more specialist media.  Google would have been better off doing a video indexing deal with YouTube, and the hundreds of other video sites out there, so that it becomes the best video search engine on the web.  That would leverage its brand (universal search!) and its technology.  But owning the media itself leverages neither, and exposes it to the shifting vagaries of consumer tastes in content.  And we don't have a decent video search engine (as pointed out by VentureBeat's Bernard Moon here).

(Yahoo of course has the inverse problem -- it's a media company trying to do universal search and other horizontal functionality.... But that is for another post.)

Panda bought out

Over at European Capital Partners Paul Elosegui reports on a very quiet but large software buyout that took place last week: the acquisition of a 75% stake in bootstrapped Spanish anti-virus software vendor Panda Software.  There has been no press release, and local news coverage is sparse.  Paul suggests the valuation was €133m.  Back in 2005 the company was already generating revenues of €100m, so if the valuation is correct, then Panda's growth must have stalled since then.

It was always going to be a tough ride to remain as an independent, small AV vendor in a mature market dominated by Symantec, McAfee and Trend Micro.  Panda is a great example both of:

• a successful, bootstrapped European software business that makes it to the global stage; and,
• a founder-managed business that waited too long to bring in outside investors.

This is pure speculation, but indulge me.  I suspect market conditions for this company started getting really difficult in 2005, perhaps earlier.  At that point it should have invested in new products in order to protect itself from increasing competition and declining margins in the AV business.  At the time Panda could have raised significant private equity capital, probably at similar or higher valuations than today.  With the right investor the founders may have been able to expand their market opportunity, reduce their exposure to the AV market, and add key managers that could grow the business beyond €100m in revenues.

The obvious example of a European company that did exactly this at the right time (but perhaps with mixed success) is Sophos, where the founders took £41m from TA Associates for a minority stake in 2002.

It's of course somewhat churlish to suggest that Panda founder Mikel Urizarbarrena got it wrong: since he owned virtually 100% of the business he's walking away with as much as €100m, which probably ranks top 10 among the takes of the most successful European tech entrepreneurs....

P.S. There is now an official press release on the Panda website.

Top VC exits in the US

Here's a good companion post to the list of top European VC-backed M&A exits I published yesterday: VCRatings lists the top 10 North American exits, all of which are well above $100m (altough they include 4 biotech deals, which I'm not tracking).  In fact the top 40 exits (!) are above $150m, a good indicator of the depth of the US exit markets.  These numbers also show a clear improvement on 2005, unlike in Europe where the trend is less conclusive:

"[...] the 40th largest M&A exit of a US-based venture-backed startup in 2006 was worth $150 million versus just $67 million in 2005."

Thanks Paul Kedrosky for the lead.

The top exits of 2006

In an earlier post I wrote about the importance of keeping in mind at what values tech company exits happen when thinking about how much capital to use to build a business.  I used a graph to show how few transactions above $80m-100m actually happen in Europe, to highlight the fact that using more than $15-20m to build a software business (for example) dramatically reduces the likelihood of an acceptable return.

So let's look at the top European M&A exits of 2006 to see if this theory holds at the top end.  By my count there were 8 acquisitions of tech companies above $100m. Of these 5 were venture-backed and 3 had not raised professional external capital.  Perhaps this means that venture investors do in fact add value (or that they are attracted to valuable companies...).  You can see the Top 10 exits in the chart below (the ones in bold were venture-backed).

But in all of 2006 there were probably more than 80 exits known to be above $20m, so in fact only 10% break the $100m barrier.  Considering the usual challenges that European companies face as they expand internationally, this is in fact not a bad statistic.  All it means is that for investors that have put less than $20m to work, the probability of a 3x or 5x return is significantly higher than for those that have put $30-40m into a company -- self-evident you might say, although it's surprising how many investors are still pushing funding round sizes higher and higher.

The other deal of note in 2006 is the acquisition by TA Associates of eDreams from incumbent investors Apax, Atlas, 3i and others.  This is rare in the tech market, but expect to see more of these secondary buyouts in Europe as larger private equity funds look for deals in the sector.  We also had HgCapital's huge leveraged buy-out ($675m) of Norwegian software vendor Visma (not included here because it's public).

Interestingly, 2005 saw about the same number of $100m+ exits (including Skype), so let's hope that in 2007 we can nudge that number up to, say, 10?

Kennet hat trick on Times Tech Track 100

The annual Tech Track 100 listing of the UK's fastest-growing companies has just been published by The Times.  This event is usually followed by a brief spike in outbound calls made by VCs to the companies on the list, in search of the next growth company that might take outside funding. 

As usual, the list is a varied mix of Internet companies, service providers, small software and games developers.  While I like objective rankings in principle, the trouble with this one is that it looks so far backwards to measure revenue growth, in this case covering the period 2003-2005.  While this may be representative of the current momentum of a company, in some cases it reflects historical events during those years (an acquisition perhaps, or starting from a very small base) which do not ahve anything to do with organic growth or current performance.

I guess that's why we pick up the phone to learn more ...

Naturally, I'm delighted to report that three of our portfolio companies made the league tables this year (and I'm happy to say that their historical growth is mostly organic and reflects their current momentum!):

• Volantis Systems (#20) - through its multi-channel content delivery platform, Volantis enables content owners and carriers to automate the delivery of content and applications to consumers, whether they are using the web, mobile phones, PDAs or interactive television.
• Adviva Media (#25) - as brand advertisers increasingly shift their ad dollars onto the Internet, Adviva offers a high-quality, targeted online advertising network of premium web publishers in the UK, France and Germany.
• Fluency Voice Technology (#70) - in the nascent but fast-growing market for speech applications, Fluency offers a proven suite of speech solutions for call centres in the financial services, utilities, travel and other sectors.

Congratulations to the management teams; get ready to take some phone calls from inquisitive investors.

Cramer Systems and efficient uses of capital

Today we announced one of our bigger exits -- the sale of telecoms software company Cramer Systems to Amdocs for $375m, net of cash.  See the brief note in The Deal.com here and the Amdocs press release here.  We're particularly excited about this one because (in addition to being a good exit for our fund):

1. it represents one of the highest cash prices ever paid for a European software business; and,
2. it is a great example of a European technology business using not much external capital to become a global market leader.

While Cramer is hardly a bootstrapped company (it raised around $27m in total), it was in fact run like a very capital-efficient, owner-managed business.  And much of the raised equity was never actually spent, remaining on the balance sheet to this day.  That capital-efficient cost culture was a key part of the company's success during the "nuclear winter" of telecoms spending.  A few years ago I wrote in Real Deals about Cramer in the context of capital efficiency:

[...] Cramer took its time to establish credibility with a handful of early customers, such as Diax and Cegetel. But the founders had broader ideas for a new way of visualising and managing the networks and service offerings of large telecoms operators. In 1999, they raised a small amount from angel investors and Kennet to test this vision – and so the category of “Inventory Resource Management” was born.

Then, in late 2000, Cramer was able to raise $25m to take its business global. What is critical to Cramer’s success is that a large chunk of that investment round is still in the bank. Cramer expanded its US market presence carefully and – in spite of the usual setbacks during initial US market entry – relatively inexpensively.

Capital efficiency was – and still is – core to Cramer’s culture, and it is this culture that secures the steady improvement in operating performance. Its customer list now includes BT, Vodafone, Bell Canada, KPN, Cable & Wireless and Japan Telecom.

[Source: Real Deals, Guest Comment, 20 May 2004]

So here we have at least one data point to support our theory about captial efficiency generating better returns.  How many data points do I need for an informal proof?

If this isn't a bubble, what is?

No comment necessary...

Facebook Turns Down $750MM Offer, Hopes for $2 Billion

With marketing and advertising activity in the social-networking sector heating up, the popular online social network for high school and college students Facebook.com - which has recently put itself up for sale - has turned down a $750 million offer, holding out for as much as $2 billion, reports BusinessWeek (via ediaBuyerPlanner). MySpace is the largest social-networking site - with 23.5 billion logged pageviews in February, second only to Yahoo, Media Life writes. Last month, two-year-old Facebook had the seventh-heaviest traffic levels, with 5.5 billion pageviews.

- MarketingVOX, 29 March 2006