Micron Technology said yesterday it has appointed D. Mark Durcan to replace chief executive Steve Appleton, who died Friday when the small experimental plane he was piloting crashed at the...
Hi. While this blog is a part of Seed Catalyst’s website, I realised over the initial few weeks that a lot of you are first introduced to the firm via the blog rather than our home page.
So to introduce myself - I’m a business consultant working with early stage technology firms to help streamline their strategy and go-to-market approach and support them for fund raising.
With this blog, I aim to capture key market trends that I see in the industry, the ecosystem and cross-plays in some of the more interesting and upcoming sectors, as well as cover interesting companies that I meet.
I will also be addressing vexing and interesting valuation and deal/term-sheet structures that would be of interest to technology start-ups at various stages of their growth.
A discussion with a VC in November 2009 recently came to mind. He asked me the typical question – what are the trends and investment opportunities you see in the market? And I remember talking about the impact the growth in cloud based services will have on virtualisation software and storage.
A few investments recently bought that conversation to mind. Unfortunately some of them are in stealth mode so not too much information currently forthcoming still worth keeping an eye out.
Bromium is an enterprise software developer focussed on virtualisation and security software. They have just raised (23rd June ’11) $9.2 million from Andreesen Horowitz, Ignition Partners and Lightspeed Ventures. Their website mentions they are focused on the ‘delivery of infrastructure solutions’. Their solutions, it seems, would help address the security concerns for anytime anywhere access to enterprise data and applications. Interestingly, they also have an office in Cambridge, UK.
Another recent investment was Tintri which is developing VM-aware storage solutions (June 15th ’11). Their flagship product VMStore is a 4U box with 8.5TB of spare capacity which can store up to 13 logical TB in one unit. They have just raised $18 million in a Series-C round from NEA and Lightspeed Venture Partners. (In fact storage for virtualised environments is receiving a lot of attention with a variety of solutions.) Tintri is interesting because they are using virtual machine abstractions--VMs and virtual disks--in place of conventional storage abstractions such as volumes, LUNs, or files.
Nutanix came out of stealth mode in April with an initial investment of $13.2 million from Lightspeed Venture and Blumberg Capital. Their focus is also on storage for a virtualised network but the aim is to eliminate the traditional SAN/ NAS architecture. Very succinctly their news article states that virtual machines running on Nutanix appliances use high performance flash and hard disk storage from the cluster ‘in real-time’ for reduced capital and administration costs. Their quote says it best, “The Nutanix approach follows Google's model of leveraging smaller blocks of commodity hardware with a more intelligent software layer, delivering this to enterprises in a hardware appliance that brings the compute and storage together, eliminating the need for costly network-attached storage.”
And another virtualisation storage oriented investment was Virsto which raised $12 million from Interwest Partners, Canaan Partners and August Capital in June 2011. Virsto software is targeted at removing the randomness of read-write operations between VMs and the attached storage thus enhancing the efficiency and effectively turbo charging the IOPS per spindle of existing storage. Virsto’s Virtual Storage Engine (VSE) installed through a simple, software plug-in creates a Virsto vDisk which allows fast, efficient snapshot backup operations based around hypervisor-based storage APIs. Simultaneously they also announced the acquisition of EvoStor, a company specializing in storage virtualization technology for VMware environments.
To keep an eye out for is an interesting firm which has raised a small amount this year, $1.3 million, but will be looking at raising their Series-A later in the year - Midokura. Their focus is true virtualisation of a network i.e. flexibly virtualising networks so that users can create layer 2 switches, routers, load balancers, firewalls et al with the click of a button. In effect virtual machines can be moved around the network with the virtual network following automatically. I am far from an expert on the subject but this sounded interesting to me. All the best for their fund raising!
Another investment this year (Feb ’11) was Nicira Networks which raised $26 million for enterprise network virtualisation from Lightspeed Venture and NEA. Their aim is to deliver software which virtualises networks thus meeting the operational requirements of cloud based data centers. Their network hypervisor decouples network services from the underlying hardware reproducing the entire network service model in logical space.
And we round off with Solidfire, a stealth cloud computing storage platform startup which raised $11 million in Series A from NEA, Valhalla Partners and Novak Biddle Venture Partners. The info available is that they are aimed at providing an enterprise-class cloud storage system. SolidFire’s solid state architecture is said to enable independent virtualization of both capacity and performance, allowing complete flexibility in cloud-scale storage provisioning and management.
All of these are datacenter focused virtualisation solutions. And then there is Appsense providing user virtualisation solutions. This essentially implies that all the user information - corporate policy, settings, rights management, applications – are managed independent of the desktop and can be migrated on-demand to any point of use. The firm recently raised a whopping $70 million from a single investor, Goldman Sachs. Current revenues are $47 million (2010).
In summary,
- There appears to be a significant focus on virtualisation solutions especially storage.
- Two investors who have been recurrent are Lightspeed and NEA. Andreesen Horowitz was recently joined by a venture partner with an infrastructure solution focus and hence followed their investment in Bromium. Accel Partners has also recently added on a venture partner with industry experience from VMWare and other data storage and infrastructure firms, plus two new funds. Worth watching.
- These are investments being made in core technology, appliances and software, rather than just social media and advertising platforms. Two key characteristics of such investments is their high capital requirements and long gestation periods. Is this then a snail paced return to higher risk and longer term investments?
Bernanke's address yesterday has once again got the economic slow-down in the US and possiblity or rather lack of QEIII into focus. So where does an investor put his money? Angel investing in the US has been seeing stellar growth, so much so that the word bubble is becoming a part of almost every blog I know.
In this context, mSolve Partners, a firm I work with frequently, asked me for my opinion on the Indian economy. The following is an article I wrote for them. Thought I'd post it here as well:
India these days brings out very mixed sentiments. From investors focused on the market, phrases like 'This is where the money is' are quite commonplace. And from western developed markets we hear phrases like 'Inflation and corruption will be the bane of India'. So what's the real story?
In summary, the Indian economy is continuing along a strong growth trajectory, However, due to head winds in terms of inflation, regulatory uncertainty, corruption etc, public markets and FDI, post a strong rebound after the credit crisis, have not reflected the same optimism be it in terms of relative valuations to the west or in absolute trajectory. Telecom and IT services specifically continue to see growth in revenues and investments and I feel this trend will continue over the near future given strong government support and definite needs. The question is which are the sectors where we will see the strongest opportunities?
A brief look at Indian numbers shows a dynamic economy which would be the envy of any of the developed markets. GDP in 2012 is expected to grow at 8.8% in real terms after growing at 8.2% in 2011. This compares with the 0.5% GDP growth of UK and 1.8% in the US.
The stock market can be a relevant indicator of positive sentiment and anticipated growth rate of an economy. However here we have an aberration. As of Dec 2010, the Indian BSE Sensex was trading at a P/E of 22.5x. Compare that with the S&P 500 which is trading at 23.3x. A comparative story in 2009 was the BSE Sensex at 22x and the S&P 500 at 20x.
The differential is bourne out by the investment trends seen in the Indian economy. Foreign direct Investment into India has decreased from a peak of $41B in 2008 to $35B in 2009 and $23B in 2010. (Source: OECD) As a percentage of GDP that has decreased from 3.3% to 1.5% in 2010.
The decline can in part be attributed to the close to 12% inflation figures and anticipated contraction in the economy driven by higher interest rates. However, what is relevant to our story is where the investment is flowing, how relevant is telecommunications in this scenario and which are the sub-sectors where the real opportunity lies? The trend for FDI flow has been as shown below:
Source: Ministry of Commerce and Industry
India's IT and services sector has a significant exposure to developed markets and hence an initial decline in revenues and valuation was anticipated. However that was counterbalanced as a greater number of firms began outsourcing functions to cheaper off-shore destinations such as India in a bid to cut costs. The telecom sector has consistently constituted around 13% of total FDI. A deep dive into the sector throws up some interesting paradigms.
Subscriber numbers have been increasing consistently. As of March 2011 wireless subscribers stood at 812 million, a growth of 2.6% over Feb 2011. To put the numbers in perspective, the largest market after India is the US at 302 million. A worrying trend on the other hand has been the decline in ARPU across the sector driven by an increase in the number of players in the market and greater competition. The situation was hardly helped by the lack of spectrum availability and the delay in issue of 3G licenses by close to three years.
As a result, even though overall telecom sector revenues have grown by close to 8% over the FY 2009-2010, the declining ARPU and lack of spectrum have had a negative impact on the sector valuations in 2010. Some of the leading telecom operators are trading in the range of 20-24x while VAS players are 12-14x. (Bharti Airtel – 23.2x; Idea Cellular – 23.9x; OnMobile Global Limited – 14x)
This is significantly lower than 2006 when various telecom deals saw P/E multiples of over 50x. Having said that, it continues to be higher than developed markets represented by the iShares Global Telecommunications ETF (IXP) trading at a P/E multiple of 12x. In this scenario, before looking at any opportunity in India it is necessary to identify whether it has a greater exposure to the strengths of the sector or the potential threats. There have been three significant developments which are impacting the Indian telecom sector:
3G The 3G spectrum allocation is a huge boon for the sector as data revenues begin to countermand the decline in voice and SMS revenues. Operators are increasingly focusing on revenues from m-commerce and m-entertainment. VAS providers operating in a SAAS model and providing both 2G and 3G related services hope to benefit both from the growth in subscriber numbers as well as the diversity of 2G and 3G across rural and urban markets respectively. Specifically with respect to Bharti Airtel and their acquisition of the African Zain Telecom, VAS and other service providers have the additional benefit of addressing a larger market consisting of both Indian and African subscribers.
Investors are also looking for growth stories in the mobile solutions space. In the last few months, Intel Capital has invested close to $18 mil from a $250 mil India focused fund in opportunities ranging across mobile media and online solutions. Bessemer Venture Partners has raised a $1.6B fund, quarter of which is focused on Indian investments. One of their investments is the leading VAS provider, OnMobile. Over 2006-07 Sequoia raised a $700 mil India focused fund for investments across early and growth stage firms. One of their recent investments in May 2011 was $10 million in a mobile application development firm Sourcebits. Other investments from US and Indian VCs have ranged across mobile social networks, video content platforms, video streaming platforms, gaming etc.
Banking on 3G growth, there has also been a spate of consolidation across telecom operators. To name but a few, in April 2011, Vodafone acquired the remaining 33% in their India holding from their partners, the Essar Group, for $5 billion. In 2008, NTT Docomo had acquired 26% of Tata Teleservices (TTSL) for $2.7B. They have recently invested another $180 mil for TTSL's 3G expansion.
Outsourcing of telecom infrastructure Very early on Indian telcos began outsourcing their service requirements to outsourced management providers. This included billing, CRM, fraud management etc. Step two was the outsourcing of telecom infrastructure. Over the last 2-3 years several large PE funds have invested in outsourced telecom infrastructure firms which are a huge boon for telcos considering the diverse economic density and hence telecom requirements of the country. Telecom operators have opted to share infrastructure in rural areas, and increasingly in urban areas, rather than incurring the capital expenses on their books.
In 2008, KKR invested $250mil in Bharti Infratel for an enterprise valuation of $10-12 billion. Macquarie SBI Infrastructure Fund invested $300 mil for an 11% stake in mobile tower firm Viom Networks in August 2010. June 2010 saw GTL Infrastructure acquiring the tower assets of Reliance Infrastructure and Aircel Cellular creating an independent behemoth supplier to various telcos.
Further, in March 2010, AT&T acquired 8% of Tech Mahindra, an IT outsourcing specialist. In March 2011, UK based Apax Partners baked enterprise solutions, data warehousing and consulting specialist iGate in acquiring 65% of Indian software firm Patni Computers for $1.2B.
For the infrastructure providers it is a very profitable model as it leads to higher utilisation charges and the ability to bulk bargain with equipment vendors. The model is also leading to innovation along the lines of solar powered base stations and the like.
Regulation In recent times, there has been a spate of corruption cases against and imprisonment of key players in the Indian telecom industry as well as implicated government officials. These events have had a negative impact on the relative valuation of the sector.
However, with a clean-up of the regulatory environment, there is hope that there will be faster and more efficient allocation of additional 3G spectrum as well as the availability of 4G over the next 1-2 years. Both will work to the advantage of telecom operators. Additional services such as quad play packages and ubiquitous video services will become more wide-spread. This is an opportunity both for Indian firms as well as tech firms in the US and Europe to enter the Indian market. For example, mobile video sharing firm Vuclip has recently raised $8 million to expand into Indian and Indonesian markets. Getjar raised $25mil recently to expand their sales and marketing initiatives in Asian markets.
In summary, the Indian juggernaut continues to be a great growth story which is seeing a current valuation dip due to the negative impact of regulation and corruption. However, there are still very profitable business development prospects abounding for US and European firms across the telecommunication spectrum.
My aim is to help identify the right partnerships and business development and investment opportunities across the Indian IT and Teleom diaspora.
I’d be amiss if I don’t take note of the LinkedIn IPO on Wednesday. Stellar is an understatement.
The question is: Are we seeing a bubble or is there just too much money in the market that investors don’t know what to do with?
First the facts: The IPO was for 7.84 million Class A common stock, 4.8 million new shares and 3 million from existing shareholders. The firm continues to hold 86.7 million Class B common stock which has voting rights of 10:1 as compared to 1:1 for the Class A stock. The stock opened at $85 and by mid-day it was trading at a peak of $122.7. At end of day, the stock was at 94.25 with a market cap of $8.9B.
As of March 2011, the firm had 102 million registered members. Revenues have grown from $78.7 million in 2008 to $243 million in 2010. The firm has moved from making losses to a profit of $15.4 million in 2010.
So, here we have a few multiples:
P/R: 36.7x
P/E: 578x
P/member: 87.4x
The question is - when it comes to social networking sites, what do you monitor? No. of page views, no. of clicks, no. of members? I know LinkedIn isn’t exactly Facebook or Renren since it even has paying members. Revenues may come from advertising but the focus is on providing recruiting and other related corporate solutions. In such a case, P/E and P/member taken in conjunction may be the right monitor.
Source: SEC Filing
So that means 578x and 87x – phew!! And that too for a firm with a free float of 8% and voting rights of 0.1%! Perhaps it is because it’s only a freefloat of 8% - low supply greater demand.
I was looking at some numbers for LinkedIn according to SharesPost. At the end of March, 2011, the company was being valued at $2.4B with a per share price of $30.8.
3.5 times in 2 months. Does seem a bit of a bubble, doesn’t it?
Now, is it just excess money in the markets. We've all heard enough about the impact of quantitative easing on markets and the trillions which are raising the prices of commodities world wide and causing inflation in emerging markets. Is it relevant in this case?
Investing in the US has certainly come back into fashion since September last year. Both the S&P and NASDAQ have risen by almost 25-30% with the NASDAQ outperforming by about 5%.
This may explain part of the excitement related to the IPO. At the same time, let’s also take a look at the iShares S&P 500 Growth (IVW) vs Value Index (IVE).
Once again since September, we see a 5-8% out-performance of growth stocks as compared to value stocks.
I guess it’s fair to say that the market is looking for interesting growth stories and they certainly don’t come better than the LinkedIn types. $250 million in revenues, 40% growth, profitable.....it's not just a dotcom story.
So, is it a bubble? Right now, I do think so but we should certainly see the numbers settle down lower. However I still think it will stay higher than it’s IPO list price (going out on a bit of a limb aren’t I?)
And now its Microsoft and Skype. I’ve been thinking about this transaction along various lines:
- Price paid
- Revenue impact
- Organizational impact
Price paid: In 2005, Ebay acquired Skype for $3.1 billion at which point Skype’s revenues were in the $70-75 million range ($71 million according to the recent IPO filings). 2007 the firm was re-valued at $2.7 billion. A peak, a recession, and the price has more than doubled to $8.1 billion.
What could possibly explain that?
- Since '07, the number of subscribers has more than doubled from 217mln to 560mln
- Paying users have also doubled from 4.6 million to 8.1 million since '07
- Revenues in 2007 were $382 mln which have grown to $719 mln in 2009
Press reports state that the firm continues to be loss-making. Net loss in 2007 was $1.4 billion. 2008 was profitable only to return to losses of $369 million in 2009. However, these losses are explained to a certain extent by litigation expenses booked in connection with the JoltId transaction.
So can the revenue and user growth justify the price paid? There is however another angle. We’ve been talking about the huge cash balances at Microsoft. Another aspect is that these balances are distributed across their various international subsidiaries. Moving these funds to the US would have entailed a significant repatriation tax. We’re not talking about a small amount here, rather it’s almost $42B of their $50.2B of cash and STI balances. Skype itself is Luxembourg based and most of the investors also have funds based in various tax-free jurisdictions.
Revenue impact: News coverage is full of Skype’s revenue possibility through advertising. However, I would estimate the real impact would be through the amount of technologial integration Microsoft can implement:
- Integration with the X-Box
- Integration with Windows Mobile
- A more targeted approach for the SME segment
None of these will have an impact overnight. With the X-Box it can take-over home communication. Apple’s Facetime is only just entering the market. Google Voice is US-centric. Skype has the ability to provide landline numbers which can be diverted to Skype thus enabling landline to VoIP calls. It has the ability for VoIP to landline calls; and all of this internationally.
Tighter integration with Bing may also be a possibility. Imagine a search where the phone numbers are reflected along with the Skype icon in case the user wants to make an instantaneous call.
As for the SME segment, Skype has been inching it’s way into the SOHO and SME sector with video-conferencing being one of the key drivers. Till early last year, I had thought of Skype as a potential target for Cisco considering their focus on video, SME and conferencing. However, that became theoretical as they started pulling back as of late last year. There are certainly more overlaps with Microsoft.
And of course, we won't even talk about competitive revenue impact gained just by keeping Skype out of the hands of Google or Facebook.
Organizational impact: As far as I am concerned, this is where it all falls apart. I just don’t have faith in the ability and agility of Microsoft to pull off this integration. Yes, I know, I am going in with a prejudiced viewpoint. Let’s see Microsoft prove me wrong. I hope they do.
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