Occam's Razor

Recent European funding rounds

Two European recent funding round that I had missed:

Red-M Group United Kingdom who Red-M Group provides services for managing wireless infrastructure raised $8.1M from Pi Capital, Octopus Asset Management

Appear Networks Sweden who is a provider of wireless communication platforms raised $7.2M for a second round of funding from Northzone Ventures.

VoIP operator B3G raise 16M€

B3G Telecom (the VoIP operator used by Occam Capital in our Paris office) just raised 16M€ from Axa Private Equity, Société Centrale d’Investissements (BNP Paribas) and Partech International who now collectively own around 33% of the equity. This follows the 1M€ seed round of 2003 lead by Iperium.

B3G revenue in 2005 was 60M€ for a small but positive EBITDA. More than 50M€ of those 60M€ was based on call termination, and only 11M€ based on VoIP services (5M€ for French SMEs).

Running schedule

I have just registered for the forthcoming Paris half marathon (March 5 2006). 

If you want to join me during my Sunday's training, I run a 10K loop from Montorgeuil to Palais Royal to Tuilery to Seine river to Eiffel Tower and then back, or a 20K loop to the east starting in Montorgueil all the way to Vincennes horse track, or a 20K to the west starting in Montorgueil all the way to the bois de boulogne lakes.

Feel free to email/comment if you want to join (I usually run with my good friend Emmanuel who is gracious enough to slow down for me ;-))

BTW: i have missed the deadline for the April Paris marathon which is now sold-out at 35.000 participants, if you know anybody who is registered, and does not plan to participate, I'll gladly buy his/her ticket entry...

VC worst-10 lines

Good post from Guy Kawaskaki on the top 10 lies of venture capitalist, and you could guest, i have NEVER used any of them ;-)

1. “I liked your company, but my partners didn't.”
2. “If you get a lead, we will follow”.
3. “Show us some traction, and we'll invest.”
4. “We love to co-invest with other venture capitalists.”
5. “We're investing in your team.”
6. “I have lots of bandwidth to dedicate to your company.”
7. “This is a vanilla term sheet.”
8. “We can open up doors for you at our client companies.”
9. “We like early-stage investing.”
10. "We bring a lot more than money to the table."

VC performance analysis

Interesting, (and self serving...)   analysis of the VC industry from Focus Venture. As Focus Venture is a late stage (aka cap dev or growth capital) tech fund, the analysis demonstrates that later stage investment as a rewarding to investors that earlier one (the opposite would be strange no?).  Despite this aspect (its marketing collateral from a VC fund aimed at convincing LP that the strategy of that fund is the right one...) it has several VERY interesting facts:

-         Early staged pooled IRR 84 to 03 = 20%

-         Late staged pooled IRR 84 to 03 = 14%

-         Early staged pooled IRR 84 to 03 excluding 99 = 11%

-         Late staged pooled IRR 84 to 03 excluding 99 = 11%

-         Early stage pooled IRR as of 12/31/02 = 21.4% BUT risk factor (std deviation/IRR) = 3.2

-         Late stage pooled IRR as of 12/31/02 = 16.5% BUT risk factor (std deviation/IRR) = 1.8 (significantly less risk than early stage who has a risk factor of 3.2)

-         Geographical spread factor of return variance = 2.5% (i.e. almost irrelevant)

-         Industry focused spread factor of return variance = 2% (i.e. almost irrelevant)

-         Manager spread factor of return variance = 21% (i.e. relationships are key)

[source Jeff Nolan]

More public market views on the software industry

Following on yesterday's view on the macro view off the software industry, a great post from Bill Burnham on how the software industry has been shrinking in 2005 (providing low public market returns, but interesting M&A exits for innovative software SME's).

It's an important perspective as investing is all about managing the risk/return ratio, and anchoring the return from a public market perspective define some horizon on what type of exits are reasonable.

Despite this explosion of new software, the software industry itself is shrinking.  In 2005, the aggregate market capitalization of the software sector shank by almost 10% despite the broader NASDAQ market being up 1.4%.  Even if one adjusts that number to account for privatizations, M&A and IPOs, the software market still shrank by 9%. This shrinkage is also apparent when looks at the raw number of public software companies.  There were 236 public software companies at the start of 2005, but only 213 at the end of the year, a decline of 10%. Put another way, for every new software company that went public in 2005, almost 7 were acquired or went out of business.  Not exactly an encouraging picture.

What then is responsible for the software sector’s precipitous market cap decline?  Like most complex systems, there is no one single factor driving this trend, but a combination of factors including:

1. Software is moving from “growth” to “value”.  value managers simply aren’t willing to pay 35X next year’s EPS for anything, which is leading to major multiple contractions in many of the top names in the industry.

2. Open Source and SaaS.  The modern software market was built on the backs of large one-time perpetual license sales.  Unfortunately two major trends are conspiring to make it increasingly difficult to grow revenues quickly: Open Source and SaaS.  Open Source basically flips the revenue model: it gives away the source code up-front and tries to make money on the back-end by charging for support.  SaaS (Software as a Service) allows companies to purchase software “on demand” over the web.  As a result, SaaS requires little or no up front investment from a customer and is often purchased on a short term subscription plan.  The lack of large up-front payments makes it very difficult to grow SaaS revenues quickly and reduces margins because the company actually provides a real service as opposed to just shipping a disk.  Thus, as Open Source and SaaS gain prominence it’s becoming increasingly clear to investors that the good old days of 200% revenue growth/year at 95%+ gross margins are gone for good and stock multiples are responding by heading south.

3. No big platform transition.

4. Networking companies are encroaching on software company turf. If you pry open the hood of your average router, you won’t find a disk drive or a keyboard but you will find a ton of software sitting inside flash memory or embedded in chips.  In fact, many network company executives will insist to anyone that listens that their company is more of a software company than it is a hardware company. 

5. Being public ain’t so great.  Being public in these post Sarbanes-Oxley days is not easy, especially if you were a software company that lavished options on its employees and played it a little loose with revenue recognition from time to time.

Public market perspective on software industry

Interesting public market perspective on the software industry, and on Software's New Economic Drivers By Rick Sherlund (Goldman Sachs).

• The macroeconomic influence on tech is greater than ever as tech has grown to
  become the single largest component of corporate capital spending - now almost 40% of the total.
• IT spending was able to well outpace economic growth as it grew as a proportion of GDP from 1.5% in 1970 to almost 5% in 2000. Since settling in at less than 4% in recent years, tech is likely to resume growing as a percentage of the economy, but not nearly at the rate of decades past.
• Not surprisingly then, the correlation of IT with the broader economy has jumped from less than 0.1 in the 1970s to over 0.9 in recent years as the industry has matured.

Also several interesting trend analysis:

(1) Of all tech trends, wireless's impact will be broadest
(2) China and India are altering both supply and demand formulae
(3) The low-end unit epidemic is distorting revenue realities
(4) With drivers escalating, security is at an earlier stage than the consensus view
(5) Even at this stage, spending is still consolidating around fewer, larger vendors
(6) Internet treasure chest now being unlocked
(7) Open source opening Pandora's box on pricing throughout the IT stack
(8) The true digital home will be longer in coming than expected
(9) SOAs shake up the software industry

The rise of intangible assets

My position paper on "10 years of internet" is today live on les echos web site. feedback/comments welcome here or on les echos online blog.

10 years of Internet, certainly 10 years of technology change and new businesses models, but more than that 10 years for a paradigm shift on how corporate assets are identified, valued, and monetized:  10 years during which the importance of intangible assets, their mode of valorization by the markets and their mode of appropriation by the entrepreneurs and owners of these companies became our true obsession....

Blog penetration reaches 10% in France

Amazing article in Le Monde today, blog usage is on the increased in France and has reach 10% as more than 6 millions blogs are today active...

The phenomenon of the blogs is of great width, even if it is difficult to encircle it with precision, complicated and random countings being.  According to sources', one would count between 50 and 70 million blogs in the world today.  At the time of a conference held in June 2005 in Copenhagen, the stepping of the data with licence to trace an approximate chart of the blogosphère European.  With its 3 million participants, France then occupied largely the head of the classification, in front of Great Britain (900 000 blogs) and Russia (800 000).  A little more than six months later, there would be in France 6 to 7 "active" million blogs - or on French on ten who would have created his blog!  -, causing about as many visits per month, according to figures' of the Heaven arrange-council, recutting those of Médiamétrie.  What would make of it to the second more significant community Internet of the world after the United States.  And "the blogosphère continues to double every five months", affirms one at Heaven.

[Google translation of the original La Monde article]

Media Disruption

Interesting panel discussion IT conversation podcast from Supernova 2005 with Dan Gillmor, Jeremy Allaire, Suranga Chandratillake, Lawrence Gelburd on "Reinventing Media" with good point of view from Blinks and Brightcoves

More and more people are turning to the internet as a place to find, share, and create media of all kinds. From the origins of the world wide web in text and graphics, more and more audio and video content is making its way to the web from both large-scale producers and individuals, legitimately or illegitimately.  This growing platform for the distribution of media is forcing changes within our use of media and the producers ability to control over their creations.

The section on how in a world of infinite choice, value is shifting to those that offer search and aggreation services to allow people to locate and structure relevant content is perticularely relvant in a long-tail world, and resonates with some recent posting from David Hornik on business opportunities created by such a wealth of content...