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Article from Silicon Valley Business Journal.

Institutional Venture Partners’ Steve Harrick sees a lot of opportunity in the enterprise and B2B startup space and has a $1 billion fund that was raised last year to work with.

His Menlo Park firm focuses on later-stage venture and growth equity investments, so it’s not the small fry they have their eyes on.

IVP is looking for startups that already have $20 million to $30 million in revenue and the potential to grow that by tenfold or more.

The firm had several big exits last year, including the $223 million IPO of CafePress and the $745 million sale of Buddy Media to Salesforce.

Harrick took some time to speak to me this week about the startups that are exciting him today and why IVP often remains an investor long after a startup has gone public.

Here are excerpts from that conversation:

There has been a lot said about a shift away from social and consumer-focused startups since Facebook’s IPO last year. What does that mean at Instiutional Venture Partners?

IVP has always invested in enterprise companies and we’ve been investing since 1980. We’re on our 14th fund, IVP-14. It’s a billion-dollar fund and we’re just beginning to invest that.

But enterprise has always been a mainstay of our investment effort. It ebbs and flows with budgets and where we see growth. But right now we’re seeing a lot of good activity in the enterprise space, a lot of innovation being brought to bear and the opportunity for new high-growth companies. So we’re actively investing there.

Can you tell me a little bit about the companies that are exciting to you right now from your portfolio?

There are a number of them. The most recent investment was AppDynamics. AppDynamics does application performance management. It’s really a very exciting area. The company allows anybody that’s creating an application to bug test it, to test it for security, to see if it can support high volume loads, all while they are designing the application.

The reason that this is such an interesting space is that every enterprise has applications that reach out to customers that they use internally and that they connect to partners with. It’s a real competitive edge for companies that do it correctly.

All the old stuff doesn’t support mobile. It doesn’t support the latest programming techniques. It’s long in the tooth. The market has been desperate for a more modern solution and AppDynamics really delivers that. We were really impressed with the growth the company has shown and just the massive demand for the product offering.

A lot of our portfolio companies were already using AppDynamics. That’s how we found out about the company and it’s a space that right now is at about $ 2 billion market size. It’s growing and it’s a very good management team. So we’re excited to be part of it.

Another one I understand you invested in last year is Aerohive.

Oh, yeah. David Flynn is the CEO over there. It’s a great company to watch in Sunnyvale. It’s a next generation Wi-Fi company. What Aerohive did very early on is it realized that a controller can be costly and also is a choke point for an enterprise deployment. If your controller goes down, you can’t change configurations. A lot of the old vendors had built a lot of cost around the controllers, which increased the cost of deployment for a customer.

Aerohive took that controller and put it in the cloud. You can manage your Wi-Fi deployments remotely from any computer. It doesn’t go down and their Wi-Fi deployments are enormously successful at scale. They’ve got a lot of enterprise and education and government customers. It’s a business that more than doubled last year and really one to watch going forward.

Are you finding a lot more company these days looking at the enterprise and B2B space than there were a couple of years ago?

Enterprise budgets have come back. People are recognizing that they have to refresh their technologies. They’ve got a lot of new demands in terms of supporting new trends in the enterprise.

Take another one of our companies for example, MobileIron. It is a software company that solves the bring-your-own-device problem for businesses. People are bringing iPhones and Android phones into the enterprise and they’re viewing enterprise information. They’re putting things in a Dropbox account and they’re leaving with it.

IT can’t control that and that is a big problem, particularly when you want to maintain rights and provisioning and state-of-the-art security and be able to track confidential information.

So MobileIron’s products allow you to do all that. It allows you to push out patches, security, rules and provisioning. It allows you to take control of a mobile environment in the enterprise.

Five, six, seven years ago, this wasn’t a problem. It just wasn’t happening. Now, it is and it is being driven by consumer behavior that has flown over to the enterprise.

So people are saying, I have a budget for this. I have to spend. We have to be on top of these issues or it’s going to be a big problem for us.

You know those kinds of trends are really unstoppable.

Are there other trends you are watching?

Another is Wi-Fi, which is being kind of taken for granted, how to be able to connect if I’m visiting your company or I’m in your auditorium or I’m having lunch in your corporate cafeteria. These are all things you need to have infrastructure for. You need to do it cost effectively. So these fund-smart entrepreneurs are seeing an opportunity and people are spending for it.

As a venture capitalist, we look for those tailwinds in terms of budget because that allows you to grow. It accelerates the sale cycle. It becomes less of a missionary sale and that’s how you have rapid growth in businesses. It is different from five or six years ago. There are a lot of people paying attention to it.

There is a lot said about the consumerization of IT, the trend where shifts in consumer technology is requiring IT departments and enterprises to change how they do things.

It’s a massive change in behavior. Enterprises are organizations that are comprised of employees that have jobs to do. Their behaviors change and the enterprises have to change with them.

There is also a lot of talks about what is being described as Network 2.0, involving things like software-controlled networking and flash storage. Are you guys involved in that at all?

On the network side, a lot of that is cloud computing and services around the data center. We are involved in that.

We invest in a company called Eucalyptus Systems, which is the leader in hybrid cloud deployment. They allow you to manage and test software on your own premises and switch seamlessly back and forth between Eucalyptus and the Amazon Cloud.

Cloud computing is still an area where people are trying to figure out exactly what their needs and specs are. It’s still early in the market. But there have been some large successes that have kind of changed behavior.

Salesforce is one of those. Salesforce is widely deployed. It really took customer relationship management and managing your sales force to the cloud. They’ve offered additional cloud applications and people have gotten used to paying by subscription.

That’s also a change from seven or eight years ago, when everything was license dominated. The old world was you paid for licensing and maintenance, 80-20. That was what you paid.

Those are perpetual licenses and they were often expensive. Sometimes, they were underutilized or never deployed and the world gradually shifted to paying on subscription.

Customers like it because they say, hey, if I’m not using it, I can turn it off. I don’t have to renew.

The vendors like it because it’s a more predictable revenue stream. You’re no longer biting your nails at the end of each quarter to figure out if you’re going to get those two or three deals that are going to make or break your quarter.

You get a lot of smaller deals that recognize revenue monthly and that provide a more predictable business and that have been a reward in the public markets. Networking and application functionality is being delivered that way now. The economics have changed and I think that is a very exciting trend. I think it leads to more sane management for software businesses.

How about the security? Are you into that at all?

We are. We were investors in ArcSight, which Hewlett-Packard bought. That was an example of a dashboard for enterprise security.

We’ve been involved with a number of other security companies. I think two to watch are Palo Alto Networks and FireEye. We aren’t investors in either of those, but they’re both very good companies. We’re looking at a lot of security companies currently.

The challenge with security is that it can often be a point solution and a small market. To be a standalone security company, you really have to have a differentiated broad horizontal functionality that could stand on its own.

You can’t have customers saying, I want that, but it’s a feature and should be delivered with a bunch of other things. A lot of small companies fall into that trap in security.

So we’re on the lookout for the broader security places that you know really can get the $50 million, $75 million or $100 million revenue.

Have there been any companies that you passed on that you wished maybe in retrospect you hadn’t? The ones that got away?

Yeah, you know, there always are. That would be the anti-portfolio. You run into those things and you try to see what you learn from it. Sometimes, they’re very hard to anticipate.

We passed on Fusion-io, the Salt Lake, Utah, flash drive memory company. They have done well, but I think they have fallen off recently in the public markets. That one would be in the anti-portfolio.

We also looked at Meraki. Cisco bought them for $1.2 billion, more than 10 times revenue. It’s hard to predict when somebody’s going to buy a company at that kind of multiple. We believe Aerohive is the superior company. That’s why we invested in Aerohive instead of Meraki. You can’t really invest in both. They’re competitors.

Then there was Yammer, which was acquired for $1.2 billion. That was also a company we were familiar with, good technology acquired for huge multiple of sales and it was hard to predict that happening, too. So I wish all those guys well. Sometimes you miss on big returns like thoses, but we like the investments that we have made.

What is it that you’re looking for at the top of your list when you’re considering a company that you might invest in?

Well, you know, the old adages in venture capital have some merit in them. But things change and you can’t rely too much on just pattern recognition. There’s always seismic shifts in technology where old assumptions have been disproven. You have to adapt to those.

But the adages that do hold are quality of management. We really look for companies and management teams that can take a company to $50 million to $500 million in revenue.

That’s a very mature skill set. They have to show the ability to hire, the ability to supplement the businesses, to attract great board members and to build a company that can be public.

There are a lot of demands on being public today. The industry is still dominated by mergers and acquisitions, as it always has been, for exits. Probably about 80 percent of the exits happen from M&A.

But we really look to exceptional management teams that we can be in business with for many, many years.

How does being a later stage investor change what you are looking for?

We have a long-time horizon for investment. We often hold after a company goes public and even invest in the company after it’s gone public. That’s in our charter.

So we really look for these management teams that are really exceptional and deep.

As a late stage investor, you can’t really invest in small market opportunities. The early stage can do that, and they can exit nicely. You know they can invest $10 million valuation, the company sells for $60 million and they do great.

When you’re investing at a later stage, you know looking for companies that have $20 million or $30 million of revenue so the valuation is higher and you have to get these companies to a higher exit value to get a great return.

So you have to able to identify large market opportunities and AppDynamics, Aerohive, MobileIron, Spiceworks, all have really large market opportunities. That’s why we’re excited about them.

Interviewer: Tell me a little bit more about the philosophy of holding on to companies after they’ve gone public.

Our perspective is that going public is a financing event. It’s also a branding event for a company. It raises awareness. It creates liquidity in the stock.

But valuations fluctuate with market conditions. We say this is just the beginning of growth. That valuation that it’s at now may not be the right place to exit .

If you look back historically, venture capitalism left a lot of money on the table by exiting companies prematurely. You know if you exited when Microsoft or Apple or Cisco went public, you probably left a 10X, 20X, or 50X return on the table by doing so.

Obviously, that requires a lot of judgment. Not every company is going to be an Apple or a Cisco.

So that’s a judgment call and when we make the judgment that there’s a lot of growth ahead and the current valuation doesn’t reflect that, we’re happy holders. We establish price targets for exit and when it reaches that price target, we make a new assessment.

We do have to exit eventually, but we raise 10-year funds and our holding period is typically 3 to 5 years and then oftentimes its 5, 7, 8 years.

Is there a specific example to illustrate this from your portfolio?

Sure. One would be HomeAway. HomeAway is a remarkable business. People list homes on the website. If you’re traveling with your two kids, you get a home for 800 bucks for the week and you would’ve paid 500 bucks a night for a hotel. It’s a great service. It’s public. We invested, my gosh, about five years ago and we’re still holding that stock.

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Article from TechCrunch.

No one got just how powerful it was that Facebook recently said it would allow ad targeting to lists of email addresses. Today at the Dreamforce conference it became clear, as Facebook ad chief David Fischer formally launched “Custom Audience” ads and how they tie into CRM. I’m convinced they’re going to be hugely profitable for advertisers and Facebook.

Why? A hotel company like Starwood has email addresses of its customers and could target “Come stay at the luxurious St. Regis” to high-end customers who’ve stayed there before, while targeting “Find cheap hotels nearby” to those who’ve stayed at its low-budget brands. That means more sales and more loyalty for advertisers, and more revenue for Facebook.

On August 30, Facebook told press that Custom Audiences was coming, but now it’s live with eight ads providers. Custom Audience ads let businesses submit a text or CSV file of privacy-protected hashed email addresses, phone numbers, or Facebook User IDs and have Facebook target those people with a specific ad. Businesses can also layer on additional ad targeting parameters, such as age or interests to reach a specific demographic within a customer segment.

Salesforce who brought in Fischer for its Dreamforce conference is uniquely suited to take advantage of custom audience ads because it owns both its massively popular eponymous customer relationship management system, but also a Facebook ads buying system Brighter Option that it got with its acquisition of Buddy Media this summer.

I’ve attained from Facebook a list of the seven other vendors working with custom audience ads, but none have their own CRM. They are AdParlor, Alchemy Social, GraphEffect, Kenshoo, Nanigans, Social Moov, and Optimal.

Custom audience targeted ads will be much more relevant than ads just targeted to a business fan’s or some biographical demographic. They can reach people who a business is sure purchased its products before, or that haven’t thanks to exclusionary targeting. Yes, businesses could just email these existing customers for free. However,  Facebook can help them hone in on certain demographic segments of their customers by overlaying additional targeting parameters, and reach them vividly through the news feed instead of their dry inbox.

Here are a few more examples of industries that could use custom audience ads:

  • A car company with email addresses of its customers could target “buy a new SUV” ads to people who bought an SUV 5+ years ago, while targeting “Find nearby charging stations” to those who recently bought an electric vehicle.
  • A bank company could target different ads to customers with savings of $5,000 versus customers with $5 million.
  • A Facebook game developer could plug in the user IDs of its gamers, targeting ads for its newest war-strategy games to those who played its old strategy game, while targeting ads for its latest shopping game to users who played its fashion game.
  • A B2B vendor could submit a file of the phone numbers of its biggest clients and target ads for a premium service to them to increase revenue, while targeting its newest clients with ads for discounts to increase loyalty.
  • Instead of targeting general ads to all its Facebook fans encouraging return visits, Amazon could advertise specific products to segments of its customers who’ve bought similar things.

Precise targeting of segments of existing customers like this could produce huge return on investment for advertisers and command high ad rates for Facebook. CRM-equipped companies might spend more when they know who they’re reaching, and that could help Facebook please Wall Street with higher revenues. In fact, it’s such a smart idea to plug CRM into ads that I bet we’ll see more advertising platforms integrate like this soon.

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Article from NYTimes.

Few investors have ridden the recent Internet boomlet like the GSV Capital Corporation.

After GSV announced in June 2011 that it was buying a stake in the privately held Facebook, the closed-end mutual fund surged 42 percent that day. Capitalizing on the euphoria, GSV sold another $247 million of its shares, using the money to expand its portfolio of hot start-ups like Groupon and Zynga.

Now, GSV is feeling the Facebook blues.

When the public offering of the social network flopped, GSV fell hard, and it still has not recovered. Shares of GSV, which were sold for an average of $15.35, are trading at $8.54.

“We probably benefited from our stake in Facebook more than we deserved on the way up,” said GSV’s chief executive, Michael T. Moe, “and were certainly punished more than we deserved on the way down.”

GSV, short for Global Silicon Valley, is the largest of several closed-end mutual funds that offer ordinary investors a chance to own stakes in privately held companies, at least indirectly. Closed-end funds like GSV typically sell a set number of shares, and their managers invest the proceeds. In essence, such portfolios operate like small venture capital funds, taking stakes in start-ups and betting they will turn a profit if the companies are sold or go public.

“I think GSV was really innovative in creating a kind of publicly traded venture capital fund,” said Jason Jones, founder of HighStep Capital, which also invests in private companies.

But the shares of closed-end funds trade on investor demand – and can go significantly higher or lower than the value of the underlying portfolios. The entire category has been hit by Facebook’s troubles, with GSV trading at a 38 percent discount to its so-called net asset value.

Mr. Moe, 49, has previously experienced the wild ups and downs of popular stocks.

A backup quarterback at the University of Minnesota, he started out as a stockbroker at the Minneapolis-based Dain Bosworth, where he wrote a stock-market newsletter called “Mike Moe’s Market Minutes.” He met the chief executive of Starbucks, Howard Schultz, on a visit to Seattle in 1992, and he began covering the coffee chain after its initial public offering.

“I left believing I had just met the next Ray Kroc,” Mr. Moe wrote in his 2006 book, “Finding the Next Starbucks,” referring to the executive who built the McDonald’s empire.

After stints at two other brokerage firms, Mr. Moe became the director of global growth research in San Francisco at Merrill Lynch in 1998. There he ran a group of a dozen analysts at a time when mere business models “were going public at billion-dollar valuations,” he said.

Shortly after the dot-com bubble burst, he founded a banking boutique now called ThinkEquity. At the time, he expected the I.P.O. market to shrug off the weakness and recover in a couple of years. Instead, it went into a decade-long slump.

“Market timing is not my best skill,” Mr. Moe said. In 2007, he sold ThinkEquity.

The next year, he started a new firm to provide research on private companies, NeXt Up Research. He later expanded into asset management, eventually changing the name to GSV. Within two months of starting his own fund, he bought the shares in Facebook through SecondMarket, a marketplace for private shares.

GSV soon raised additional funds from investors and put the money into start-ups in education, cloud computing, Internet commerce, social media and clean technology. Along with Groupon and Zynga, he bought Twitter, Gilt Groupe and Spotify Technology. The goal is finding “the fastest-growing companies in the world,” he said.

But Mr. Moe has paid a high price, picking up several start-ups at high valuations on the private market. He bought Facebook at $29.92 a share. That stock is now trading at $19.10. He purchased Groupon in August 2011 for $26.61 a share, well above its eventual public offering price of $20. It currently sells at $4.31.

Max Wolff, who tracks pre-I.P.O. stocks at GreenCrest Capital Management, said GSV sometimes bought “popular names to please investors.”

“This is such a sentiment-sensitive space, the stocks don’t trade on fundamentals,” Mr. Wolff said, adding, “If there’s a loss of faith, they fall without a net.”

GSV’s peers have also struggled. Firsthand Technology Value Fund, which owns stakes in Facebook and solar power businesses like SolarCity and Intevac, is off 65 percent from its peak in April. “We paid too much” for Facebook, said Firsthand’s chief executive, Kevin Landis.

Two other funds with similar strategies have sidestepped the bulk of the pain. Harris & Harris Group owns 32 companies in microscale technology. Keating Capital, with $75 million in assets, owns pieces of 20 venture-backed companies. But neither Harris nor Keating owns Facebook, Groupon or Zynga, so shares in those companies have not fallen as steeply.

GSV is now dealing with the fallout.

In a conference call in August, Mr. Moe was confronted by one investor who said, “the recent public positions have been a disaster,” according to a transcript on Seeking Alpha, a stock market news Web site. While Mr. Moe expressed similar disappointment, he emphasized the companies’ fundamentals. Collectively, he said, their revenue was growing by more than 100 percent.

“We have been around this for quite some time, and we are going to be wrong from time to time,” Mr. Moe said in the call. “But we are focused on the batting average.”

In the same call, Mr. Moe remained enthusiastic – if not hyperbolic – about the group’s prospects. Many of GSV’s 40 holdings are in “game-changing companies” with the potential to drive outsize growth, he told the investors.

Twitter, the largest, “continues to just be a rocket ship in terms of growth, and we think value creation,” he said. The data analysis provider Palantir Technologies helps the Central Intelligence Agency “track terrorists and bad guys all over the world.” The flash memory maker Violin Memory “is experiencing hyper-growth,” he wrote in an e-mail.

But Mr. Moe was a bit more muted in recent interviews. While he says he still believes in giving public investors access to private company stocks, he recognizes the cloud over GSV. “We unfortunately have a social media segment that got tainted. I completely get why our stock is where it is. It’s going to be a show-me situation for a while.”

Acknowledging some regrets, Mr. Moe said he was angriest about overpaying for Groupon, saying, “Yeah, I blew Groupon.” He said that he also did not anticipate what he called a deceleration in Facebook’s growth rate, and that it was “kind of infuriating” that some of its early investors were allowed to exit before others. GSV often must hold its shares until six months after a public offering.

But the downturn in pre-I.P.O. shares has a silver lining, Mr. Moe said. Since the Facebook public offering, he has been able to put money to work “at better prices.” He recently bought shares of Spotify at a valuation of about $3 billion, roughly 25 percent below the target in its latest round of financing.

The I.P.O. market is also showing signs of life, he said, with the strong debuts of Palo Alto Networks and Kayak Software. And he still has faith in Facebook.

Whatever its current stock price, at least it is a “real company” with revenue and profit, Mr. Moe said, adding, “It’s not being valued off eyeballs and fairy dust.”

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Article from NYTimes.

 

Institutional Venture Partners has another billion to play with.

The venture capital firm, an investor in Twitter, Zynga and LivingSocial, has raised $1 billion for I.V.P. XIV, its 14th and largest fund to date.

According to a partner, Sandy Miller, the firm initially set a $750 million target but increased it on robust demand. The fund, which was raised over four months, relied mainly on capital from previous investors.

Unlike some of its peers, Institutional Venture Partners does not write a lot of checks, usually not more than a dozen a year. As a later-stage investment firm, it invests $10 million to $100 million in seasoned start-ups in three main buckets: Internet, enterprise technology and mobile.

“I hate to sound dull but we’re doing the same strategy,” Mr. Miller said.

Mr. Miller, a longtime technology investor and co-founder of Thomas Weisel Partners, is optimistic despite recent setbacks in the technology sector.

Skepticism in the public markets, most recently highlighted by Facebook‘s underwhelming initial public offering, has damped enthusiasm for some late-stage start-ups. Zynga, for instance, an Institutional Venture Partners portfolio company, has tumbled more than 44 percent since its debut last year. And plenty of experts question whether another start-up it has backed, LivingSocial, is worth such a high valuation after Groupon, its far bigger rival, has fallen about 50 percent since its I.P.O.

Mr. Miller acknowledges that some valuations may pull back, but he says he invests for the long term.

“I’ve watched the technology market over a 30-year period,” he said. “There’s more interesting, high quality companies today than there has ever been and by a very wide margin.”

He added, “In every market, most deals don’t make sense, and that’s true now, but that’s always been true.”

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Article from GigaOm.

Microsoft announced Monday that the company has officially acquired social software startup Yammer for $1.2 billion in cash. The purchase was widely reported more than a week ago, but Microsoft confirmed the deal Monday in a press release.

As we noted earlier this month, the purchase could give Microsoft a social dimension to its popular corporate software products. Yammer creates a Facebook-like experience for business clients.

Yammer will join the Microsoft Office division after the acquisition, but CEO David Sacks will continue to lead the group, Microsoft said in the release. Kurt DelBene, president of the Microsoft Office group, offered some thoughts on how Yammer might fit into the Microsoft world in a blog post that accompanied the formal press release:

The combination of Yammer, SharePoint and Office 365 will provide the most comprehensive and flexible solutions for enterprise social networking. Over time, I see opportunity for exciting new scenarios by adding Yammer’s stand-alone service alongside and integrated into our collaboration offerings with SharePoint, Office 365, Dynamics and Skype. I picture people being able to use Yammer to manage and expand their professional relationships, share and collaborate on Office documents, stay informed about content updates, and to seamlessly move from status updates and feeds into voice and video conversations.

Yammer most recently raised $85 million in a February funding round, which brought it to $142 million in total funding. The company currently has more than 5 million corporate users, including customers at 85 percent of Fortune 500 companies, Microsoft and Yammer announced along with the acquisition today.

“We think that Microsoft is a great partner for us,” Sacks said in a conference call Monday with DelBene and Microsoft CEO Steve Ballmer. “I think it’s really the best possible partner in terms of its reach and resources, and its ability to help us scale.”

Ballmer said Yammer’s emphasis on cloud computing fits perfectly with Microsoft’s expansion into that area, and Yammer’s popularity with corporate clients makes it a natural partner:

“What we love about Yammer is that it was built on the notion that things can grow virally,” Ballmer said.

They noted that Yammer will remain in the San Francisco area even after the acquisition with Microsoft, which is headquartered near Seattle.

“When most people thought social networking was for kids, we had a vision for how it could change the way we work,” Sacks wrote in a blog post Monday. “Four years ago, we started paddling out to catch the wave that we’re riding today.”

Read more here.

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