Investing in Software, Internet

1
Investing in Software, Internet Technology
Enabled ServicesVenture Association of NJ
January 15, 2008
Crossbar Capital
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Agenda

• The dynamic of my business
• Market leadership lifecycle
• Investment opportunities
• Summary investment strategy

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The Venture Business

• Raise a blind pool of capital
• Invest the money over 5 years
• Diversify risk by creating a portfolio
• Hope to return capital AND 20 compounded
  return (net of fees) over 10 years

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Market Leadership Lifecycle
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Opportunity Knocks- IT Market Lifecycles

• Always start small with vendor denial and few
  competitors

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Opportunity Knocks- IT Market Lifecycles

• Always start small with vendor denial and few
  competitors
• Steep growth ramps attract many competitors, VCs
  and exits

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Opportunity Knocks- IT Market Lifecycles

• Always start small with vendor denial and few
  competitors
• Steep growth ramps attract many competitors, VCs
  and exits
• Aligning performance with investment timing is
  essential
• Capital too early run out of oxygen
• Capital too late roll-up or sell to gorilla
• Just in time proper execution and market
  momentum will drive hyper-growth

8
Opportunity Knocks- IT Market Lifecycles

• Always start small with vendor denial and few
  competitors
• Steep growth ramps attract many competitors, VCs
  and exits
• Aligning performance with investment timing is
  essential
• Capital too early run out of oxygen
• Capital too late roll-up or sell to gorilla
• Just in time proper execution and market
  momentum will drive hyper-growth
• Returns predicated on leadership attained via
• Category creation
• Existing category disruption

9
Opportunity Knocks- IT Market Lifecycles

• Always start small with vendor denial and few
  competitors
• Steep growth ramps attract many competitors, VCs
  and exits
• Aligning performance with investment timing is
  essential
• Capital too early run out of oxygen
• Capital too late roll-up or sell to gorilla
• Just in time proper execution and market
  momentum will drive hyper-growth
• Returns predicated on leadership attained via
• Category creation
• Existing category disruption
• Investors challenge is to have a process that
  efficiently identifies and then participates in
  the right ones in a timely manner

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Traditional IT Lifecycle
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Traditional IT Lifecycle
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Traditional IT Lifecycle
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Traditional IT Lifecycle
Integrated
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Traditional IT Lifecycle
Best of Breed
Growth Phase
Integrated
Consolidation
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Traditional IT Lifecycle
Oracle
Best of Breed
Growth Phase
PeopleSoft SAP Siebel Retek Symantc MSFT
JD Edward Lawson I2 Informatica Webmethods
Navisoft Great Plains
MSFT Oracle SAP IBM ?
Integrated
Consolidation
Winners
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Internet 4Cs Experiencing Similar Dynamics
ICQ
Best of Breed
Growth Phase
Digg Hotmail Oddpost Skype MySpace
Dialpad Kazaa Usendit Pando Flickr
del.ici.ous Pyra Labs Picassa Dialpad
Yahoo eBay MSFT Google
Consolidation
Integrated
Winners
Winners
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Explosion of New Affecting Internet Markets

• Too numerous and fast moving to properly
  identify, but formally arcane markets include
• Phishing, Clickfraud, Blog, Vlog, p2p, Voip, Rss,
  Wiki, Soa, Ajax, Open Source, On Demand,
  Virtualization, Social Networks, Mash-ups

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Explosion of New Affecting Internet Markets

• Too numerous and fast moving to properly
  identify, but formally arcane markets include
• Phishing, Clickfraud, Blog, Vlog, p2p, Voip, Rss,
  Wiki, Soa, Ajax, Open Source, On Demand,
  Virtualization, Social Networks, Mash-ups
• How many 1B market cap realizations from these
  segments?

19
Explosion of New Affecting Internet Markets

• Too numerous and fast moving to properly
  identify, but formally arcane markets include
• Phishing, Clickfraud, Blog, Vlog, p2p, Voip, Rss,
  Wiki, Soa, Ajax, Open Source, On Demand,
  Virtualization, Social Networks, Mash-ups
• How many 1B market cap realizations from these
  segments?
• Not every investment requires a billion exit

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Market Opportunities
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The Enterprise is Ripe for Business Model
Disruption

• Sales and Marketing SM inefficiency issues are
  being addressedby learning from the consumer
• Acceptance of downloads
• Thriving industry, geographic, and market blogs
• Remote support (to lower cost regions) or
  automated support

22
The Enterprise is Ripe for Business Model
Disruption

• Sales and Marketing SM inefficiency issue are
  being addressedby learning from the consumer
• Acceptance of downloads
• Thriving industry, geographic, and market blogs
• Remote support (to lower cost regions) or
  automated
• SM has the potential to move down from 50-60 of
  vendor spending to 30-40

23
The Enterprise is Ripe for Business Model
Disruption

• Sales and Marketing SM inefficiency issue are
  being addressedby learning from the consumer
• Acceptance of downloads
• Thriving industry, geographic, and market blogs
• Remote support (to lower cost regions) or
  automated
• SM has the potential to move down from 50-60 of
  vendor spending to 30-40
• Broadband enables small(er) vendors to
  efficiently reach global customers

24
The Enterprise is Ripe for Business Model
Disruption

• Sales and Marketing SM inefficiency issue are
  being addressedby learning from the consumer
• Acceptance of downloads
• Thriving industry, geographic, and market blogs
• Remote support (to lower cost regions) or
  automated
• SM has the potential to move down from 50-60 of
  vendor spending to 30-40
• Broadband enables small(er) vendors to
  efficiently reach global customers
• Challenge is weighing lower ASPs and deferred
  maintenance/support revenue with capital
  requirement to support market share scale

25
Across all Segments, Disruptive Factors Decrease
Initial Capital Thirst

• Early stage software/internet investing becoming
  LESS capital intensive
• SM leveraging the Internet communication
  paradigm
• RD leveraging open source tools

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Disruptive Factors Decrease Initial Capital Thirst

• Early stage software/internet investing becoming
  LESS capital intensive
• SM leveraging the Internet communication
  paradigm
• RD leveraging open source tools
• Ready supply of 2nd time entrepreneurs
• Experienced the boom/bust
• Know how to prioritize resources
• Dont need the initial cadre of VPs

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Disruptive Factors Decrease Initial Capital Thirst

• Early stage software/internet investing becoming
  LESS capital intensive
• SM leveraging the Internet communication
  paradigm
• RD leveraging open source tools
• Ready supply of 2nd time entrepreneurs
• Experienced the boom/bust
• Know how to prioritize resources
• Dont initially need the cadre of VPs
• Users acclimated to remote or computer generated
  support

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What this Means for Investors and Entrepreneurs

• Opportunity to invest within the explosion of
  niches that are rapidly growing into viable exit
  markets (e.g. Vocus IPO)

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What this Means for Investors and Entrepreneurs

• Opportunity within the explosion of niches that
  are rapidly growing into markets (e.g. Vocus IPO)
• Be wary of timing two profitable entrance points
  are
• at the top of the triangle or
• consolidate at the midpoint

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What this Means for Investors and Entrepreneurs

• Opportunity within the explosion of niches that
  are rapidly growing into markets (e.g. Vocus IPO)
• Be wary of timing two profitable entrance points
  are
• at the top of the triangle or
• consolidate at the midpoint
• Align capital consumption with leadership/exit
• Lead, or exit, to the leader or contender
• Know the ecosystem

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Investment Strategy
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Summary Core Investing Principles

• Invest only where the potential exists to be a
  market leader
• IP Driven- Market creation through fundamental
  technology shifts
• Business Driven- Market disruption through
  business model shifts
• Marketing Driven- Niches which will emerge into
  markets

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Summary Core Investing Principles

• Invest only where the potential exists to be a
  market leader
• IP Driven- Market creation through fundamental
  technology shifts
• Business Driven- Market disruption through
  business model shifts
• Marketing Driven- Niches which will emerge into
  markets
• Primary investment strategy is the identification
  of new markets expected to experience tornado
• Initial value creation driven by market growth
• Exit timing determined by ability to
  seize/maintain leadership position (execution)
• Exit alignment with founder(s) is essential
• Technology and competitive environment moving so
  rapidly that real-time involvement is critical
  (for leadership execution and exit)

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Summary Core Investing Principles

• Own enough of the winners
• Capital efficiency and rapid time to market
  minimizes large capital early stage risks
• Build a portfolio of early stage/high ownership
  situations. Blend of IPO disrupters, Market and
  IP disrupters
• Disciplined process to determine which are
  entitled to deeper support
• Exit Early from market share laggards