Dear All,
I am taking a week off from blogging. I will resume blogging on Feb 6th. Am sure you can survive a week without a Shamsa hit!
Prudential is selling Egg, its online bank, to Citigroup of the US for £575m ($1.13bn) cash, the UK life assurer said on Monday. Proceeds from the sale, which is expected to be earnings enhancing, would be used to cut debt, the Pru said. In December, the Pru said it had rejected an approach for Egg – believed to have been from Citigroup – which it described at the time as “speculative and conditional and not in our shareholders’ interests to pursue”.
Copyright The Financial Times Limited 2007
Its always a good thing to have goals, so my goal for this time next year is to be at Davos. Probably a bit difficult to garner an invite, as well currently - I can't say I am high-powered or important enough, as say Angelina Jolie or Angela Merkel. But, a girl has to have a dream? So next year, Davos here I come. Well - at least the world is warned.
Anyway, my reasons for the above is the amount of interesting news that has been emerging this year. Last year - Davos should have been called the "Brad and Angelina" show. They are probably very nice human beings, but this years no celebrity approach, I believe has meant at least the focus has remained where it should: on the issues.
Last night I attended the Young Person networking event hosted by the BVCA (British Venture Capital Association). Lots of young people, but none of them in Venture. Every single person that I spoke to, except Stephen Wilson from Unilever Ventures, was with Private Equity/Buy-out Funds. I know the BVCA get tired of me complaining about the same thing every time: where are the VCs and why are you not called the BPEA (British Private Equity Association)? If you're under 35 and working in VC in the UK, drop me a line at techbytes [at] mac [dot] com and we'll set up our own networking event.
In response to your question - we venture capitalists were working! Sadly, in terms of priorities, attending a networking do just wasn't on the top of my "to do" list. I would be more then happy to meet at Super Return or Super Investor, networking events that I attend religiously and try to speak at. Both vehicles in my humble opinion are most suitable to improve the position of venture both within the industry and amongst LPs.
Otherwise thank God its Friday - I seem to have had plans made for me for the entire weekend. Not that I mind, as I tend to leave social planning to the last minute. Thus, I am glad that others have taken on the reponsibility for planning and "I just get to show up!". Nice! Also, in London, the private equity community has launched its very own charity and although, I did not attend the event - I am pleased that a united effort is being made to give back to the larger community. Refer to here for details: http://www.bloomberg.com/apps/news?pid=20601102&sid=avw_hftRjbTs&refer=uk
Google and YouTube
I am going to lead today's discussion with the happenings at Google. Fox has served YouTube with a subpoena seeking the identity of a user, ECOtotal, who uploaded episodes of the network's "24" and "The Simpsons". This raises two obvious question will YouTube owner Google fight to protect the identity of its user and how did the user named ECOtotal get hold of the episodes anyway? First, Google has a reputation of being fiercely protective of the identity of its users. It has however acknowledged that it has a problem with posting of copyrighted material on YouTube and has always complied with requests to remove it. However, Fox's actions are reflective of copyright owners who are becoming increasingly vocal in their disapproval of YouTube's policy, demanding that it do a better job of policing content that gets posted to the site. Last year music companies demanded that YouTube clean up its act with anti-piracy software if its wanted to do business with them. YouTube promised to comply and reached agreements with companies such as Warner Bros and Universal Music Group to have anti-piracy software in place by the end of 2006 - a deadline it failed to meet.
The current action by Fox, however, requires YouTube to join the battle against its own illegal posters. If successful, the Fox lawsuit might very well spell the beginning of the end of the anarchic nature of YouTube video posting, which has enabled users all over the world to see entire seasons of TV programs before they go to air. The question that the lawsuit does not address, however, is how did ECOtotal get hold of the episodes prior to their release in the US. The unknown answer raises the possibility that TV studios may have to do some internal policing of their own to prevent further leaks of their content. Information for this discussion sourced from: ITWire, the Hollywood Reporter, and various other articles.
On a related note, Google said on Thursday that it intends on leaving YouTube as a separate business, but will integrate it to some degree with Google Video site. Beginning Thursday, users of Google Video will find search results that include YouTube videos, and will be taken directly to the videos by pressing a thumbnail. Over time, Google Video said that it expects to evolve into a service that lets users search for all videos, irrespective of where they are hosted. "YouTube… will continue to operate separately," Google wrote in its official blog. "Google will support YouTube by providing access to search and monetization platforms and, when/where YouTube launches internationally, to international resources." Refer to http://www.google.com/intl/en/press/annc/video_youtube.html for more details.
Valuing startups - a better way?
Okay, now moving into venture. A very interesting development as far as valuing startups. As reported by RedHerring, Jan 22nd, 2007. Read the full story here: http://www.redherring.com/Article.aspx?a=20869&hed=A+Better+Way+to+Value+Startups%3f+§or=Capital&subsector=VentureCapital
But, in short - venture capitalists could start relying on a new way to measure the potential value of tech startups if a Wharton professor has his way. Andrew Metrick, an associate professor of finance at the University of Pennsylvania’s Wharton School of Business in Philadelphia, believes he has found a simpler way to value tech companies using Microsoft Excel spreadsheets and some common-sense advice. Mr. Metrick has written a textbook, Venture Capital and the Finance of Innovation, which he hopes will become a standard in the field. “The idea of the book is to provide a unified framework for thinking about the valuation of high-tech, high-growth investments,” he said in an interview last week. Mr. Metrick is examining a variety of scenarios, including ways that a large company like Intel or Merck could evaluate a licensing deal or investment in a startup, or how a VC could decide on an investment in a small company, as well as how bankers might look at different pieces of the capital structure in a company. “If someone is thinking about how to value, say, an IPO, how can I do this in a quick and dirty way that is anchored to reality, instead of having to look at all the companies selling at 10 times revenue to decide what they’re worth?” he said. He includes a “reality check model” in the book to help investors make such determinations.
Anchoring to RealityMr. Metrick believes VCs need to follow more of a cash flow-based method of thinking about the valuation of VC-backed high-growth companies. “Most people will do some kind of a comparables method, some multiple,” Mr. Metrick pointed out. “They’ll say this company is doing 10 times revenue, this one is at five times revenue, so we’re going to be somewhere in between those two. There’s no anchor there. You’re never really asking whether the company is generating cash flows that could support that valuation.” The other element he emphasizes is providing enough detail to evaluate different types of structures. In Silicon Valley, he noted, most VCs don’t just buy plain old common stock when they make their investments. Instead, they acquire very complicated structures, such as participating convertible preferred stock with a 2X liquidation preference. “That’s not just a nice proportional fraction of a company,” said Mr. Metrick. He wants to make it easier for VCs to be able to boil down complicated structures like these to their component elements to properly decide how a promising tech startup would be valued. But even though Mr. Metrick is in favor of more realistic valuations he doesn't criticize some of the pricier deals that have been done over the past few years, such as Google’s $1.65-billion buy of YouTube and News Corp.’s $580-million acquisition of Intermix Media and its social network MySpace. The potential those companies are bringing to their parent companies makes them worth their price tags.
Record Fund raising by private equity firms poses Challenges
Finally, the record fund raising by private equity firms poses problems for GPs and LPs. Specifically, buyout and mezzanine funds raised a record $102.9 billion in 2006, data from Thomson Venture Economics and the National Venture Capital Association show. In a report published on Wed. by Mercer Investment Consulting, this record level is placing pressure on GP managers to put the new money to work quickly, possibly increasing bid valuations. Further, as buyout firms are launching new funds well before their previous fund has realized most of its investments. This leaves investors in a tricky position of deciding whether to reinvest in the firm's next fund without fully understanding the firm's performance. The resulting problem: LP investors could end up with a buyout firm that hasn't stuck with its original strategy because they've tried to put money to work quickly rather than waiting for the best opportunities. But if big institutional investors have decided to increase allocations to private equity, they may have to take the plunge anyway. A conundrum or catch 22?
I came across this very nice piece of writing on the issues faced by investors into the alternative asset classes. In brief, it will be published in the Wall Street Journal on Feb 1st, so I am breaking it to you early: http://www.onwallstreet.com/article.cfm?articleid=3525. One of the statements made in the article is my headline above - "elephants in the wild clear the way for other animals". It made me laugh! Anyway, the article examines alternative asset classes which are defined as hedge funds, private equity and cabernet for the wine connoisseurs amongst us! It provides rather good data on the amounts raised, the key "larger" players and issues to consider from an investor perspective. Definitely worth a read if you have a moment!
The second piece which was newsworthy is the fact that U.S. consumers who watch network TV shows on the Internet are younger, better educated, more tech-savvy and more affluent than the general population, making them a lucrative target for advertisers, according to a report from Nielsen Analytics and Scarborough Research. The study, "Whatever, Whenever, Wherever: How Broadband is Redefining the Economics of Television", is authored by industry analyst, Larry Gerbrandt, the head of Nielsen Analytics. It makes for fascinating reading. [Editor's Note: Broadband Video -- also known as web video, Internet video or broadband television -- is streaming video fed from a web site]
You can read about it here: http://sev.prnewswire.com/advertising/20070124/NYW03024012007-1.html
Key findings include: - Broadband access across the U.S. has reached critical mass and is having a clear impact on user behavior.
- Broadband consumers tend to have high speed web access virtually 24/7 at work, at home and increasingly across an array of portable devices such as laptops, PDAs and mobile phones. While only about 9% of US adults report spending 20 hours or more a week on the Internet, this number nearly doubles, to 17%, among those with broadband access at home.
- There is a strong correlation between education and Internet access, and the same holds true for broadband connections. Of the roughly one-third (33 percent) of U.S. adults reside in households without any Internet connection, 69% have only a high school degree or less. The comparable percentage for those in broadband households is one-third or 33%. Of all US adults, almost a quarter (24 percent) have a college degree or greater. This number increases to 35% among adults with broadband Internet access at home. Moreover, the overwhelming majority of those with post-graduate degrees have an Internet connection, and most of those have a broadband connection.
- Broadband consumers are upscale: 17% of consumers have an annual household income of $100,000 or more, compared to 28% of those with broadband connectivity. Less than a quarter (21 percent) of all consumers live in homes worth $300,000 or more; but the figure is 30% for those consumers with broadband in their household.
- There is a clear generational divide in broadband adoption. The 18-34 demographic represents 34% of those with broadband connectivity in their household. Though consumers 55+ are less likely than their 18-34 or 35-54 year-old counterparts to be broadband customers, broadband penetration among this older age group will likely increase. The 35-54 demographic is currently most likely to have home broadband access (45 percent).
For my non-British readers: refer to here http://en.wikipedia.org/wiki/Burns_supper to understand Burns night.
Awoke to the most gorgeous winter wonderland. See picture of trees laden with snow from my window! An absolutely perfect morning and hopefully, day.
Okay onto the world of new media and startups. My inbox was full of news on new media, venture and technology. These were the pieces that were most interesting to me, so I am sharing them with you.
- The first bit of news is a bit unexpected and quite disheartening. I had heard rumours through the grapevine a few weeks ago that not all was well at Spiralfrog, the startup that I felt had a great deal of potential. Rumours were rife that Robin Kent, the CEO had moved on and five directors had also followed him out the door. Well, its official now and the Company has now managed to miss its launch date. Its saddening news as the initial management team were indeed very impressive, as were the record deals it had signed, and advertising contracts that had been signed. But, as the article notes - not all frogs turn into Prince's and as I have personal experience of that phenomenon - Tribune had decided not to invest in Spiralfrog as it was a bit too early stage for us. The right decision at the right time. Sigh of relief!
- Secondly, surprise, surprise - VC bets into the next possible Youtube failed to generate returns. Although there seems to be some irrationality in the current venture environment, I would argue that most venture capitalists have learned lessons from the dot-com crash and are driven by rational considerations and actually do a good job of diversifying risk.
- Third, Yahoo is to roll out the commercial version of its next-generation search advertising portal a month ahead of schedule in an effort to regain ground lost to Google, the world’s biggest internet search group.
- Rupert Murdoch is making a bid for Tribune! Rupert Murdoch’s News Corp has joined the Chandler family in its bid for Tribune Company, with an eye on taking a stake in New York’s Newsday newspaper. Newsday, which is based in Long Island, is one of Tribune’s largest newspapers, along with the Los Angeles Times and Chicago Tribune. The media group, which put itself up for sale in September, also includes 23 television stations and the Chicago Cubs baseball team; and finally
- BBC is in talks with Google to put its video on Youtube. It follows the leads of American Broadcasters, such as NBC. Unsurprising move, given that internet video advertising is pegged to earn more than $1 billion in 2008, much of which is expected to come from television advertising budgets. This is called protecting one's revenue stream, clear and simple.
The Financial Times leads with the Dow Jones, VentureOne, and Ernst & Young study of the amounts invested by American VC firms; it was the significant sum of $25bn, refer to article below. Pretty amazing, given that European venture was in the region of about 3bn Euro, comparably about $3bn dollars.
That is a significant difference and is alarming! It made me pause and consider the state of venture in relation to private equity. I am not going to beat around the bush, with a few notable exceptions, venture in Europe is a struggling, struggling industry. There is much finger pointing between LPs (investors) and GPs (venture capitalists) with respect to ultimately who is responsible. LPs contend that GPs in Europe have not shown the performance returns necessary to deserve large capital commitments. While GPs point to the risk-aversion that is present amongt most LPs fund investment process. Both issues are in fact contributing factors to the resulting situation. However, GET UP and SMELL THE COFFEE ALREADY!
Private equity in Europe may indeed be in a bullish phase but the companies that later stage investors back through private equity financing - were at some stage start-ups. Further, much of the job creation that occurs happens at the early stage level, within firms with 20 or less people, as reported by the EVCA. Refer to a more detailed discussion of the importance of venture in an article I wrote last year: http://ariadnecapital.com/journal/v5e4/comment/doom_gloom.htm
If Europe fails to support early stage companies financially, not only does this pose a question as to the resulting impact on job creation, but private equity players should consider the impact on their long term pipe-line. Finally, the creativity & the innovation that arises from early-stage companies requires support. As well those are attributes that every society should fight for, not allow to suffer a quiet death.
Therefore, European VCs - one's war song/dance should be the Haka, as demonstrated by the New Zealand, All Blacks rugby team: http://www.youtube.com/watch?v=NY8_gG1dAh4 - I am going to in fact, make this into my official - venture call to arms. Anyone want to join me? To learn more about the haka - refer to the All Blacks website here: http://www.allblacks.com/index.cfm?layout=haka
VC firms invest $25bn in US
By Kevin Allison in San Francisco, Financial Times, Published: January 22 2007 05:03 | Last updated: January 22 2007 05:03
The amount of money poured into US start-ups last year hit its highest level in five years as venture capitalists threw cash at new deals in healthcare, consumer internet and alternative energy, according to new data published on Monday.
The study by Dow Jones, VentureOne and Ernst &Young found that VC groups pumped $25.8bn into fledgling US companies in 2006, an increase of 8 per cent over 2005. While the total amount invested was the highest since 2001, the amount invested in the fourth quarter of last year fell by 2 per cent compared with the same period a year before.
I came across two articles on private equity that have left me wondering both about the good and bad that the world of private equity offers.
- The first article focuses on the "get-out clauses" that are being introduced by private equity buyers and it has left me a bit concerned, given the rate at which defaults are beginning to occur. Since Jan, I have read accounts of at least four cases of private equity backed companies going into default. Its a little alarming?
- On a related note, the entrance of private equity players into the technology/new media industry is being awaited with baited breath and I attach an article which looks at the merits and concerns of this entry.
- James Murdoch will be moving onto a role at NewsCorp from his CEO position at NewsCorp. Preparations are beginning for the likely successor to his father, Rupert Murdoch at NewsCorp. and knowing Rupert nothing can be assumed, or assured. Other then that James will have to prove his credibility and abilities to take on his father's mantle at NewsCorp. I for one, am a fan of James - therefore, wish him the best in making this happen. http://today.reuters.com/news/articleinvesting.aspx?view=CN&storyID=2007-01-21T165604Z_01_L21681658_RTRIDST_0_BSKYB-CEO.XML&rpc=66&type=qcna
- Finally, a thanks to Wellesley graduates - nominations have now been accepted for all roles that I was looking for. A big thank you and a big, big sigh of relief! I look forward to welcoming you on Board, as well you all know who you are ;)
Hillary Clinton is making a bid for the US Presidency and in doing so makes both history as the first woman to do so and also as the first Wellesley College graduate to run for this role. It just struck me that writing Hillary would be the first amongst Wellesley graduates and women to run for this role seemed a very natural thing to do. I met her twice at Wellesley during my college days. She is an extremely focused woman.
Of course, the rest of the US, and the world does not share my views. Hillary has an uphill battle as discussed by much of the press, you can read more here: http://www.abcnews.go.com/Politics/wireStory?id=2810349. Despite my own political views on Hillary's candidacy, I wish her the best. As its sometimes a bit difficult to be a women in the world of business, politics and even occassionally life. Not for the obvious reasons that you might think. Rather, simply for the expectations that are placed on women both by others and themselves. Its a tough road, she is taking on - and she has far more courage then I could ever have.
I wish her luck and I would like to put in a special request to be invited to the White House for tea should she win. I was abroad for all of the Wellesley tea's at the White House during Bill's Presidential reign and always felt a little miffed to have missed out on a private Presidential tour. So, in 2008 - I look forward to an invite.
PS Hillary - love the pink suit...can see Wellesley hasn't changed much since you left in terms of dress expectations from its graduates!
