Tuesday, June 30, 2009

The VC Cleanse - Taking Advantage of the Downturn to Walk Away


VCs are cleaning out their portfolios right now. It seems like there are 3 drivers and 3 methods to doing so. Implications are discussed.


WHY ARE VCS CLEANING OUT THEIR PORTFOLIOS?
  1. Some companies should get the plug pulled on them. Silicon Valley is built off of a fail fast mentality and the constant birth and death of startups. There are some investments that have underperformed, misexecuted, or been hit hard by the current environment and can not raise cash and are getting shut down.
  2. The downturn is an opportunity to write off companies with a long time horizon and large capital needs. Some VCs are using the recession and removal of companies that "should die" to also force exits or write offs of investments that may do OK longer term, but are either (a) not on a ridiculous growth curve or (b) require large amounts of additional capital to keep going. I think the thinking is: (i) we can free up partner time to invest in all the high growth startups on a ridiculous growth curve that we can get into cheaply today - so why back a company with only so-so prospects for the forseeable future? and (ii) with the broader cleanse of our portfolio, we can use the recession as "air cover" with our LPs for shutting down or getting out of this company, so it is an easy exit for us and frees up time as per (i) so we can find something that is more of a "sure bet".
  3. They need to return their funds and please LPs, so they will force exits. The last 2 weeks have seen a slate of exits. Exits are driven by (a) inability by the company to raise capital (so an exit is a better alternative) (b) VCs want to show strength or return capital to LPs so they may force exists (especially if they are raising money or negotiating terms with their LPs for their fund) (c) larger companies may be opportunistics about low startup valuations (especially if their stock is doing well) and buy out startups who think a safe home may be a better alternative then the extra hard work of navigating a recession or (d) traditional M&A logic - sum greater then the parts, the acquirier is giving a good offer, etc. etc.
HOW ARE VCS EXITING?
  1. Shutting down / liquidating a company.
  2. M&A - selling (often) at a lower price then the last round
  3. Wiping the cap table. Having a company go through a down round without the original VC participating, allowing the VC to leave the board although with loss of any future ownership in the company.
SOME RECENT EXAMPLES:
(I have zero inside knowledge of any of these, so my classification of these companies is PURELY 100% speculative and in some cases baded on rumors or e.g. TechCrunch or other blogs):
-Mochi Media (rumors), Zappos: recent press suggested entrepreneurs and investors may have disagreed on exit paths where investors may have been more eager to sell.
-SearchMe: company significantly downsizing/repositioning due to large amount of add-on capital needed.
-iMeem: Cap table wiped, new money raised.
-Xoopit, Zappos (again): Exit into synergistic company with good product fit.

IMPLICATIONS?
  1. A lot of startups are going to shut down in the next 6 months. As VCs clean out their portfolios further, a lot of companies are going to go out of business.
  2. VCs are going to have a lot more time to do new deals in Q1/Q2 2010. With less partner time going to struggling companies, VCs will be able to buy into all the cheap deals they have been seeing lately. This means getting funded for new startups may be easier in early 2010.
  3. There may be cheap assets to buy. Following the last downturn, there were a number of assets that people bought on the cheap and turned in businesses worth 10s of millions or more. For example, eHow was a site that generated a large amount of content during the last bubble which was then sold for peanuts and reborn as a new version of the original site and eventually sold to Demand Media. You can read about it on wikipedia.
So what do you think? What other companies will be affected by the VC psychology above?

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Tuesday, June 23, 2009

8 Digital Media Companies I would Invest In (If I was a VC)

If I was a VC I would be taking advantage of the sparse funding available for later stage deals and depressed valuations to chase down a handful of deals that I think will end up being substantial companies with a reasonable probability of a good exit.

From what I understand, this is basically what IVP did with Twitter, with Benchmark then being pulled into the fray once Twitter was in play for an investment (until IVP pursued Twitter, the Twitter founders kept claiming they didn't need to raise any more money)

Companies I would pursue*:
  • Mint.com. Mint has a great model, a market leading position, and access to tons of interesting and unique data that leads to some pretty direct monetization opportunities. They have solid user growth and traction, and nice repeat use. They will have a great exit. Now may be the last chance to get in reasonably cheap.
  • Coupons Inc. Really fast growth in coupon volume, a patent based monopoly on online coupons, a crappy macro econ environment in which people want more coupons. Oh yeah, and as far as I know they have never taken any VC money.
  • Playdom. Zynga gets all the press, but also probably sports a higher valuation per $ revenue or per user. Playdom is a leading player in social gaming and is on a rapid growth (and monetization) curve. I think the danger is that (a) certain short term aspects of social media monetization (i.e. offers) will soon collapse in value and (b) as a social gaming company they constantly need to be iterating on the next hit. But despite these risks I think the company is on a tear and the traditional gaming companies (e.g. EA) are still totally lost when it comes to social gaming. Playdom just recruited John Pleasant, the COO of EA as their CEO, so perhaps this would make them harder to pick off to fund :)
  • Admob. When I was as intern at Cisco many years ago one of my mentors there said "growth covers up for A LOT of mistakes". The mobile web is now exploding due to iPhone et al, and a rising tide raises all ships. Just as Cisco benefited from the rise of the Internet/IP everywhere, AdMob is well positioned to capitalize on mobile web explosion. Further, there are a number of great potential buyers for the company if the company decides not to build to an IPO (Microsoft, AOL, etc. will all need mobile stories, and some of them really want to build out their ad networks). That said AdMob faces potential strategic challenges as the mobile web shifts dramatically from WAP to iPhone and Apple effectively controls the channel and could potentially partner with Google to compete in ads.
  • Cloudera. Alas - in this case Greylock beat me to it! Greylock was smart to make the investment in Cloudera right now. Cloudera is rapidly gaining traction as an industry leader in a market that will continue to grow due to the masses of data being accumulated everywhere (e.g. bioinformatics, digital media, advertising etc.) and hadoop will be increasingly all pervasive. I think the most likely outcome is an exit to IBM, HP or the like, but now is the time to invest.
  • SMSgupshup. OK, maybe the exit here won't be huge given the India market focus / lower value per user, but I think this company is pretty cool.
  • Fixya. Like many SEO-driven businesses, it took Fixya 18+ months to really ramp up and get traction, but they have recently hit the "virtuous cycle ramp" where users are generating content to attract users who generate more content. Fixya has some interesting monetization opportunities it can capitalize on. Not sure they will ever be a consumer brand (and benefit from the value of a brand) but they could be a great SEO driven business.
  • Twitter. I would only invest in Twitter at this point if I was a VC looking to build my brand as a consumer internet investor. Twitter's internal valuation is probably quite high at this point, but at the same time I think they will have a $1 billion+ exit. So the return on Twitter itself might be sucky (i.e. somewhere in the "government bonds to 2X range"), but from a brand building exercise it might be worth it if I wanted to build a consumer internet/digital media franchise for my venture fund. (I will write a future post on brand building for VCs in digital media later)
Feedback?
So what do you think? What companies would you invest in if you were a VC and why?

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*Disclaimer: I have zero inside knowledge into these companies and don't have access to their internal metrics. So this is me making guesses best on total stabs in the dark on what I think is interesting medium term.

Monday, June 22, 2009

M&A: How to tell if Google/Microsoft/FB is about to buy your social media startup

Whenever a larger company (e.g. Google, Y!, Microsoft, Facebook, or the like) is trying to buy a smaller company (e.g. Twitter, Facebook 2 years ago, Myspace, etc.) a leading indicator of interest is the fact that the company execs all suddenly sign up for accounts on the social media service they are trying to buy.

E.g. when rumors abounded about multiple companies trying to buy Twitter, I suddenly saw a bunch of execs from a not-to-be-named-here company join Twitter.

Indeed, I am tempted to create a list of email address of top execs at different companies I know, and run this through the email scrapers of various services periodically to see where M&A interest (or cloning of functionality) is about to occur.

If anyone wants to automate this and share results, let me know, could be an interesting view into what is the next hot (or soon to be acquired) company in the valley is.... :)