Felicis Ventures Blog

When To Raise Money

This was one of the key questions we had to address in a panel during last week's Red Herring 100 Conference in San Jose. While it's not an easy question to answer, the reply simply isn't just "when you need money". In fact, being contrarian is a good strategy when it comes to fund-raising. For example, Fund-raising in emergency mode only exacerbates the negotiation position.

While there are numerous variables that come into play in answering this question, such as if the markets are on the rise or not, certain factors play an important role regardless of market conditions. If possible, raising money from a position of strong momentum  significantly helps achieve a better outcome. For instance:

1. Coordinating the fund-raising effort to coincide with a major technical break-through, closing a key business deal or distribution partnership, making or identifying a major hire, where the positive momentum you're creating could clearly benefit from the newly raised funds.
2. To use Seth Godin's popular Passion-Pop chart, the cusp of either the passion or the pop curve, when traffic starts getting really viral, would be an ideal time as well.

Asian Internet Users Poised for Strong Growth

With 530 million users, Asia has the world's largest internet user population according to Internet World Stats. The penetration of internet users compared to the total population however is lowest in the world with 14%, except for Africa. Given internet penetration rates in North America and Europe of 73% and 48% respectively, that bodes well for strong growth in the number of internet users in Asia for years to come, making the region important to watch in the coming years.

While China has more than double the internet users of Japan with 210 million, it has less than one fourth of Japan's internet penetration at 16%. India has third largest internet user base in Asia, almost twice as much as in South Korea, but its internet penetration is 1/13th the rate of South Korea. More details of the specific Asian countries and their internet user statistics can be found here.

Facebook + Craigslist = Worked Like a Charm

My wife and I have just sold our two year old designer sofa in less than 24 hours. First step was taking a picture and posting it on Craigslist. What really closed the deal, however, was inserting that Craigslist link to our listing, into our Facebook status message (we did it with Gtalk status as well). It was my wife's brilliant idea and it worked like a charm. It's too early to say if this implies a new market or business model, but the experience was so positive - it makes me wonder. Most of us would rather buy from or sell goods to people we know and trust. More importantly, when that transaction is time sensitive, that connection might be even more crucial. Food for thought...

The iPhone Effect

eMarketer's recently published market research on Mobile Social Networks has surprising insights on the convergence of mobile market with social networks, highlighting key trends. The chart comparing the behavior of iPhone, Smartphone and regular phone users isn't an exception. While the differences are somewhat expected, the contract is pretty stark: an iPhone user is more than 10 times more likely to do a search, watch an on-demand video or access a social networking site compared to a regular phone user. While the differences between iPhone and Smartphone users are not as large, they're still significant. The chart below tells the story pretty clearly. It's one of the first interesting comparison stats I saw on the topic. (check out the report mentioned above for more details)

Google Leads in European Search, But Yandex Ahead of Yahoo

Google dominates the European Search Market with 80% share of all searches according to comScore's newly released European Search Rankings for March 2008. What's most interesting about the rankings is that the countries with highest searches per user happen to be places where Google dominates searches like Finland where it has about 92% market share.

It's surprising to see Yandex ahead of Yahoo with 2.2% market share of all searches in Europe. Especially considering Russia was at the bottom of the list in terms of searches per user, where each Russian user does a little more than half the searches compared to their Finnish counterparts, this number is even more intriguing. If Yandex could improve that searches per user number, it has a chance to solidify its position as being one of the top 3 search engines in Europe. It's interesting to hear many new upcoming search engines strive for that elusive "just 1% of the search market goal" and actually see the Russian search engine Yandex achieve that goal with over 2% market share in Europe.

Consumer Web is Still King (at least for me)

(image courtesy of Consumer Internet Barometer) Imagine Facebook working to win customers one at a time, climbing on the roofs of their users' houses, install solar panels and hand them a bill several days later...That's how Steve Jurvetson from DFJ compares  Consumer Internet companies' potential with their counterparts in other industries in a Cnet interview regarding how Consumer Internet is tops when it comes to most consistent / highest returns in venture capital. While I feel it's too early to count out the alternative energy space, it's clear that it's a completely different playing field. Nanosolar, one of the sector's stars, recently raised $50M, bringing its total investment since it was founded in 2002, to over $100M for a valuation around $2B. Compare that with Google, founded in September 1998, which raised one round of venture capital at $25M in 1999 (besides some seed funding by angels) and then went public in August 2004 at an initial valuation of $23B, less than 6 years after its inception. Capital efficiency is certainly one of the most important factors that make investing in consumer internet attractive.

Viral marketing plays a major role in the success of internet companies as well - in this case, Jurvetson gives the example of Skype which was able to grow to 309 million members world-wide mostly by word-of-mouth.

To put it in comparison, I wanted to see aggregate value created by the different sectors in technology. The best data source I could find was on Forbes Global 2000 from March 2006 - after manually regrouping companies (only based in the US and excluding alternative energy since I couldn't find any such companies on this list) into their respective buckets, the following table came out - Highlights:

• Internet companies have the highest average market capital created at $74B per company
• The top US companies in the technology sector (Internet, Software, Hardware, Storage, and Networking) generated over $1.8 trillion in market cap
• Software wins the top honors in terms of highest overall market cap created with over half a trillion dollars

 

This table would be even more interesting if I had the aggregate venture investment numbers to go along with it. However, I personally believe, consumer internet companies still have room to grow, and there is more value to be created in this sector. Combined with the philosophy "invest in what you know", I remain bullish on consumer internet...

Billions of Videos & YouTube's Unstoppable Rise

  According to latest metrics data release by comScore, basically 3 out of 4 people from the US internet audience watched an online video in February of 2008. While YouTube attracted 80 million viewers to MySpace's 50 million, each YouTube user watched over 4 times as many videos as a MySpace user. Average online video duration was under 3 minutes.

While the gap in traffic rank (according to Compete.com) between MySpace and YouTube narrowed to just 1 earlier this year, the search volume on Google for YouTube was more twice as much as MySpace. On another related update from Hitwise, Google's traffic referral for online videos went up by 44% during the last 12 months while MySpace's share of referred traffic fell 25% during the same period.

Microhoo - The Story The Numbers Tell...

It might have been best to comment on the Yahoo Microsoft deal until tomorrow when Yahoo's Q1 Earnings Report comes out. But the key numbers already tell a pretty clear story: Google has outspent Yahoo on R&D, 2.3:1, and generated operating cash flow at a rate of 2.7:1 compared to Yahoo (caveat: I'm comparing Google's Q1 numbers to Yahoo's last Q4 numbers based on Financial Times' coverage from last week). When it comes to cash, the contrast is even more striking: Google's cash is 6 times as large as its competitor. According to Attributor's analysis of content monetization across 68 million domains, the combination of Google and Doubleclick have almost 69% market share in monthly unique users versus Yahoo's 12% and MSN's 10%. The difference is even larger if market share is reviewed in the context of unique domains.

While Yahoo could really use a partner like Microsoft with deep pockets, R&D strength, Microsoft is running out of major players to buy or partner with to stay competitive in this space. I find it extremely hard to imagine how either party could simply let this deal not materialize. They both have too much to lose.

Tomorrow's Q1 earnings report will be interesting to watch but is unlikely to change the fundamental dynamics significantly. Silicon Valley Insider has actually gone through the trouble of running through a number of scenarios in great detail here.

In the meantime, Yahoo keeps bleeding executive talent, including senior old-timer engineers like Eric Boyd who recently defected to Mochi Media. It's painfully clear that steering Yahoo to be a media company in the past worked disastrously for the company. What's even worse is the hesitation to sharply return to the company's roots and be more engineering / product focused. Given Google's razor sharp focus on improving its core products and relentless drive to excel in key technical areas, maybe the real picture is even worse than the one painted above by the sheer numbers.

Vkontakte.ru - Russian Facebook Clone Growing By Leaps & Bounds

If you've never heard of Vkontakte.ru before - you're not alone. It was shocking to discover that it rose all the way to Alexa #34 in very short order. The site is growing so fast and is so popular in Russia that the country's secret service FSB got concerned that it might become a security risk because the Russian soldiers are signing up in droves. Social networking keeps demonstrating phenomal international growth. This shouldn't be a surprise: according to comScore's "State of the Internet" report from March of this year, Social Networks are the fastest growing vertical on the internet globally (60% annual growth) with under 40% penetration rate (versus 90% for portals).

What's even more amazing is that as far as I can tell, the site seems to be a carbon copy of Facebook - but localized in Russian and cyrillic alphabet. According to third party sources, the company has a team of only 20 people. It ranks among the top ten sites (based on Alexa stats) in Russia, Ukraine, Belarus, Kazakhstan and Tajikistan.

Russia is the country in Europe with the lowest market share for Google at 32% (versus Portugal's 94%) and its top 3 sites are all homegrown: Yandex, Mail.ru and Rambler. Facebook might find itself fighting an equally uphill battle in this important BRIC internet market.

Too Much Money Chasing Too Few Exits ?

  Fundraising by VCs hit a crescendo in 2007 according to NVCA, jumping almost 10% from 2006, totaling to about $34.7 billion. What's even more impressive is that number is almost 9 times (!) the amount of money raised in 2002, merely 5 years back. Contrast that with recent statistics on exits: first quarter of 2008 saw just 5 IPOs amounting to just over $280 million according to research by NVCA and Thompson Financial. The IPOs hit a low not seen since 5 years ago. Similarly the number of M&A deals totaled 56, the lowest in a decade.

While it's incredibly difficult to reconcile the exits with the investments, since most of the former transactions occur years after the latter, it's clear that the venture industry will face tremendous pressure this year.

It will be interesting to watch this space in the next months. Without a doubt, this trend is likely to bring a lot more attention to early stage investing, as well as force funds to move up on the funding cycle chasing lower risk deals, and acting more like PE funds.