Month: July 2007

EntrepreneurshipVenture CapitalWireless

Learning lessons from Amp'd Mobile

Posted on by Ed Sim

I am not here to pile on the Amp’d Mobile situation, but I find it is always important to learn as much as you can from your mistakes and from other people’s mistakes.  Rafat Ali has a great interview with Peter Adderton, the former CEO of Amp’d Mobile.  Here are a couple of interesting points that Peter says helped to ultimately bring the company down:

— You don’t raise $400 million in 18 months by spending time inside the office. Trying to ambiguously raise that amount of money, while at the same time trying to create something new and different was a challenge that caught up with us in time.
— On the financing, we were learning as we went along. With the amount of cash that we required, it probably made more sense to go with one or two big pockets than a lot of smaller pockets.
— The biggest struggle I had [with the board] was agreement on where the company should go. We had way too many board members and then we had observers at top, and the any partner could dial in, to a point where it became very difficult for the management to manage.

Rather than dive into some of the operational or economic lessons like how a company that raises $400mm can’t get to profitability, I thought I would focus more on the financing side that Peter discussed with Rafat.  In short, some of the lessons learned from Peter include having too many investors and too many board members.  One VC once told me that having a great board did not guarantee success but having a bad board can almost certainly guarantee failure.  Speaking from personal experience, it is pretty easy to see how differences in strategic direction and plans combined with egos can get in the way of real productivity.  The more people you add to the mix and the more complicated and time consuming it can get.  In fact, I remember spending at least 3/4 of my time on one of the weak boards dealing with bickering between other board members instead of spending my time helping management and focusing on the important issues.  The CEO also had to spend just as much time massaging egos and different incentives to keep driving the company forward.  At times, It was close to impossible for the board to come to agreement on a budget, hiring plans, and strategy and ultimately the company missed many opportunities.  I can only imagine what Amp’d board meetings were like when you mix in a number of VCs, hedge funds, and strategics, all of whom invested in different rounds at different prices and with different preferences.  So one of the lessons to be learned is to choose your partners wisely and less is more.  Rather than try to spread out ownership of your business with lots of investors so one or two don’t have too much control, you are better off looking for a couple of investment partners who share the same vision of the business and who you believe will act rational through both good and bad times.  This is where references can help tremendously. 

One other point, every second you spend fundraising is another second you are not running your business.  Companies have to be well prepared and go through a number of meetings to raise $5mm let alone $400mm in 18 months. It is not hard to see how the CEO and management can get distracted and not spend enough time on operational issues when they are constantly raising capital. And of course, the more money you raise, the bigger the exit you need to get investors their 8-10x.  I am not saying this happened in the Amp’d situation, but when capital is abundant and the pressure to create significant returns exist, it can force companies to try to get big fast and try to spend their way to success instead of finding the right mix of organic and inorganic growth.  That is why I have always loved capital efficient business models.

Wireless

The wireless Internet is heating up

Posted on by Ed Sim

The Wall Street Journal announced another Nokia mobile internet purchase today of a company called Twango which allows users to share photos, video, and media.  According to the WSJ, the Twango service will be integrated into Nokia phones and will start with a free and premium based subscription model.  While this acquisition in and of itself is not mind blowing, the fact that Nokia has made a number of acquisitions over the last 18 months encroaching on possible carrier revenue does make the story more compelling (see an earlier post-Nokia’s Coopetition with Carriers).

Taking a step back and looking at the wireless industry overall, one can continue to hear the buzz about Apple’s entry into the wireless handset market with the iPhone.  And as much as analyts and the like want to pit Apple vs. Nokia and others, I see lots of similarities between both companies.  In fact, the more I look at the world, the more I see Nokia taking a page out of the Apple playbook and vice versa.  Apple, as we all know, has done a tremendous job with its vertical integration strategy – developing new products from start to finish, controlling the design, hardware, and software to create insanely great products which are incredibly powerful yet elegant and simple to use.  That is why the Mac gets the margins it does and why the iPod has been doing so well versus the competitors who have solely focused on one piece of the device ecosystem, software, hardware, etc.  Looking at Nokia, it seems to me that the company could clearly go into a couple of different directions – go the Dell route by providing awesome hardware or going the Apple route and providing a full end-to-end elegant experience for the consumer.  What I mean by that is that Nokia can either just be a dumb handset manufacturer with decreasing margins like Motorola or it can try to figure out how to control and provide a seamless and great user experience from handset to desktop for its customers.  What is at stake are significant margins and dollars. 

Given that Nokia has always had expertise in the hardware side of the world, the fact that the company is increasingly buying software companies for its devices (loudeye, gate5, intellisync, and now twango) and integrating it into the handsets shows that it is bulking up and getting ready for the next battleground, the phone as minicomputer and gateway to the Internet. As you know more people around the world access the web from a mobile device versus a PC or laptop.  The blurring of cell phone and mini computer is only increasing as Apple, RIM, Nokia, and others come out with devices that can do more and more-take/share/view pictures/video, listen to music, surf the interent, make VOIP calls, and watch television.  What is at stake is a bigger opportunity that will bring Apple, Nokia, RIM and others head-to-head with the large Internet players like Google, Yahoo, and Microsoft.  At the end of the day, Nokia is more like Apple than you can imagine as it is starting to take control of its destiny and beginning to offer its own web-based and wireless services directly to the consumer. Like Apple, it is increasingly clear that Nokia wants to provide its consumers with a holistic end-to-end experience delivering everything from the hardware to the operating system to the applications that reside on the phone and desktop.  This is an important shift and one that Motorola does not seem to be getting and consequently one of the many reasons its stock has been floundering.  As mentioned in an earlier post, Nokia has acquired Loudeye for a future music offering, gate5 for turn by turn navigation, intellisync for syncing software and email, and now twango for music, photo, and video sharing. Nokia ships around 350mm handsets every year and it can either let the Internet players GYM seize the opportunity or go after itself.  This is an interesting transformation that will take years but think about how much money Nokia could make if it could extract an extra $0.50 or $1 per month from a customer.  Of course the carriers won’t like that but this is why watching the wireless Internet market is so fun.

Web/Tech

Answers.com to acquire Dictionary.com for $100 million

Posted on by Ed Sim

Congratulations to the Answers.com team on the announcement of this deal!  Since I am a board member and it is a public company (NASDAQ: ANSW), there is not much commentary I can add except that I wholeheartedly agree with Bob Rosenschein’s assessment of the transaction (see press release):

"The acquisition of Lexico is a transformative event for us," explained Robert S. Rosenschein, Chairman and CEO of Answers Corporation. "We are excited about applying our experience in monetization to significantly increase Lexico’s 2008 revenues and EBITDA. Lexico’s suite of popular brands, steady direct traffic and loyal users are valuable assets that we believe will reduce our products’ reliance on search engine-driven traffic. Post-transaction, we estimate that over 70% of our total traffic will now be direct from end users or people searching specifically for the term ‘dictionary’ in search engines. Our combined size and available ad inventory should provide greater exposure among online media buyers, which we expect will lead to increased advertising sales."

As I have mentioned in earlier posts, scale matters in the Internet space and becoming a Top 28 web property in the US (according to our combined 22.5m monthly unique visitors in June based on Comscore) will provide the company with an even better opportunity to monetize our reach.

If you are interested in learning more, here are a couple of other highlights from the press release:

Lexico is a leading online provider of reference products and services, which attracted approximately 11.5 million unique monthly users in the U.S. during the month of June 2007, according to comScore Media Metrix.

Lexico is a highly profitable company that strongly complements Answers’ user base. In 2006, it generated revenues of $7 million, EBITDA of $2.9 million and net income of $2.8 million. This strategic acquisition drives Answers to a leadership position in online information publishing.

    Key benefits of the acquisition include:

    – Page Views: Lexico’s Web properties currently generate approximately three times the total page views of Answers.com.

– Monetization: Lexico’s Web properties currently monetize at approximately one-third the rate of Answers.com, presenting material revenue upside.

– Direct Traffic: Over 85% of Lexico’s traffic is direct from end users or people searching specifically for the term "dictionary" in search engines. The resulting shift in traffic mix should significantly reduce Answers.com’s current reliance on search engine algorithms.

– Market Leadership: Based on the June 2007 comScore data, the addition of Lexico’s Web properties will increase Answers reach to over 22.5 million monthly unique users, which would rank #28 in the top U.S. properties.

Venture Capital

Are all of the venture returns in B2B?

Posted on by Ed Sim

The Wall Street Journal has an interesting article today about how the resurgence of tech IPOs have really come from "less glamorous, business-focused companies selling such products as telecommunications equipment and computer storage."  In fact many of these companies have market caps > than $1b each.  The article is right in that alot of buzz gets centered on consumer Internet companies like Google or YouTube and that on absolute market capitalization many of the big returns are found in the B2B type deals.  However, I do disagree with the notion that because some of these "consumer web firms are selling themselves to larger Internet companies such as Google or Microsoft Corp. for a few hundred million dollars or less" means that returns for investors can be mediocre. In fact, what the article fails to look at is how much money some of these infrastructure companies have raised in order to get public.  Obviously if a VC is looking for 10x type multiples on their invested capital, the more money raised means the higher ultimate market cap a company needs to achieve.  Taking this a step further, let’s look at the amount of capital raised by some of the more recent IPOs:

Starent Networks: $100mm pre-IPO with first VC round in August 2000, $986mm market cap

Limelight Networks: $100mm pre-IPO with the big round in summer 2006, $1.6b market cap

Infinera Corp: $345mm pre-IPO with first VC round in December 2000, $2b market cap

Shortel: $102mm pre-IPO with first round in 1997,

Based on this data, one can see how many of the existing investors generated some great returns on absolute and relative terms.  So while there have been very few Internet companies worth $1b or more on absolute terms, one must look at the capital efficiency of these businesses to understand why companies that raised $20mm or less can still sell in the $200-400mm range and still create tremendous returns for their investors.  At this level of funding the risk/reward balance is just much different than in a traditional infrastructure play.  Sure many of these Internet companies being financed may not be standalone IPO candidates but that doesn’t mean that companies that generate 10-20x for their investors are bad investments either.  However what is beginning to scare me is that valuations for these consumer internet plays are continuing to creep higher.  In addition, many of these "capital-efficient" companies are raising bigger rounds of capital meaning the bar for exiting is getting higher and higher.  If these two factors continue to increase over the next couple of years, this could lead to disappointment for many VCs in the long run.