The Hot Sectors

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• The Hot Sectors!
• The Facts About Exits
• Sentiment in Ventureland
• Thoughts on Three Rising Trends

2
Wheres The Biggest Investment Opportunity Today?

• Greentech
• Internet B2B
• Mobile/Wireless
• Media Entertainment
• Security

55
23
11
7
Poll conducted at AlwaysOn Conference Summer 2007
4
3
Anything Else Worth Investing In?

• Enterprise equipment
• Telecom services
• Healthcare services
• Biometrics
• Semiconductors
• Financial services

4

Exits Facts and Myths
5
Private Equity A Potent Force

• 1st half of 2007
• 6 of 10 largest tech MA done by Private Equity
• Europe no exception
• 2 largest Freescale, Philips Semi
• Pending PE debt issuance
• Jan 06 40B
• June 07 250B

6
Field of Acquirers Has Shrunk

• 2006
• 40 of all tech MA above 50M done by 10
  companies
• Average market cap of acquirers 100B

Enormous buying power in hands of a few
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Myth 1

• The IPO market is back!

8
Tech IPOs Have Become Rarer
2004 -2007
2001-2003
1990s
130
20-25
IPOs Per Year
55
Today we have less than half the IPOs of
pre-bubble 1990s
9
VC Exits above 50M
MA
IPO
60
1990s
40
Past 4 years
10
90
10
Significant IPO Premium
Business Services
Healthcare Services
Technology
IPO Premium
26
37
43
and investors enjoy continued upside potential
11
2007 versus 1997

• VCs deploying 2.5X more capital versus 10 years
  ago but
• Same of exits above 100M
• 500 Increase in MA exits
• 80 decline in IPO exits

12
Implications?

• Buyer concentration continual tough MA market
• No re-population of the buyer base
• Selling our best companies
• Mortgaging our future?

13
A Shrinking Buyer Base

• 1640 public tech companies today
• Down 35 from Peak in 2000!
• 7 straight years of fewer public tech companies

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Myth 2
The bar is incredibly high for taking a company
public.easier to sell the business
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Public Market Facts

• 2/3 of names on NASDAQ are lt 500M market cap
• 80 lt 1 Billion Market Cap
• Vaunted NYSE?
• Nearly 40 lt 1 Billion market cap
• 25 lt 500M market cap

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Non Bulge Bracket Relevant

• Bulge Bracket Firms did 25 of Tech IPOs during
  80s and 90s
• 40 to 60 deals/Year
• Today do 80 of Tech IPOs
• 40 deals/Year
• What about the other 100 deals?
• Many are not getting donebut could

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Small Cap IPOsNot Just For Jeffries Co et.al.

• 1990-1998
• Avg market cap?
• Avg raise?

• 65 tech IPOs
• 197M
• 37M

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Half the IPOs Raise lt100M
lt50M
gt100M
50 - 100M
Note IPOs from QI 2004 - Q2 2007. Source
Dealogic
19
Clearly Not Just Tech.
20
IPO vs. Sale of Business
All IPOs between January 1, 2006, and June 30,
2007, where the market cap was less than 300
million...
21
Implied EBITDA?

• 15.7M

22
Moderate Revenue Bar
Riverbed Networks
Acme Packet
ShoreTel Comm
Allot Comm
Pre-IPO LTM Revenue
32M
49M
58M
71M
PeopleSupport 37M..Compellent 38M
23
Not Just Web Companies Going Public..

• Other Tech IPOs in past 12 months.
• Aruba, Bigband Networks, Infinera, Starent
  Networks, Veraz, Airvana, Mitel.

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What If..

• ..ATT bought Cisco for 250M in 1991

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Instead.

• Sequoia chose to take public at a 225M market
  cap
• Good Decision?

26
Conclusion?

• Lets get smart about the Small Cap IPO market

27

• Data Analytics
• Attractive Economics For Customers and Investors

28
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

29
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 Lovemans majic at Harris Casino

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Vintage Wine Price Predictor

• Princeton economics professor wondered..
• what factors determine wine prices?

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Dont 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

32
Expert Backlash.

• Wine experts blasted approach
• Convinced industry publications not to print it
• Gauge has proven far more accurate than experts

33
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 gt cost reduction tools

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• Managed Services
• A Trend To Bet On

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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

36
Services.More Acceptance From Resellers

• VAR margins down to 10 to 20
• Finally learning to sell services
• Europe as a model

37
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

38
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

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Service Provider More Valuable Company

• Acquirers gain immediate leverage
• customers are readily accessible versus behind
  the firewall

40
Salesforce.com

• 35,000 Customers
• 1,000,000 Users

41

• Software Tools
• Not Entirely a Shitty Business

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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
43
Worth a Second Look?

• Consumer auction site
• Job boards
• Services targeting the aging population
• Virus protection
• Online banking

44
New Fixes to Age Old Problems.Rarely work

• Verifiable Email
• Better local Search
• Improving marketing response rates
• Targeting the under-served SMB
• Fuel Additives?

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• VC Sentiment 2007
• What Are We Thinking?

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Current Beliefs in Venture Land

• Early stage has best return profile
• Ad supported businesses scale the best
• Enormous 300 billion spend to tap into!
• Search is the driver of economic activity
• Paying up for a hot company is smart
• Emerging markets are hot

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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
48
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
40
65
60
35
55
70
30
45
50
Percentage of Visitors from a Nonsearch-Engine
Source
48
CONFIDENTIAL
49
PG.The Gold Standard of Advertising Efficiency
12.0
10.0
R-Squared .84
8.0
6.0
Organic Sales Growth
4.0
2.0
0.0
9.0
10.0
10.5
11.0
9.5
Advertising as a of Sales
50
Strong Opinions in Web 2.0 Land

• Web companies should create open platforms
• Users should have access and control of their
  data
• Social features are the future of all consumer
  web apps
• E-tailing is not very interesting

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Have E-Tailers Learned Something Since the Bubble?
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
52
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?

53
Opinions Formed About Software.

• SaaS is a superior model in enterprise software

54
Heathcare Services..
Athena Health 1.1B Market Cap Trailing
Revenues 75M
55

• and yet..

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Just a Few Years Ago.

• You couldnt 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 Cant 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!

58
You Cant 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 Seeing Stars

• Iconic examples used to justify lofty valuations
  in consumer space
• Facebook
• Skype
• YouTube
• Google
• Enterprise market now has a celebrity too!
• VMWare 22B market cap

61
Top 5 Internet Market Cap Leaders
Google Yahoo eBay Yahoo!Japan Amazon
32B Nasdaq trough 325B market value 2007
Source Morgan Stanley
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2007.Greed gt 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

63

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

64
Perseverance Pays.
Note As of Aug. 22. Sources Investment Company
Institute Journal of the Academy of Finance
Morningstar.
65
Following The Crowd Doesnt
Note As of Aug. 22. Sources Investment Company
Institute Journal of the Academy of Finance
Morningstar.
66

• Discussion