Archive for December, 2009

We also say “thank you” to our clients, advisors, business partners and all the people the team has been involved with. Gerbsman Partners’ goals have been and always will be, to “Earn the Trust and Confidence” of our clients, and to maintain the highest standards of “Ethics and Integrity”.

As we enter this New Year, we are living in challenging times. The economy, jobs, financial concerns, the security of our nation and the concern regarding the health care system support for our families. However, we look to the New Year with “Hope for the Future”.

Please accept our appreciation for your past support, confidence and continued trust. May 2010 be a successful, stable and profitable year for you and more importantly, provide a gateway and foundation to a bright and prosperous future.

May you and your family be healthy, stay safe and enjoy a hopeful New Year.

Best Regards,

Steven R. Gerbsman
Principal, Gerbsman Partners

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Here is a good article written by Chris O’Brien, San Jose Mercury News.

“Last week, I reviewed my predictions for 2009. And by grading myself generously, I got 3.5 out of 9. So now it’s on to 2010, when hopefully my foresight, and the valley’s economy, will improve.

It’s tempting to pick some easy targets to inflate my score. But instead, I’m going to make some daring picks, again, because when it comes to punditry, it’s always better to wrong than boring. Or something like that.

So, onward:

1. Palm will be sold.

Sad to say, but it’s inevitable. This will be the year this valley icon ceases to be an independent company. The launch of the Palm Pre and Pixi were valiant efforts. They created an exciting mobile platform and should be valuable to someone else. But sales of the Pre are already stalling. And so is cash flow.

There are plenty of potential buyers out there, from other mobile companies like Motorola and Nokia to other tech biggies like Hewlett-Packard and Dell, which need to get deeper into the mobile space.

2. There will be at least four valley-based green-tech IPOs.

Everyone is predicting a big comeback for the IPO this year. I don’t think that will happen for Silicon Valley. But I think green-tech will be the exception. I had started writing this before Solyndra filed for its IPO. So I’ve only got three to go! Who are the other candidates? Tesla and Silver Springs Networks seem to be increasingly good bets. The fourth will be a dark horse.

3. Intel settles


The deal with AMD was the first step to putting Intel’s long-running legal feuds in the past. Yes, the legal thicket seem to be getting worse with the filing of the Federal Trade Commission’s case against Intel. But the economy is warming back up, and so are computer and chip sales. Intel will make the smart move by settling these cases so it can focus on reaping the benefits of an improving economy.

4. The mythical beasts will arrive: the Apple Tablet and the Google Phone.

My colleague, Troy Wolverton, says nay, the Google phone will remain a mirage. Indeed, the existence of these two products has been long rumored and much denied. But the increasing chatter about both leads me to believe we’ll see them in 2010.

The intriguing question is: How much will they cost? Apple has recently overcharged for new products like the iPhone, and then brought the price down. I wouldn’t be surprised if the same happens with the tablet.

For Google, there’s a radical notion making its way around the valley: What if Google gave away its phone for free, hoping to make money off mobile advertising? Now, that would be truly disruptive. It has the billions in the bank to underwrite such a plan for several years. But does it have the guts?

5. Facebook and LinkedIn won’t go public.

These social networking companies are in no hurry. Facebook is still tweaking its revenue model, as is LinkedIn. When their revenues pick up steam, they’ll eventually bump into some federal rules that require certain financial disclosures, just as Google did early last decade. But they’ve got at least another year before they have to worry about that. In the meantime, their founders are in no rush to give up the control they would lose by going public.

Indeed, I think that sentiment is widespread among many tech startups. Why rush into an IPO? And this is part of the reason why I don’t expect tech IPOs to come roaring back this year. Even Zynga, the social gaming company and long-rumored IPO candidate, recently took a big investment from a Russian firm so it could reduce pressures to go public. Don’t expect to party like it’s 1999.

6. Jobs will post a slight gain.

As a guide, let’s look at the last two recessions in Silicon Valley. The one in the early 1990s was relatively shallow. The number of jobs peaked in August 1990 and then declined for 18 months, before beginning a rebound that lasted the rest of the decade.

Following the dot-com bust, we hit a job peak in December 2000, and then hit bottom 37 months later, in January 2004.

This current downturn falls in between at the moment. Jobs in Silicon Valley peaked in December 2007, so we’ve been headed down for about 23 months. Though that’s complicated, because in recent months, the job numbers have bounced up and down. Still, this downturn feels less severe in the valley than the dot-com bust. So I expect that 2010 is the year we see a net gain in jobs for Santa Clara and San Mateo counties.

7. Twitter.

Can I do a predictions list and not say something about Twitter? Probably not, so here goes. Twitter’s traffic will decline this year. We’ve seen it stall already in the U.S. and it’s begun to flatten around the globe. I say this, though I remain completely obsessed with Twitter and consider it indispensable at this point.

Unfortunately for Twitter, I never actually visit its site. Rather, I use one of the many third-party applications to write, view and filter tweets. That’s good for me. Bad for Twitter, because it will make it harder for them to make money from me. There’s mumblings recently that not only is Twitter getting revenue, but it may be nearly profitable. But the upside may be limited if Twitter’s traffic is flattening.

8. Google gets hit with an antitrust suit.

The company narrowly skirted a federal anti-trust action in 2008 when it scuttled a search deal with Yahoo. But even though it’s doing its best to cozy up to the Obama administration, and trying to play up it’s “do no evil” motto, there’s some indication that federal antitrust regulators have Google in their cross hairs. Maybe it will be over the controversial Google Book settlement. Maybe it will be over its acquisition of mobile advertising leader AdMob. Or with Google going on an acquisition binge, it could be over some other deal on the horizon. But expect Google and the feds to lock horns in 2010.

9. The number of public companies in Silicon Valley continues to fall.

It’s been falling since 2000. And I see no reason that it will stop this year. That means that acquisitions will rise and consolidation will continue. And while IPOs will reappear, they won’t be enough to make up for the number of public companies that are acquired or go bankrupt.

10. And finally, I’ll end by going way out on a limb: Cisco Systems will buy Dell.

Think about it. Hewlett Packard has been gearing up in recent years to invade Cisco’s turf by moving into the networking space. This is Cisco’s greatest challenge in almost a decade. Cisco will need to respond by buying a PC company both to achieve greater scale and to match the range of products it can offer customers. Cisco has about five times as much market value as Dell, which has been struggling for years to regain its leadership in the PC business, which it lost to HP.

Put Cisco’s line of networking equipment and annual revenue of $36 billion with Dell’s PCs and $61 billion in annual revenue, and you still have a company a bit smaller than HP and its $118 million in annual revenue. But it gets them close.

Cisco’s Chambers has also recently ruled out launching or buying a mobile computing device. But, never say never in the tech world. This an area where both HP, Cisco and Dell need to be in the coming decade.”

This article was posted originally in American Chronicle.

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Here is a article from Greentech Media.

“2009 had plenty of greentech hits: technical breakthroughs, lots of VC and government funding, some interesting acquisitions and a few successful IPOs.  But there were also a number of misses. Here’s a list:

Spain Pays for Its Poorly Executed Solar Subsidy: The mistakes happened in 2008 but the echoes were felt in 2009. Spain went from being the largest PV market in 2008 to almost zero in 2009.

Spain had a lucrative feed-in tariff program that required utilities to buy solar electricity at high rates set by the government. After seeing an explosive growth of solar projects that far surpassed its estimates, the government reduced the solar electricity rates for solar power plants installed after September 2008. Additionally,  government investigation uncovered widespread fraud in the administration and roll-out of the FIT program.

A rush to install solar energy systems led to reports of fraud by developers claiming they had finished their projects when they only installed some of the panels or, in some cases, put in fake solar panels to buy time.

Spain had been a great market for Chinese panel makers, who were able to sell their goods at premium prices in 2008.  Not so in 2009.

Optisolar Lands Hard: Optisolar had raised more than $300 million based on a vision of the economies of scale of building a gigawatt-sized factory.  The vision was that the cost of solar could be radically dropped by building “Solar City” factory complexes capable of churning out 2.1 gigawatts to 3.6 gigawatts of solar cells a year. These factories would cost $500 million to $600 million and be composed of factories-within-factories focused on different tasks: an onsite glass making outfit capable of cranking out 30 million square meters of glass a year; a solar cell unit with 100 identical manufacturing lines; and a full-fledged packaging facility.

In this ideal world modules would cost 0.60 cents to 0.52 cents per watt and fully installed solar power would cost $1.00 to 0.88 cents a watt.

As per Michael Kanellos’ article: The ideas from the Keshner NREL paper largely formed the company’s business plan.

After building a factory in Hayward capable of producing 30 megawatts to 50 megawatts, it landed $20 million in tax breaks in 2007 to build a factory at McClellan Air Force Base in Sacramento County. By 2011, the million square foot facility would employ 1,000 and put out over 600 megawatts worth of solar panels a year. Although the original paper discussed ways of making cheap solar panels out of CIGS, cadmium telluride or amorphous silicon, OptiSolar focused on silicon because, among other reasons, of its far wider availability.

Plans were also being laid to build an even larger factory after McClellan that would contain the in-house sub-factory for glass making as discussed in 2004.”

Read the full article here.

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Here is a good article from Financial Times.

In January 2000, as Steve Case unveiled the all-stock $164bn merger between AOL and Time Warner, the AOL chief executive declared it an historic moment that would transform the competitive landscape of the media business and the way people used the internet forever.

A decade later, the “deal of the century” is not only being unwound but is widely castigated as an example of the chief executive hubris that characterised a period when the worldwide value of deals exceeded $3,500bn and bankers briefly gained celebrity status but ended with their reputation in tatters.

Daniel Stillit , mergers and acquisitions analyst at UBSsays: “The decade opened at the high point of a merger wave. It’s ending at the low point”.

The new millennium began just as the US stock market was wrapping up its fifth consecutive year of double-digit gains and the rapid growth of the technology industry had started to ebb.

The urge to merge was driven by globalisation, deregulation, the need to reduce costs and the desire to gain critical mass – not to mention chief executives’ penchant for empire-building. Bigger was not only better, boards felt, but was necessary if companies were to compete and survive on the global stage.”

Read the full article here.

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Here is an article from Seeking Alpha.

“Having watched at least three of its rivals get acquired in recent years, Meru Networks is now aiming for the other exit: a public offering. The WLAN equipment maker filed its IPO paperwork on Friday for an $86m offering to be led by Bank of America Merrill Lynch, with co-managers Robert W. Baird & Co, Cowen & Co, JMP Securities and ThinkEquity. Meru plans to trade on the NYSE under the ticker MERU. (Incidentally, the company was one we put on our list of IPO candidates for 2010 in our recently published 2010 M&A Outlook – Security and networks.)

If Meru does manage to make it onto the public market, it will reverse the flow of deals in the sector. In recent years, a large publicly traded rival (Symbol Technologies (SBL)) and two other competing startups (Colubris Networks and Trapeze Networks) have all been acquired. Those trade sales have valued the WLAN equipment vendors at a range of 2.1-3x trailing 12-month (TTM) sales.

We noted a year and a half ago that all of the transactions probably meant that Meru would have trouble finding a buyer, except among public market investors. Not that Meru hasn’t kicked around a possible sale in the past. Rumors have tied it to both Juniper Networks (JNPR) and Foundry. The Foundry relationship seems to have died off since Foundry sold to Brocade Communications (BRCD). According to Meru’s S-1, Foundry/Brocade accounted for a full 35% of its revenue in 2007, but that level has fallen to less than 10% now.

With Meru aiming to hit the market in 2010, we suspect that it will be hoping to have a stronger offering than publicly traded rival Aruba Networks (ARUN), which initially priced its shares in its March 2007 offering at $11 each. Although Aruba traded above the offer price for almost a year, it broke issue in February 2008 and has not traded above the initial price since then. That said, the stock is nearing that level, changing hands at about $10.65 in midday trading Tuesday. It has more than quadrupled in 2009. The dramatic rebound in Aruba shares has pushed the firm’s valuation to 4.6x TTM sales. Applying that same multiple to Meru’s $67m TTM sales gives the company a valuation of about $310m.”

Read the full article here.

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Here is an article from earth2tech.

“Will 2010 be the year for greentech IPOs? When lithium ion battery maker A123Systems successfully debuted on the Nasdaq back in September, there was much speculation that the move would ready the market for a following of greentech IPOs. The notion seemed over-enthusiastic then, but three months later solar power startup Solyndra has registered for an IPO, which will likely happen in 2010, and we’ve heard rumors that Tesla is plugging away at its S-1 (Reuters also reported an upcoming Tesla IPO).

Then there’s Silver Spring Networks, which just raised $100 million and looks like it’s getting to that stage where it’s too big to be acquired but will need more financing to compete in the smart grid infrastructure market. Silver Spring isn’t commenting on any IPO rumors, but it is clearly one of the best candidates in the greentech world. If these three — Solyndra, Silver Spring and Tesla — do go public in 2010, it’ll make investor Steve Westly look like a pretty solid market forecaster — he predicted in May that these three would go public by early 2010 and he’s already good for one out of the three.

Out of any of the venture capital investment sectors, greentech has the most bullish outlook in 2010 from a VC standpoint. According the National Venture Capital Association, more than half of a group of venture capitalists surveyed predicted that clean technology would see higher investment levels in 2010. According to a report by PricewaterhouseCoopers, venture capital investing in cleantech already rebounded sharply in the third quarter of 2009 to $898 million in 57 deals, up from $475 million in 49 deals in the second quarter of 2009.

The IPO market in general is also looking better to VCs. VCs surveyed by the NVCA are predicting “a mild improvement” in the number of venture-backed IPOs overall in 2010, with 74 percent of respondents saying they think there will be more than 20 IPOs in 2010. However, according to this Reuters article, greentech companies’ offerings represented only a small portion of the overall U.S. IPO market in 2009, ranking fifth by dollars raised in 2009 in the IPO market, and accountng for 8.5 percent of issuance by companies going public in 2009.”

Read the full article here.

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Here is some interresting thoughts from MondayNote.

“Limited Partners, LP, institutions or individuals put money into the fund. We, the General Partners, GP, make and manage the investments and we split the profits with the LP as the sole compensation for our services.

Over time, the split has varied with the industry’s prosperity and the fund’s reputation, it went as high as 35% of the profits for the GP but, as this WSJ story belatedly explains, is now back to about 20%. In our vernacular, that number is called the Carried Interest or, for short, Carry.
A second number, the Management Fee, needs a bit more elaboration.
As the Carry did, it varied and went up to 2.5% of the fund’s capital; it is now pegged at a fairly standard 2% per year. The Management Fee provides the money needed to run the firm’s operations, pay the rent, associates’ salaries, travel expenses and the like. It also provides fodder for misunderstandings.

The Management Fee is a loan, not a stipend. For the GP to get its 20% of the fund’s profits, both the capital, the money invested by the LP and the Management Fee must be repaid first.
When funds become very large, say a billion dollars or more, the Management Fee gets correspondingly large and can encourage spending habits, thus generating criticism the GP is more interested in the fee than in making money for its investors.
But, you’ll object, the advance must be repaid before profit-sharing kicks in. Yes…, and what happens if the fund doesn’t make money? Are the LP losing money while the VC enjoys a good time, living off the Management Fee? The answer depends upon the way the fund agreement is written. If it contains a Clawback clause, the GP is obligated to return the “unearned” fee. As you can imagine, this leads to interesting exchanges during the fund’s formation and, much later, if it turns out it loses money.

To summarize: profit sharing (Carry) of 20%, a yearly advance of 2% of committed capital (Management Fee), to be repaid before profit sharing kicks in.

Let’s move to the heart of the matter: making investments. Here, let’s focus on a basic, oversimplified but usable formula:

We like to invest between $3M and $15M to end up with 20% of a company worth $250M when it “exits”.
“Exit” can mean going public through an IPO (Initial Public Offering). IPOs are rare these days, they’ll come back when the economy does. In the meantime, exits are achieved through M&A (Mergers and Acquisitions) deals, that is the company is sold to a larger one such as Cisco, Google and countless others who thus get access to valuable technology and/or people. In may respects, we, the VC, have become an engine of “externalized” R&D, of technical innovation for larger companies. We make and manage speculative investments in riskier technologies on the big companies’ behalf. This is a meaty topic all unto itself, maybe for a future Monday Note.

Going back to the numbers, they need three qualifications. First, they’re only valid for a mid-size fund, in the $200 to $400M range. Larger funds, billion of dollars, can’t make “small” $5M investments, they deal with bigger projects requiring larger amounts of capital such as infrastructure investments, semiconductors or biotech.
Second, the $3M to $15M bracket covers the total amount poured in over the life of the investment, that is 2, 3 or more rounds, over 3, 5 or more years.
(Add to this we never invest alone, for financial reasons, more capitak, and psychological, we don’t want to “fall in love”, a small (2 to 5) group of investors, called a syndicate, provides more viewpoints, more objectivity.)

Lastly, the $3M, $5M, 20%, $250M set of numbers is a neat simplification, reality gets much more complicated, from outright failures, to so-so, middling results, to the occasional “out-of-the-park” success. It’s not called venture capital (capital risque in French) for nothing.
If we invest “only” $3M and get 20% of $250M, that is $50M, this is more than 15 times our investment. If we risk the “full” $15M, we get about 3 times our money. Either way, it looks good, even if you keep in mind a few hard failures.
But you need to introduce time: how many years did the adventure take? 3 times your money over 7 years yields “only” 17% in compound interest, but 44% if the exits happens after 3 years. (Readers interested in geekier Excel simulations of cash-flows can go back to the May 17th, 2009 and May 24th, 2009 Monday Notes.)

The permutations, the possibilities for success and failure are, pardon the bromide, endless; they make our profession so fulfilling as it engages so many dimensions of human endeavor, from technology to psychology, from the fleeting desires of customers to the hard realities of time-expiring cash.”

Read the full article here.

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