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The Hot Sectors! The Facts About Exits Sentiment in Ventureland Thoughts on Three Rising Trends. Where’s The Biggest Investment Opportunity Today?. 55%. 23%. 11%. 7%. Poll conducted at AlwaysOn Conference Summer 2007. 4%. Greentech Internet B2B Mobile/Wireless Media & Entertainment

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  • The Hot Sectors!

  • The Facts About Exits

  • Sentiment in Ventureland

  • Thoughts on Three Rising Trends

CONFIDENTIAL


Where s the biggest investment opportunity today
Where’s The Biggest Investment Opportunity Today?

55%

23%

11%

7%

Poll conducted at AlwaysOn Conference Summer 2007

4%

CONFIDENTIAL

Greentech

Internet B2B

Mobile/Wireless

Media & Entertainment

Security


Anything else worth investing in
Anything Else Worth Investing In?

  • Enterprise equipment

  • Telecom services

  • Healthcare services

  • Biometrics

  • Semiconductors

  • Financial services

CONFIDENTIAL



Private equity a potent force
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

CONFIDENTIAL


Field of acquirers has shrunk
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

CONFIDENTIAL


Myth 1
Myth #1

The IPO market is back!

CONFIDENTIAL


Tech ipos have become rarer
Tech IPOs Have Become Rarer

2004 -2007

2001-2003

1990’s

130

20-25

55

IPOs Per Year

Today we have less than half the IPOs of pre-bubble 1990’s

CONFIDENTIAL


Vc exits above 50m
VC Exits above $50M

M&A

IPO

60%

1990’s

40%

Past 4 years

10%

90%

CONFIDENTIAL


Significant ipo premium
Significant “IPO Premium”

Healthcare Services

Business Services

Technology

IPO Premium

43%

26%

37%

…and investors enjoy continued upside potential

CONFIDENTIAL


2007 versus 1997
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

CONFIDENTIAL


Implications
Implications?

  • Buyer concentration = continual tough M&A market

  • No re-population of the buyer base

    • Selling our best companies

    • Mortgaging our future?

CONFIDENTIAL


A shrinking buyer base
A Shrinking Buyer Base

  • 1640 public tech companies today

    • Down 35% from Peak in 2000!

    • 7 straight years of fewer public tech companies

CONFIDENTIAL


Myth 2
Myth #2

The bar is incredibly high for taking a company public….easier to sell the business

CONFIDENTIAL


Public market facts
Public 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

CONFIDENTIAL


Non bulge bracket relevant
Non 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

CONFIDENTIAL


Small cap ipos not just for jeffries co et al

1990-1998

Avg market cap?

Avg raise?

65 tech IPOs

$197M

$37M

Small Cap IPOs…Not Just For Jeffries & Co; et.al….

CONFIDENTIAL


Half the ipos raise 100m
Half the IPOs Raise <$100M

<$50M

>$100M

$50 - $100M

Note: IPOs from QI 2004 - Q2 2007. Source: Dealogic

CONFIDENTIAL



Ipo vs sale of business
IPO vs. Sale of Business

All IPOs between January 1, 2006, and June 30, 2007,

where the market cap was less than $300 million...

CONFIDENTIAL


Implied ebitda
Implied EBITDA?

$15.7M

CONFIDENTIAL


Moderate revenue bar
Moderate Revenue Bar…

Riverbed Networks

ShoreTel Comm

Acme Packet

Allot Comm

Pre-IPO LTM Revenue

$49M

$32M

$58M

$71M

PeopleSupport = $37M…..Compellent = $38M

CONFIDENTIAL


Not just web companies going public
Not Just Web Companies Going Public…..

  • Other Tech IPOs in past 12 months….

    • Aruba, Bigband Networks, Infinera, Starent Networks, Veraz, Airvana, Mitel….

CONFIDENTIAL


What if
What If…..

…..AT&T bought Cisco for $250M in 1991

CONFIDENTIAL


Instead
Instead….

  • Sequoia chose to take public at a $225M market cap

  • Good Decision?

CONFIDENTIAL


Conclusion
Conclusion?

Let’s get smart about the Small Cap IPO market……

CONFIDENTIAL


Data Analytics:

Attractive Economics For Customers and Investors

CONFIDENTIAL


Thinking by numbers
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

CONFIDENTIAL


Analytics coming of age
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

CONFIDENTIAL


Vintage wine price predictor
Vintage Wine Price Predictor

  • Princeton economics professor wondered…..

    • what factors determine wine prices?

CONFIDENTIAL


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

CONFIDENTIAL


Expert backlash
“Expert” Backlash….

  • Wine experts blasted approach

    • Convinced industry publications not to print it

  • Gauge has proven far more accurate than experts

CONFIDENTIAL


Still some work to do
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

CONFIDENTIAL


Managed Services:

A Trend To Bet On

CONFIDENTIAL


Services upheaval in the equipment space
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

CONFIDENTIAL


Services more acceptance from resellers
Services….More Acceptance From Resellers

  • VAR margins down to 10% to 20%

  • Finally learning to sell services

  • Europe as a model

CONFIDENTIAL


Services customer lock in
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

CONFIDENTIAL


Operational benefits of managed services model
Operational Benefits of Managed 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

  • CONFIDENTIAL


    Service provider more valuable company
    Service Provider = More Valuable Company

    • Acquirers gain immediate leverage

      • customers are readily accessible versus behind the firewall

    CONFIDENTIAL


    Salesforce com
    Salesforce.com

    35,000 Customers

    1,000,000 Users

    CONFIDENTIAL


    Software Tools:

    Not Entirely a Shitty Business

    CONFIDENTIAL


    Two honorable mentions
    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

    CONFIDENTIAL


    Worth a second look
    Worth a Second Look?

    • Consumer auction site

    • Job boards

    • Services targeting the aging population

    • Virus protection

    • Online banking

    CONFIDENTIAL


    New fixes to age old problems rarely work
    New Fixes to Age Old Problems….Rarely work

    • Verifiable Email

    • Better local Search

    • Improving marketing response rates

    • Targeting the “under-served” SMB

    • Fuel Additives?

    CONFIDENTIAL


    VC Sentiment 2007:

    What Are We Thinking?

    CONFIDENTIAL


    Current beliefs in venture land
    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

    CONFIDENTIAL


    Indeed search is king
    Indeed….Search is King

    Direct Access

    Big 5 Search

    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%

    As of August 25, 2007

    CONFIDENTIAL


    Positive but weak relationship between ad and non search traffic
    Positive (but weak) Relationship Between Ad $ and Non Search Traffic

    45%

    RNWK

    40%

    MOVE

    35%

    NFLX

    30%

    FLWS

    Trend line

    WBMD

    CNET

    Sales and Marketing Spending

    as Pct of FY06 Revenue

    KNOT

    MNST

    25%

    REDE

    20%

    FTD

    TSCM

    15%

    PCLN

    10%

    NILE

    OSTK

    5%

    DSCM

    CTAC

    0%

    65%

    60%

    40%

    70%

    30%

    45%

    35%

    55%

    50%

    Percentage of Visitors from a Nonsearch-Engine Source

    48

    CONFIDENTIAL

    CONFIDENTIAL


    P g the gold standard of advertising efficiency
    P&G….The Gold Standard of Advertising Efficiency Traffic

    12.0%

    10.0%

    R-Squared = .84

    8.0%

    6.0%

    Organic Sales Growth

    4.0%

    2.0%

    0.0%

    9.0%

    10.5%

    11.0%

    10.0%

    9.5%

    Advertising as a % of Sales

    CONFIDENTIAL


    Strong opinions in web 2 0 land
    Strong Opinions in Web 2.0 Land… Traffic

    • 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

    CONFIDENTIAL


    Have e tailers learned something since the bubble
    Have E-Tailers Learned Something Since the Bubble? Traffic

    2007 YTD Performance

    Market Cap

    Blue Nile 129% $1.3B

    Overstock 36% $510M

    1800 Contacts 42% $312M

    1800 Flowers 61% $620M

    As of August 25, 2007

    CONFIDENTIAL


    And mobile as well
    …And Mobile as Well… Traffic

    • 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?

    CONFIDENTIAL


    Opinions formed about software
    Opinions Formed About Software…. Traffic

    • SaaS is a superior model in enterprise software

    CONFIDENTIAL


    Heathcare services
    Heathcare Services….. Traffic

    Athena Health = $1.1B Market Cap

    Trailing Revenues = $75M

    CONFIDENTIAL


    and yet….. Traffic

    CONFIDENTIAL


    Just a few years ago
    Just a Few Years Ago…. Traffic

    • 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?

    CONFIDENTIAL


    You can t lose with
    You Can’t Lose With…. Traffic

    • Millions of users!

    • Successful founders doing it again!

      • Mahalo, Joost, Clearwire

    • Alternative energy deals!

    • Paying up for hot deals with traction!

    • Following Sequoia!

    CONFIDENTIAL


    You can t win
    You Can’t Win…. Traffic

    • 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 %

    CONFIDENTIAL


    Parting thoughts… Traffic

    CONFIDENTIAL


    Vcs and entrepreneurs seeing stars
    VCs and Entrepreneurs Seeing Stars Traffic

    • 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

    CONFIDENTIAL


    Top 5 internet market cap leaders
    Top 5 Internet Market Cap Leaders Traffic

    Google + Yahoo + eBay + Yahoo!Japan + Amazon

    $32B = Nasdaq trough

    $325B = market value – 2007

    Source: Morgan Stanley

    CONFIDENTIAL


    2007 greed fear
    2007…….Greed > Fear Traffic

    • 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

    CONFIDENTIAL


    Risky to Redline ANY sector….even lowly optical, storage, comm, healthcare services….

    CONFIDENTIAL


    Perseverance pays
    Perseverance Pays…. comm, healthcare services….

    Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar.

    CONFIDENTIAL


    Following the crowd doesn t
    Following The Crowd Doesn’t… comm, healthcare services….

    Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar.

    CONFIDENTIAL


    Discussion comm, healthcare services….

    CONFIDENTIAL


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