Posts from 2003


Well I guess its a landslide now. VOIP is the future of the telecomm business. Circuit switched phone calls are going the way of the rotary phone.

Today’s New York Times, give this news some good coverage.

I’ve been a big believer in VOIP ever since we made our investment in ITXC in 1998. It’s a big business already with almost 10% of all international calls going over the public Internet according to Telegeography.

Now we’ve got all these companies selling local voice over cable and DSL. I would bet that 10% of the local calls will be VOIP by the end of next year. And I’d bet that at least 90% of all calls will be VOIP by the end of the decade.

This is going to be one of the biggest technology stories of this decade.

#VC & Technology

How Much Is Too Much?

I was at a conference last week for institutions that invest in venture capital funds. These institutions are called Limited Partners (LPs) in the venture capital business.

The LPs were all very concerned about overfunding of the venture business.

One LP put up a chart that showed from 1992 to 1996, about $10bn per year came into the venture capital business from LPs. Funds raised in those years produced on average 25-40% annual rates of return. So those were good years.

From 1997 to 2001, the amount raised per year soared, reaching $70bn in 2000. Funds raised in the 1997-2001 period aren’t yet mature, but the returns plummetted, going negative by vintage year 1999. These are the bad years.

So the argument this LP made is that $10bn is the most that LPs can put into the venture business each year without negatively impacting returns.

There are a few things I don’t completely buy about this argument, but the basic reasoning is sound. At some level, the venture business gets overfunded and returns suffer. The question is – what is that level?

I think there were more things going on in the 1997-2001 vintage funds than just overfunding.

1 – There were too many VCs getting funded that weren’t actually VCs. There were people who decided they wanted to be VCs, were able to raise money because there was so much out there, and they set up shop and did a bunch of stupid things. If all of that money went only into the hands of experienced VCs, a lot less of it would have been invested, and a lot less of it would have been lost.

2 – The equity markets tanked in 2000. It takes 3-5 years to get a company to the stage where it can be sold or taken public. The health of the equity markets at that time will have a lot to do with the returns that can be generated by a VC. So you had to make investments in the 1993-1997 timeframe if you wanted to take advantage of the crazy prices that were being offered in the 1999-2000 time frame. The “good years” benefitted from that. The “bad years” suffered.

3 – The story on the 1997-2001 vintage year funds hasn’t been fully told yet. The equity markets are back. Companies are being sold at good prices again. There is even the hint of an IPO market coming back. Many of the funds raised in the “bad years” will end up in much better shape than anyone can imagine right now.

So that’s a long way of saying that this chart needs to be run again in 2005 and then we’ll know a lot more about how much money is the right amount. But even then, we’ll need some way to show the exit value effect that benefits funds raised 3-5 years before the market peaks.

I think all markets are self correcting. LPs aren’t stupid. They will overfund a market for a while, but if returns suffer long enough, they’ll cut back and wait until returns come back. That is exactly what has happened in the venture business. Very little money was raised in the past three years. In fact, when you factor in all the money that the big VC firms have given back, it could well be that no net money has come into the venture business since 2000. This has made the business healthy again.

I think $20bn will come into the venture business in 2004. I think it will come in intelligently and rationally. Only experienced VCs will get funded. And I think that level will be sustained for the remainder of the decade. I do not think we’ll get back to $70bn any time soon. And I think the venture business will outperform most asset classes during this decade as a result.

#VC & Technology

Dean vs. Clark (Continued)

I just heard Gore is going to endorse Dean. That’s huge for Dean and bad news for everyone else, including my favorite Wes Clark.

It will be interesting to hear why Gore is supporting Dean. I think Gore is a very smart guy, but he was a terrible candidate who lost his home state.

And I also feel as my friend Cliff said to me today that the train is leaving the station before the debate has even been held before anyone other than the core activist wing of the Democratic Party. I just fear this is going to backfire badly in the general election.


Dean vs. Clark (Continued)

As I’ve said in this blog recently, I am for Clark. I’ve taken some heat for that stance, but sitting here a couple weeks after making that decision, I honestly think its the right place to be if you are a Democrat that wants to win back the white house.

Josh Marshall put up a post on his Talking Points Memo blog on Friday evening that captures the essence of where we are. Dean doesn’t have a chance of beating Bush but he’s almost instoppable in the Democratic primary.

Add to that this morning’s article in the New York Times about the Super Tuesday primaries and its clear to me that the only candidate who has a chance of stopping Dean is Clark. And he needs to win big on Super Tuesday to do that.

By the way, check out the picture of Dean in the NY Times article. That picture says it all to me about Dean. He’s way too defensive to make it in the bigtime against Bush. He’s going to get slaughtered.


Getting The Mail Through

On this snowy morning in NYC, I am reminded of the US Post Office’s motto, “neither rain, nor sleet, nor snow will stop the mail from getting through”. I am sure I bastardized this motto, but you know what I mean.

In the email business, its not rain, sleet, or snow that’s the problem, its the spam filters that have gone up everywhere.

Consumers are now being protected by AOL, Yahoo, Microsoft, Earthlink, and others. Corporations are being protected by BrightMail, Postini, and many others. And that’s a good thing. See all my posts on Spam and you’ll know that I hate spam and have had terrible problems with it.

The point I am making is that there is this new business opportunity in email that’s probably going to be as big as the sending business is today. The market for email sending services for legitimate commercial marketers (your bank, your utility, your retailer, your newspaper, your car company, etc) is somwhere between $300 million and $500 million today and continues to grow. I have an investment in one of the largest email service providers (ESPs) called Bigfoot Interactive so I know a bit about this business. The ESP business has to date been all about composing the mail, buildig the list, segmenting it, and then sending the mail.

But that’s changing. Sending the mail doesn’t mean much these days if it doesn’t get through. And it’s a lot of work to get it through. You have to make sure the content of the mail doesn’t have anything in it that could get it caught in a filter. You have to make sure the subject line is “clean”. And you have to make sure you are on everyone’s “white list”. This last one’s a big one. And its where the next battle will be fought in the email business.

Every spam filter has a white list. It’s a list of “good” senders. If you are on the white list, your mail gets through as long as the content isn’t problematic. AOL has a huge white list. Yahoo has one. Earthlink and Microsoft have them. Bright Mail, Postini, and all the commercial filters have white lists. Every white list is a dynamic list, it changes all the time depending on the activity, the complaints, etc.

So managing these white lists and making sure you are on them is going to be a huge business. The ESPs like Bigfoot Interactive are in this business now and that’s why they are on a growth spurt. They’ve got a new product to offer their customers.

But what if you are a company that sends email in-house and doesn’t use an ESP? Then you have this new problem and don’t have the resources to deal with it. There are companies that can help. I’ve got an investment in a company called Return Path that offers “assured delivery” services. I think they are the best company in the assured delivery business that’s not an ESP.

So if you are worried that the electronic equivalent of rain, sleet, and snow is going to stop your email from getting through, call Bigfoot Interactive or Return Path.

#VC & Technology

What's It Worth?

I am out here in San Francisco at a Private Equity Conference. Yesterday we heard all about these new valuation guidelines that are being promoted throughout the private equity business. In case you are interested, the Wall Street Journal ran a story about them yesterday that is a pretty good summary of the issue.

If you don’t want to pay to read that story, but are still interested, you can go to the website of the group that is promoting these new guidlines, called the Private Equity Industry Guidlines Group.

To sum this all up, this industry group is saying that our investments which are illiquid, can’t be easily sold, often have to be held for 5-7 years before we can exit them, must be valued on our books at “Fair Value”. Hey, that makes a ton of sense. If you are valuing your investments, they should be valued at what they are really worth. I can’t argue with the logic of that.

But I take objection to it anyway. Why? Because the way we’ve been doing it in the venture business for as long as I’ve been around is better. We’ve avoided writing up our investments until they’ve been valued higher than our cost by some real event – either a financing or a sale. But we have total freedom to write them down for any reason we think results in their impairment. This results in an inherently conservative assessment of the value of the investments. But even so, when one of our partnership interests trades in a “secondary sale”, it always goes for less than our current carrying value. So the reality is that our conservative bias in valuing our investments isn’t conservative enough to reflect market realities.

And yet the industry is now saying we need to be less conservative. We need to write up our investments in the same way we write them down. If something happens in our companies other than a third party financing or sale that makes them more valuable, we should reflect that in a higher valuation. I don’t think that’s a good idea. Who is to say that the increase in value is permanent? Why are the General Partners a good aribiter of that value? Doesn’t this offer an incredibly tempting opportunity to “play with the numbers” when it comes time to raise another fund.

I can see why this is a good idea for the buyout business. Those investments are often held at cost for many years without an external valuation event because there aren’t subsequent financings in that business the way there are in the VC business. And value in that business is much more a function of cash flow and so as cash flow increases, the value clearly goes up. And the valuation multiples in the buyout business aren’t nearly as volatile as they are in the tech driven world of venture capital.

So if the industry wants to change the way the buyout funds value their investments, that sounds like a good idea to me. But I don’t think the industry should change the venture capitalist’s current methodology.

There were two other substantitive recommendations which I enthusiastically endorse. The Private Equity Industry Guidelines Group proposes that all funds be valued every quarter and that it be done in consultation with a valuation committee comprised of a select group of the fund’s investors. Both of these recommendations are consistent with the way most venture capital firms operate today, but making this the rule instead of the norm sounds like a good idea to me.

#VC & Technology

The Productivity Debate (Continued)

Well no less than 48 hours after my post on this subject, my friend David Kirkpatrick weighs in on the same topic in his excellent weekly Fast Forward column for Fortune Magazine.

David writes:

We may be entering the second great technology boom. The first one, of the late ’90s, was a boom in expectations, which pushed up stock valuations and investor enthusiasm in the belief that the new technologies born of the internet would fundamentally transform the economy.

It’s starting to look like investors were right, just off slightly in timing and targets. I’m no economist, but I am a true believer in the transformative power of technology, and a close observer of just how many places such transformation is happening.

Is this boomlet we are now officially in the “Bush Bubble” built on artificially low interest rates, tax rebate checks, and inventory rebuilding, or is it a real recovery built on huge gains in productivity driven by technology investments made over the past ten years?

It’s too early to tell. But it’s hard to imagine that Corporate America isn’t much more efficient than it was 10 years ago and my guess is that a good part of the recovery in profits is coming from that. We’ll see how sustainable it is.

#VC & Technology

Turning Off Comments

I know a lot of bloggers who turn off comments. They don’t want to have to police all that reader generated content. I know how they feel. I’ve had to delete at least 10 vulgar or hateful comments from my blog since I started blogging in late September.

But I blog because I want to stimulate thought. I want that feedback. And I get a lot of it.

In the past several days, my blog has begun to feel like a Wes Clark debate site.

Watching “Compelled to Reply” debate with “Robin” has been interesting and informative. They both have made some strong points. Nobody has been knocked out by my count yet, though. And I’ve learned a lot.

The same is true about wireless power. My post on that subject was borderline throw-away. I want wireless power. But I thought it was not physically possible. Well go read the comments yourself and then tell me what is possible and what is not.

My point is this. The Internet is a two way medium. That’s a big deal. Don’t ever forget that. Your audience aren’t just your readers; they are your knowledge base, your customers, your vendors, your supporters, your antagonists, and most everything else.

So leave the comments on. And listen. And learn.

#Random Posts

The Productivity Debate

GDP is up over 8% in the last quarter. Jobs aren’t growing nearly as fast. Sure its early in the economic rebound cycle and jobs take longer to come back, but I think there is something more going on. I think the big investments that corporations made in information technology over the past 10 years are finally producing the desired effect – more efficient operations. In other words, more productivity.

Steve Roach disagrees in a column in today’s New York Times.

He thinks we aren’t measuring productivity correctly. He makes some excellent arguments as to why the government’s statistics are badly flawed. And he says we are all just working harder for the same amount of compensation. And he’s likely right about all of that.

But he doesn’t make any arguments to refute the notion that information technology makes corporations more efficient and therefore more productive. It seems obvious to me that the rapid diffusion of technology in our society – ATMs instead of tellers, EZ Pass instead of toll booth operators, eTickets instead of airline counters, metrocards instead of tokens, etc, etc – is leading to more productivity.

And it seems to me that this trend is accelerating. It’s great news if you are a corporation that knows how to integrate information technology into your business. And it’s great news if you are a supplier of information technology. But it’s bad news if you are a low skilled worker whose jobs are being replaced by a computer. And it may be bad news for our country if we can’t replace those jobs with something better for these people.

Which is why I think Steve Roach is doing everyone a disservice by calling into question the productivity story. If its not true, then we don’t have to face these painful issues facing our society. And knowing the politicians and policy makers in our society, they’ll postpone facing up to the truth as long as they can credibly do that.

#VC & Technology