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P.S. YahooBay

Posted on Friday, May 5th 2006

Few months back I wrote YahooBay. In the last month, eBAY shares have dropped a great deal. The core auctions business is slowing, and under threat from Google. So far, Paypal continues to grow by 30%+, but if Google launches a payment platform, that business will also go through jitters. The stock will definitely tank further. Skype hasn’t kept up with forecasts so far, hence, has not been the white knight.
eBay needs to be in search & content, monetized via online advertising, but it isn’t yet. Instead, it pays huge ad dollars out to Google.

And for Yahoo, also, adding the stronger e-commerce business would be healthy, while keeping the huge ad revenue off Google.

And if not, there are literally dozens of search startups out there right now that specialize in this, that and the other kinds of vertical search. It’s time for eBAY to go shopping again.

They should also put in place an advertising business ASAP, which can tackle a lot of the growth concerns. Their merchants, to differentiate, should be able to buy contextual advertising a la Adwords. For this, they need an Ad Management system like Adwords, as well as an Ad Sales Force.

eBAY’s DNA is staying relentlessly focused on their core business model of auctions. All this other stuff, especially selling Ads, will require a shift. Can they do it? Unclear.

At this point, their story is no longer resonating with investors. Lot of questions remain. Long term, it’s still a good business, but to become an attractive investment, it would have to take some major steps into unknown territories. I would have liked to see the first real step they did take (Skype) to have been a different step. The money they spent on Skype needed to have been spent on building their online advertising presence.

As it stands, it looks like an expensive misstep.

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Dissecting Online Tutoring

Posted on Monday, May 1st 2006

A number of businesses have cropped up that claim to provide online tutoring. It is a multi billion dollar market opportunity with incumbents such as eSylvan, and upstarts such as Growing Stars and Tutor Vista.

My thesis: the service is only effective in a one-on-one mode, and the P&L, then, is only interesting if off-shore tutors are used (i.e. tutors from India, China, Eastern Europe). India may the best solution, because language problems may be more of an issue elsewhere.

Here are some questions to ask in analyzing a tutoring business:

– How many students are they tutoring?
– How many hours on average do the students use the service?
– Who are these students? Public school students? Private school students?
– Any ethnic bias towards kids of Indian/Asian parents?
– Any geographical bias? Which school districts are adopting the service?
– Experience with home schoolers? Is that a segment they serve? What percentage of the business is home schoolers?
– What subjects do they receive the maximum number of tutoring requests for? Algebra I? Calculus? Biology? Physics?
– Do they ever have missed appointments, whereby students skip their scheduled session?
– What kinds of skill-gap assessments do they do? How do they zero in on what to focus on?
– What content/syllabus do they follow in tutoring the students?
– How do they reconcile state-to-state and school-to-school variations in course material?
– What is the user experience like? Hardware? Software?
– What is the pricing model?
– How much have they benefitted from NCLB certification?
– How do they market the service?
– Do they have experience with advertising using the MySpace/Facebook communities?
– Do teachers recommend/use the service to help their students?
– What are the primary drivers of the business? Test-preparation? Homework help? Other?
– Any issues dealing with teacher’s unions (NEA, etc.) due to off-shoring?

Here are some facts to keep in mind on this market:

While the tutoring TAM is very large ($5 billion), online tutoring TAM is likely to constitute of students who are quite motivated, and omit the ones who are not. This may limit the market substantially, and precise segmentation is necessary to tap into the right set of customers for efficient scalability. In my assessment, Growing Stars, one of the earlier entrants to this market, is doing a miserable job of strategic marketing, and hence will have difficulty gaining any traction whatsoever in terms of growth financing. The one thing they do right, however, is have a 1:1 service, which positions them well against the 1:2 and 1:3 offerings like eSylvan. Personalization is key. They understand that.

There are a number of VCs looking at deals in the area, gauging from the questions I get. It was not so two years ago; this is a good sign.

I haven’t seen the “right deal” yet, though, that warrants financing.

If I Were Jonathan Schwartz

Posted on Thursday, Apr 27th 2006

Amongst other things, I have, this week, triggered a process of premature aging. My youthful face and cute ponytail are to become a thing of distant memory, soon!

As I think through my new responsibilities, a series of questions breeze through my mind, with a subtle realization that if Scott can be removed, so can I. And much more quickly, mercilessly!

I start scribbling notes to myself :

SUN, like Apple, has made its mark as a vertically integrated computer company with proprietary computer hardware and operating system. However, like Apple, the importance of the computer business has become questionable. The significance of the OS is questionable. The relevance of the chip business is definitely questionable.

On the other hand, Apple used that diverse set of expertise – chips, hardware, industrial design, software, OS, Applications, the web – to conjure a completely new category of products which rescued them out of ensuing irrelevance.

Qs: What is my equivalent of the iPod?

What are SUN’s major assets? The brand, particularly the enterprise computing brand is perhaps the biggest at this point. But we are trying to leverage it in very traditional ways, mostly by selling servers and services around servers, while margins in that business keep shrinking. We need to get out of this commodity business, and find a related but non-commodity niche.

Qs: What is this niche? Can I load up the servers with unique software applications and invent Enterprise Software-As-A-Service Appliances as a new vertically integrated and optimized set of products? What do I need to acquire to create this business? Clearly, my current portfolio / strategy is not sufficient.

If I can answer these two pivotal questions, the rest is financial engineering and execution. Cut SPARC to begin with.
I really don’t want to grow old too soon. Nor do I want to be fired from this job. Rather, I would like to be remembered as the man who gave SUN back its glory …

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Massive Sets The Tone on M&A Spree

Posted on Wednesday, Apr 26th 2006

In March 2006, the largest percentage of Digital Media related financings have been in Online Advertising Infrastructure technologies. 28.1% or $93 Million was invested out of the total $331.4 Million in Advertising Infrastructure deals. This constituted 10 deals out of a total 48 media deals: AdBrite (Sequoia), AdKnowledge (TCV), Federated Media Publishing, Flytxt, Insider Pages (Sequoia), mFoundry, turn.com, TXT4, and a very high profile Sequoia-Accel deal in Israel, focused on cellular adverstising infrastructure, Upsteed.

Now, Online Advertising is clearly a market that has been created by the entrepreneurs and VCs in Silicon Valley over the last 10 years, and it still has plenty of wind in its sail. Google was the first real success in this market, combining Advertising Infrastructure with Search, now a proven winning formula.

Today, Microsoft legitimizes Massive, an in-game advertising play with a decent sized exit price tag.

In the 12 months to come, expect to see some more M&A in this general area, as some of the 50-100 odd ad infrastructure deals out there get picked up, after which the remaining will crash. Meanwhile, the competition will be fierce amongst those playing in this bubble to differentiate and survive.

Howard Schultz From Sixty Minutes

Posted on Monday, Apr 24th 2006

Sixty Minutes did a segment on Howard Schultz of Starbucks yesterday and it is damn good. Have a look.

What I would have asked him a bit more about is how did he manage to convince the investors to buy that 6-store chain at a time when there was no market for coffee in America and also the investors on how did they evaluate Starbucks before agreeing to put money into this venture.

Starbucks needs visiting and revisiting over and again at this stage of the game … “The Timer” makes it imperative that we understand how to build scalable businesses like Starbucks.

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.

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.