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Piczo & The Sound of the Crash

Posted on Friday, Apr 14th 2006

If you’ve read The Timer, you know the Online Club concept.

Piczo is a new club, which I looked at last Fall with Trinity, and which Sierra ended up investing in.

It is a site for teenage girls, and I hear that it is already at breakeven. Sierra owns a large chunk of the company for very little investment. Looks like a deal in which they can make some good money by flipping quickly, before the next social networking crash arrives. “Can you hear the drums, Fernando?”
On the other hand, I tried advertising in Facebook recently, and I asked them to send me some statistics on CTR, etc. They sent me an email saying they are unable to provide anything of the sort.

Well, this sounds like the deal that will likely lead the crash, if the rather amateurish management does not know the basics of supporting advertisers with minimum ROI information.

Featured Videos

The Timer

Posted on Thursday, Apr 13th 2006

Tech has been a notoriously complex business because of the Timer phenomenon. New opportunities open up, get attacked, problems get solved, companies get built, and market windows close. There is a Timer on most of the tech opportunities, because once a market window closes, and a market leader or two are established, the Timer goes off in that market. No more opportunity, no more investment, no more interest from VCs …

Going forward, however, the Timer phenomenon is going to be less of an issue because many of the tech businesses of the future will not be based on “problem solving”, but rather, on “emotional appeal”. Anyone who has ever been in Retail or Restaurants, knows, that success depends hugely on positioning, branding and user-experience. Consumers have low switching costs, are willing to try new brands, and new stores, cafes, restaurants get born every day.

The Internet will be no different. Today’s preferred Internet store may be RedEnvelope in shopping for gifts, but tomorrow there will be 50 to 500 other choices, each with their own appeal and merchandise uniqueness.

Same with Content. Movies get made every year. Books get published every year. Indeed, it is a “hits” business. Internet Content will be no different. Money will be lost and made. Hollywood’s film industry and New York’s Publishing Industry – both have much to learn from and teach the Silicon Valley investors on how to evaluate “hits” deals.

Another emerging “fad” business is social networking. Kids, Teens, Adults – all go to clubs. MySpace is a Club. It’s hot today. Tomorrow it may or may not be. And just because I go to one club does not mean I won’t go to fifteen others that I find attractive for different reasons. Again, no Timer. Clubs open all the time. Clubs also close all the time.

In summary, as the Silicon Valley venture business matures and gets increasingly into these “No Timer” businesses, how to evaluate an investment is changing fundamentally.

Remember that question all VCs used to ask once upon a time: “Is this a must have or a nice to have?” “Is this a pain-killer or a vitamin?”

Well, iPod was neither a must-have nor a pain-killer, until the oozing sex-appeal injected into the brand by Apple made it so.

2006 Tech IPO Prospects & Market Outlook

Posted on Thursday, Apr 13th 2006

Business Week article Tech IPOs: Here Comes The Next Wave profiles a few potential IPO candidates for 2006, TellMe Networks being a notable one, which was founded in 1999 and has raised a huge $232 million in venture capital. TellMe turned profitable in 2004 after roughly doubling revenues in each of the prior two years, and posted about $100 million in sales in 2005.

There are a number of other companies in the $50 – $100M range that are waiting in the wings and figuring out their growth and exit strategies, and they span multiple domains.

Shutterfly is a consumer Internet photo site that is growing fast and well. I have written previously about Epocrates, Netsuite, Capella Education. Epocrates is a targeted Mobile Content service for Physicians that is growing on the basis of subscription and advertising revenues. Netsuite is a SaaS service for SMEs, while Capella is an Online University.

The Business Week article identifies some others. The networking equipment sector hasn’t produced a blockbuster deal since NetScreen Technologies Inc. went public in 2001. But companies such as Force10 Networks, Peribit Networks, and Calix have since developed into serious IPO contenders. Since September 11, venture firms have pumped lots of capital into security technologies. Those investments have produced promising IPO candidates, such as Fortinet, CipherTrust, and ArcSight. Sunnyvale (Calif.)-based Fortinet, would like to go public later this year at a valuation of $750 million to $900 million, or five to six times its projected 2006 revenues, says Chief Financial Officer Harold Covert.

Below, I summarize the market segments that have representative IPOs and show trends for future overall market attractiveness for the next 24-months:

Consumer Internet (Shutterfly, Nextag)
Software-As-A-Service (Netsuite)
Small-Medium Enterprise Solutions (NetSuite, Epocrates)
Online Education (Capella)
Content (Epocrates)

Security and Networking equipment, on the other hand, although still have several IPO candidates, and some companies in those sectors are doing well, the outlook is somewhat less exciting than the above. One notable exception is Qualys, a Security SaaS (Managed Security Service provider), which will probably do $40-$50M in sales this year. This company and its business model have a lot of potential.

The Venture Market for Consumer Internet and SaaS are quite hot right now. SME and Online Education, on the other hand, have not yet caught hold amongst the VCs. However, given the MySpace generation’s level of comfort with the Internet, Online Education at ALL levels – kids, teens, college students, working adults – are exciting categories, each with their own nuances.

In earlier years, the only way to market educational products for children was through schools and parents. Now, however, sites like MySpace, Facebook, Piczo, Xanga, etc. offer direct access to the kids themselves. If, for example, eSylvan, the tutoring service, wanted to market to these kids, it has ample opportunity to create tremendous word-of-mouth via social networking amongst them. And since both Generation X and Generation Y are very much on the Internet as well, adult education online is just as attractive and viable.

SME’s last great victory was Intuit. Since then, VCs have shied away from this market which has trillions of dollars in spending power. Netsuite and Epocrates, perhaps, will unlock this market as well within the next 18-24 months.

Finally, the other emerging market that I see as a strong long term opportunity is Content. VCs typically don’t like Content, because it is a “hits” business. Epocrates, however, has turned the content model on its head. Something to note.

Video FAQs

Invention vs Commercialization

Posted on Wednesday, Apr 12th 2006

There has been a number of hot issues lately around patents, lawsuits, rights of inventors versus business builders. TVi vs Microsoft, Netflix vs Blockbuster, RIM vs NTP, eBay vs MercExchange.

Here are two articles from the Wall Street Journal on two divergent points of view:

Nathan Myhrvold, the first CTO of Microsoft, who now owns an IP company, writes: Inventors Have Rights, Too!

The counterpoint is provided by Bruce Sewell, Intel’s General Counsel, in : Troll Call

Some excerpts from Sewell’s piece:

RIM, the company that brings BlackBerry service to four million subscribers, finally caved in to the threat of losing its business. It paid NTP, a small patent holding company reputedly comprised of just one inventor and one patent lawyer, $615 million to settle a four-year patent dispute. For NTP it was like winning the lottery, but for the rest of us, and for business in particular, it stinks.

NTP doesn’t have a competitive product. It isn’t even in the business of making products. It’s one of a large number of companies known as patent trolls. Trolls acquire and use patents just to sue companies that actually make products and generate revenue. A patent without a product isn’t worth much, whereas a patent tied to a revenue stream, particularly someone else’s, is a whole different matter. RIM was the best thing that ever happened to NTP, because by last Friday the only question left was how much of RIM’s pie NTP could get.

The distressing part of this picture is that RIM’s contribution of complementary technologies, business acumen, product R&D and marketing is what “enabled” the NTP invention to achieve commercial relevance.

Myhrvold counters with:

The patent system exists to give economic incentive to create inventions — not products. After all, profit is the incentive to create and sell products. In order to have a level playing field, inventors must have a full set of rights, regardless of whether they are big or little, or whether they make products or just invent. Those rights are what give them the incentive to work long and hard on new ideas that may not work. A lot of big innovative companies agree with this — companies like DuPont, GE, Qualcomm and 3M, as well as the pharmaceutical and biotech industry, have filed amicus briefs in support of MercExchange and equal rights for all inventors.

The right question (as Bruce Sewell asks it) is: What would be a fair royalty for NTP, given its contribution of the patent and RIM’s contribution of everything else?

My own favorite is the Netflix vs Blockbuster case which I think Netflix should win. They did everything from invent to innovate to commercialize to popularize to educate the market. Why should Blockbuster just walk in, copy, and reap all the benefits, without Netflix having some protection, at least? Their stock suffered tremendously last year, as Blockbuster, Amazon and Walmart made announcements of competitive services.

On the others, I have to say, my bias is more along the lines of Bruce Sewell : to not unduly reward patent holders in the name of protecting inventor’s rights, to not overlook the contributions of those that invested the time, energy, and financial resources to create a market for inventions.

It is, however, also essential to protect inventors from being squashed by big business.

NetSuite IPO: Some Thoughts

Posted on Tuesday, Apr 11th 2006

Well, here’s a good analysis on Netsuite by Jason Wood: Netsuite Ponders IPO.

I wrote an earlier piece on Netsuite, and contrary to Jason’s point that Nestuite’s lack of Enterprise customer revenues is a negative, I think it is a positive.

You know by now, that I really believe in the SME opportunity. It’s a humongous untapped market opportunity, and I hope NetSuite gets it right, gets to focus on it, and make it happen in a big way.

Salesforce.com opened the floodgates for Saas and On-Demand business models.

I am hoping NetSuite opens up SME as a perfectly desirable market opportunity. It’s amazing what one big success does …

Right now, I am a bit sick of everyone chasing the already extremely crowded teen market. And to think that the teens have no direct spending power, whereas SME has HUGE direct spending power …!

Hello?

Indian Chips

Posted on Friday, Apr 7th 2006

Here is a wonderful article by Betsy Corcoran on India’s budding chip design industry. It traces Cadence CEO Mike Fister as he visits various customers in India. Betsy points out that the geographical mix of Cadence’s customer base is changing, as India emerges as a major chip design hub.

Indeed, this is a trend whose seeds were planted way back in 1984, when Texas Instruments set up its first off-shore development center in India. The man behind this move was Dr. Pallab Chatterji, then a Vice President of R&D at TI, Dallas. Today, TI has 1,200 chip designers working in their Bangalore center.

Intel and ST have more. Intel has 2,500 in Bangalore and ST has 1,525 in Noida. So far, the hubs of chip design are in Bangalore, Noida (near Delhi), and Hyderabad.

But remember my Team of Twenty One thesis? The rest of India is still relatively virgin territory for chip design. Pune has a bit, and LSI Logic has just set up in Calcutta. Kanpur has a fabulous IIT, and so do Madras (Chennai), Bombay (Mumbai) and Calcutta (Kharagpur). BITS Pilani is a good engineering school in the North, as are universities like Jadavpur and ISI in Calcutta.

Besides, there are 1,346 degree engineering colleges in India with annual student intake of 440,000 students plus 1,244 polytechnics with annual intake of 265,000 students.

This is what I would do, if I were Cadence: I would do a JV with Apollo Group around Online Training on Chip Design using Cadence Tools, and simply lock up the Indian engineering education market.

[For additional reference, please read my previous article: Online Colleges: Staggering & Growing Numbers].

Netflix vs Blockbuster

Posted on Wednesday, Apr 5th 2006

Wow, I just saw this news item that Netflix has sued Blockbuster and is demanding that Blockbuster shuts down its online DVD rental service.

Wedbush Morgan analyst Michael Pachter, who also is an attorney, said it was unclear whether Netflix’s challenge to Blockbuster’s online service would be upheld by the federal court.

“It’s my opinion that it won’t be,” Pachter said. “Blockbuster detrimentally relied on their silence as consent. If in fact (Netflix) feels so damaged they should have sought injunctive relief before Blockbuster rolled out its service.” [Reuters]

I am not sure I agree, nor do I claim to know what has been the level of correspondence between the two companies.

All I can say is that, indeed, Reed Hastings innovated fundamentally on the DVD rental category, and deserves some credit / protection for that. I am also happy to see that he did file process patents in the first place, and that two of those have now been granted.

Venture Capitalists always tend to ask whether the IP in a company is defensible. What we are seeing these days is that some of those startups have survived and blossomed, and are in positions to defend their IP. Furthermore, they now have the wherewithal to benefit from their innovation.

Don’t you think this is good news?

TVi vs Microsoft: What Can YOU Learn?

Posted on Tuesday, Apr 4th 2006

Few months back, I reported on the Microsoft vs TVi patent infringement case over Autoplay.

In October 2005, the case was settled in one of the largest pre-trial settlement that Microsoft has ever concluded.

Terms are confidential, but I will try to benchmark the deal.

Here are some prior cases and their settlement terms: Microsoft has settled antitrust cases with Be Inc., ($23 million), Immersion ($27 million), Intertrust ($440 million), Novell ($536 million), Eolas ($521 million? $640 million? not settled yet?), and Real Networks ($761 million) in the past.

[Note: I am watching, also, the words “pre-trial patent settlement”, because the Eolas case went into trial, and Real Networks was an Anti-Trust case, not Patent. I am not sure, therefore, what the denomination of this settlement is, even range-wise. However …]
The reason I find this deal interesting is that it validates a reasonable way to make money off defending Intellectual Property and innovation, and today, the legal service providers have developed the expertise to defend such cases. In Peter Redford’s Autoplay case, the lawfirm representing TVi was Robins, Kaplan, Miller & Ciresi L.L.P. Ron Schutz, Chairman of RKMC’s Intellectual Property practice, led the litigation.

There are mixed feelings out there about companies making money off suing others, rather than building products and businesses. In this case, however, TVi was just about to launch a product based on the Autoplay technology in 1995, when Windows ’95 was released, and No. 3 amongst its top features was Autoplay. TVi’s product roadmap had to undergo a quick cancellation, and a long and tedious battle to fight Microsoft had to be launched.

RKMC took this case as a contingency suit, which is the only way a little company like TVi could afford to go after Microsoft. The actual lawsuit did not get filed until 2002, and the final settlement took 3 more years to come through.

If you want to learn more about the long and winding road that led to this watershed settlement, (especially if you have some fundamental IP to defend yourself) consider attending this event: How to Take On Microsoft and Win where I will be interviewing Peter, and he will be doing a Q&A session with the general audience.

You can also ask questions at the Comments section at this site, and Peter will answer, to the extent possible, and without violating his confidentiality agreement with Microsoft.

ps. If you are looking for examples of companies built with the IP Licensing business model, look up Tessera (Nasdaq: TSRA).