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B:B Advertising’s Holy Grail

Posted on Saturday, Mar 18th 2006

Epocrates sells web-based reference guides packed with medical information that doctors can access on their PalmPilots or Pocket PCs. Why it’s growing? More than half of the nation’s 400,000 physicians use Epocrates guides, which the company updates weekly with current information on everything from drug interactions to treatment recommendations.

Here is an older story by Erick Schonfeld on the company.

The revenue mix comprises of subscription and advertising, the latter because pharmaceutical companies find it a very targeted way to reach the eyeballs of the physicians.

This is an interesting, new trend, whereby, B-to-B advertising is seeking out extremely targeted, verticalized channels, rather than the spray-and-pray models that prevailed earlier.

Epocrates is benefitting handsomely. They have a very narrow niche offering which the target audience finds enormously valuable, and hence their viral, word-of-mouth marketing has been superbly successful.

This would, by and large, be true for all precisely segmented, compelling offerings, and Epocrates is a good case-study to learn from.

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Has Larry Ellison Disrupted Himself?

Posted on Saturday, Mar 18th 2006

Netsuite is a Larry Ellison experiment. A successful one, I would say, although it has gone through some hiccups.

Founded in 1998, Netsuite has grown into a $40 million revenue company with a product suite that spans accounting, e-commerce enablement & CRM, and project 100% revenue growth in 2006. It is a loosely integrated ERP SaaS, and competes on the low end against Intuit Quickbooks and Act!/Goldmine, and on the high end against the Microsoft Dynamics [formerly Navision/Great Plains], Epicor and Lawson. In other words, their market comprises of small- to mid-sized enterprises that are looking to move beyond point products into a loosely integrated solution set.

Larry Ellison is a majority shareholder in NetSuite.

It is interesting that one of the most active and successful Angel investors in the On-demand, SaaS model, and targeting the highly fragmented and hard-to-reach SME market is Larry Ellison, the king of Enterprise Software.

I heard Marc Benioff, CEO of speak last year at a HBS event, and he described his fund-raising experience. Pretty much all VCs turned him down, and he had to go the route of Angel financing. Good thing he had access to deep-pocket angels like Ellison, otherwise this posterchild of On-Demand software would not have happened.

It is also interesting to see that Ellison’s investments have created maximum headache for the Enterprise Software business, as these lightweight On-Demand software providers have moved up the chain and started disrupting the likes of Siebel, as evidenced by’s success.

As Ellison continues to strengthen his monopoly, Netsuite probably features somewhere in his acquisition plans within the next 12 months.

This Week’s Deals

Posted on Saturday, Mar 18th 2006

Google buys a little 3D software company called @Last that makes SketchUp. My first reaction is: Damn, this was another company Adobe should have bought!

Benchmark and Omidyar network invests $15 Million in stealth-mode startup, Metaweb Technologies, Inc. Danny Hillis of Thinking Machines fame is the Founder. Metaweb was incubated inside Hillis’ company Applied Minds, down in Los Angeles. Kleiner Perkins is an investor in Applied Minds. Yet, Benchmark walks away with Metaweb. Funny, eh?

Anyway, watch this deal. It has good concepts and technology. Whether they can execute – remains to be seen … And I can’t say anything more, because I worked on the deal earlier!

Acquicor, a shell company also got funded with $150 Million in new money, with Ellen Hancock, Gil Amelio and Steve Wozniak at the helm. No investment thesis. Just $150 Million to do … err … whatever?
Whose money is it? Why such cavalier approach to giving out money?

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Sex And The Single Zillionaire

Posted on Friday, Mar 17th 2006

This is the title of a new book by Tom Perkins, one of the pioneers of Silicon Valley, whose name is on the esteemed firm Kleiner Perkins. This week, the MIT alumni association honored Tom at the Spotlight ’06 event, and Tom delivered a screwball speech which had the entire audience rolling with spontaneous laughter. With great stories, he took us through his life, and some of the history of venture capital, made fun of himself, others, and us.

Long ago, in a galaxy very close to us, the largest venture fund, Kleiner Perkins, had $8 Million to invest. And with that, the pioneers of Silicon Valley, built companies like Cisco, Apple, Genentech, and much later, Google, Yahoo, and Amazon.

As I sat in the audience, listening and laughing, some random thoughts flew through my mind …

In 2006, the classic venture capitalists have pretty much shunned the notion of risk capital, in favor of growth capital.

Today, there is a lot of activity in very early-stage, built-to-flip venture capital, where from the get-go, the assumption is not to build a company, but to focus on making a quick million or two. This happens to be the territory of Angels and very small venture funds. Even VCs do this sort of investing on the side, with permission from their partnerships. If, however, the seed investors don’t succeed in flipping the deal quickly, and it ends up requiring more money, they often get washed out. Typically, these kinds of deals don’t have a lot of barrier to entry, and there are about 5-8 of each kind fighting it out. These “Built-for-Google” type deals are everywhere in the valley right now. Ron Conway and Reid Hoffman are its best practitioners.

In this mature market, also, those companies that have reached revenues above $15 Million, and in their history, have already burnt $20-$30 Million, but do not have the built-in scalability to get too much beyond $50-$75 Million, are in no-man’s land. The large companies don’t like acquiring these businesses, because they are too expensive. On the other hand, they are too small to become sustainable public companies. Cases in point: CoWare in EDA, Chordiant in Enterprise Software.

Enter Private Equity. String together some deals of the first category, and call it Venture Buy-Out. If the roll-up can open up a large new market opportunity, that’s one way to build a real company.

For the second category, however, life continues to be more difficult and complicated. Private Equity investors don’t necessarily want to buy businesses whose growth is slowing. If there are smaller, “micro-capitalized” companies out there that can add some throttle to a slowing business, then, again, a Venture Buy-Out may turn out to be the best route to take.

Finally, the entrepreneurs out there who have the ambition to build a real, large, multi-billion dollar company – should know that Silicon Valley has changed fundamentally. Highly speculative, capital intensive deals that require 5-7 years to build, are less popular these days. Especially, if you have a contrarian, one-of-a-kind business idea that goes against the grain of the prevalent trends, investors will ask you to find ways to either diminish the capital requirements, or reduce the startup risks.

Your answer may well lie in that category of “Built-to-flip” or “Built-as-an-accident” deals, from which you weave together a Venture Buy-Out quilt.

I am working on one of these right now. In some strange way, my motivations are similar to the growth investors: leverage!

Not ONLY Google vs Microsoft

Posted on Friday, Mar 10th 2006

John Paczowski summarizes it well: Google’s leaders can finally stop pretending that the company doesn’t have designs on Microsoft’s core PC software business. On Thursday, the search sovereign said it had acquired Upstartle, makers of Writely, a browser-based word processing application.

I don’t have a whole lot to add to this, except the following list of horizontal software services companies – big and small – who need to watch out for what’s to come after the core Office Suite is completed:, Plaxo, Webex, Citrix, SixApart, … (you fill in some blanks, please) … whose SOHO and SME businesses are likely to get hurt quite badly.

The enterprise, I think, will continue to want to have data on their own drives, and not on Google’s, but it is in SOHO and SME that this battle will be fought, and …

Oh! It Will Be a Bloody Battle.

First Women, Then Latinos

Posted on Tuesday, Mar 7th 2006

Segmented Community Portals are becoming more and more important.

Today’s Mercury News reports: Comcast targets Latinos with Yahoo-like site .

iVillage is a community portal for Women. NBC buys.

MySpace is a community portal for Teens. Murdoch buys. for Latinos, now ties up with Comcast.

More to come, Yahoo of this and Yahoo of that … watch this trend.

It is important.

iVillage: SOLD

Posted on Monday, Mar 6th 2006

iVillage is sold. GE’s NBC just bought them for $600 Million. More in this Wall Street Journal story.

iVillage positions itself as a Web site for women, focusing on subjects such as health, beauty, relationships and parenting. The site receives 14 million unique visitors a month, and posted 2005 revenue of $91 million, which is only about $0.54 per unique visitor per month.

A great deal of unmonetized revenue sitting there in that traffic, if NBC can figure out how to sell to the advertisers.

First LBO in For-Profit Education

Posted on Monday, Mar 6th 2006

WSJ Reports that Providence Equity Partners and Goldman Sachs are about to purchase Education Management Corp. (Nasdaq: EDMC) for $3.4 billion.

Education Management runs 72 primary campuses across the U.S. and Canada, training its 72,000 enrolled students in fields such as fashion, psychology and Web-site design. It also runs a small but growing operation providing online instruction.

Market leader Apollo Group (Nasdaq: APOL) did 2005 revenue of $2.3 billion on a total enrollment of 315,000 students, while rival Career Education Corp. had revenue of $2 billion and 104,000 students. In the fiscal year ended June 30, 2005, Education Management had net income of $101.6 million, or $1.35 a share, on revenue of $1.02 billion, and ranks third in the for-profit education market.

Apollo operates the famous University of Phoenix chain of educational campuses, and has recently had some hiccups, including the resignation of its long-time CEO Todd Nelson. The stock slid to a 52-week low of $47.27. It is rising again, today, on speculation that other Private Equity deals might happen in the for-profit education sector, and APOL ranks at the top of that list.

Another interesting company waiting in the wings to go public soon is Capella Online University. The fast-growing company operates Capella University, an online university that offers undergraduate and graduate degree programs in business, organization and management, education, psychology, human services, and information technology. More than 13,000 students are enrolled in the school, which employs about 740 faculty members. Students seeking doctoral degrees account for 47% of enrollment. Nearly 70% of revenues are from federal student financial aid programs.

Federal financial aid, in fact, is boosting the entire sector, from primary education (Sylvan via NCLB) to higher education (Capella, Apollo, etc.).

It amazes me that Silicon Valley doesn’t aggressively play in this sector!