Archive for June, 2011

Article from SFGate.

“Facebook is set to overtake Yahoo this year to seize the biggest share of the U.S. online display advertising market, a study found.

Facebook will reap $2.19 billion in display ads sales this year, for a 17.7 percent share of the U.S. market, topping Yahoo’s 13.1 percent, according to a report today from Internet research firm EMarketer Inc.

Facebook, with more than half a billion users, has lured advertisers such as Coca-Cola Co., JPMorgan Chase & Co. and Adidas AG. The social network’s display ad revenue more than doubled in each of the past two years, and will surge 81 percent in 2011, EMarketer estimated.”

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Article from NYTimes.

“What if you threw a $41 million party and nobody came? A start-up company called Color knows how that feels.

In March, Color unveiled its photo-sharing cellphone application — and revealed that it had raised $41 million from investors before the app had a single user. Despite the company’s riches, the app landed with a thud, attracting few users and many complaints from those who did try it.

“It would be pointless even if I managed to understand how it works,” one reviewer wrote in the Apple App Store.

Since then, Color has become a warning sign for investors, entrepreneurs and analysts who fear there is a bubble in start-up investing. They say it shows that venture capitalists, desperate to invest in the next Facebook or LinkedIn, are blindly throwing money at start-ups that have not shown they can build something useful, much less a business that can provide decent returns on investment.

Color, which says it is overhauling its app, is just one of the start-ups that have set tongues wagging about bubbly excess in Silicon Valley. The Melt plans to sell grilled-cheese sandwiches and soup that people can order from their mobile phones. It raised about $15 million from Sequoia Capital, which also invested in Color.

Airbnb, which helps people rent rooms in their homes, is raising venture capital that would value it at a billion dollars. Scoopon, a kind of Groupon for Australians, raised $80 million; Juice in the City, a Groupon for mothers, raised $6 million; and Scvngr, which started a Groupon for gamers, raised $15 million. These could, of course, turn out to be successful businesses. The worry, investors say, is the prices.

They say they have paid two to three times more for their stakes in such start-ups over the past year. According to the National Venture Capital Association, venture capitalists invested $5.9 billion in the first three months of the year, up 14 percent from the period a year earlier, but they invested in 51 fewer companies, indicating they were funneling more money into fewer start-ups.

“The big success stories — Facebook, Zynga and Twitter — are leading to investing in ideas on a napkin, because no one wants to miss out on the next big thing,” said Eric Lefkofsky, a founder of Groupon who also runs Lightbank, a Chicago-based venture fund with a $100 million coffer.

A decade ago, in the first surge of Internet investing, it was not unusual for tech start-ups to raise tens of millions of dollars before they had revenue, a product or users. But venture capitalists became more cautious after the bubble burst and the 2008 recession paralyzed Silicon Valley.

Meanwhile, it now costs less than ever to build a Web site or mobile app. So this time around the general philosophy has been to start small.

“By starting out lean, you have the chance to know if you’re on to something,” said Mark Suster, a managing director at GRP Partners. “If you start fat and the product concept doesn’t work, inherently the company will lose a lot of money.”

Two of Color’s photo-sharing competitors, Instagram and PicPlz, exemplify the lean start-up ethos. They started with $500,000 and $350,000, respectively, and teams of just a few people. As they have introduced successful products and attracted users, they have slowly raised more money and hired engineers.

Color, meanwhile, spent $350,000 to buy the Web address color.com, and an additional $75,000 to buy colour.com. It rents a cavernous office in downtown Palo Alto, where 38 employees work in a space with room for 160, amid beanbag chairs, tents for napping and a hand-built half-pipe skateboard ramp.

Bill Nguyen, Color’s always-smiling founder, has hired a team of expensive engineers, like D. J. Patil, a former chief scientist at LinkedIn.

“If I knew a better way of doing it, I would, but that’s what my cost structure is,” Mr. Nguyen said in an interview last week.

Michael Krupka, a managing director at Bain Capital Ventures and one of Color’s investors, said Color needed to raise a lot of money because it planned to do much more than photo-sharing.”

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Article from NYTimes.

“For Reid Hoffman, the chairman of LinkedIn, it took less than 30 minutes to earn himself an extra $200 million.

With the hours ticking down to his company’s stock market debut, Mr. Hoffman dialed into a conference call from San Francisco’s Ritz-Carlton hotel as his chief executive, Jeff Weiner, and a team of bankers raced up from Silicon Valley in a black S.U.V. to meet with potential investors.

Demand for shares was intense, and they decided to raise the offering price by $10, to around $45.

When trading began on May 19, LinkedIn did not open at $45. Or $55. Or $65. Instead, the first shares were snapped up for $83 each and soon soared past $100, showering a string of players with riches and signaling a gold rush that has not been seen since the giddy days of the tech frenzy a decade ago.

Now there are signs that a new technology bubble is inflating, this time centered on the narrow niche of social networking. Other tech offerings, like that of the Internet radio service Pandora last week, have struggled, and analysts have warned that overly optimistic investors could once again suffer huge losses.

That enthusiasm was on full display in the blockbuster debut of LinkedIn, which provides a window into how a small group — bankers and lawyers, employees who get in on the ground floor, early investors — is taking a hefty cut at each twist in the road from Silicon Valley start-up to Wall Street success story.

“The LinkedIn I.P.O. will be used very powerfully over the next year as these companies go public and bankers deal with Silicon Valley,” said Peter Thiel, the president of Clarium Capital in San Francisco and an early investor in PayPal, LinkedIn and Facebook. “It sets things up for the other big deals.”

The sharp run-up after the initial public offering set off a fierce debate among observers about whether the bankers had mispriced it and left billions on the table for their clients to pocket. But the pent-up demand for what was perceived as a hot technology stock set the stage for easy money to be made almost regardless of the offering price.

Naturally, Wall Street is enjoying a windfall. Technology I.P.O.’s have generated nearly $330 million this year in fees for the biggest banks and brokerages, nearly 10 times the haul for the same period last year, and the most since 2000.

Besides the $28.4 million in fees for LinkedIn’s underwriting team, which was led by Morgan Stanley, Bank of America and JPMorgan Chase, there were also a few slices reserved for specialists like lawyers and accountants. Wilson Sonsini, the most powerful law firm in Silicon Valley, collected $1.5 million, while the accounting firm Deloitte & Touche earned $1.35 million.

Mr. Hoffman founded LinkedIn in March 2003 after making a fortune as an executive at PayPal, the online payments service, but even as LinkedIn grew and other employees and private backers got stakes, Mr. Hoffman retained 21.2 percent, giving him more than 19 million shares when it went public. He has kept nearly of all them, so for now his $858 million fortune — it was $667 million before the last-minute price hike — remains mostly on paper.

Mr. Weiner arrived more recently, in late 2008, after working at Yahoo and as an adviser to venture capital firms, but his welcome package included the right to buy 3.5 million shares at just $2.32. And they are not the only big winners who secured shares at levels far below the I.P.O. price.

For example, when LinkedIn raised cash in mid-2008, venture capital firms including Bessemer Venture Partners and Sequoia Capital, scooped up 6.6 million shares at $11.47 each in return for early financing. They have held on to the stock, but Goldman Sachs, which got 871,840 shares at $11.47, sold all of it for a one-day gain of nearly $30 million.

Scores of fortunate individuals also managed to profit.

Stephen Beitzel, a software engineer, worked at LinkedIn from its founding until March 2004, but kept his stock when he left. His shares are now worth $17 million, and he sold $1.3 million worth in the offering.”

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From Fenwick and West.

Background —We analyzed the terms of venture financings for 122 companies headquartered in Silicon Valley that reported raising money in the first quarter of 2011.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 1Q11 67% to 16%, with 17% of rounds flat.  This is very similar to 4Q10, when up rounds exceeded down rounds 67% to 21%, with 12% flat.  This was the seventh quarter in a row in which up rounds exceeded down rounds.  It was also the largest amount by which up rounds exceeded down rounds in 3.5 years.
  • The Fenwick & West Venture Capital Barometer showed an average price increase of 52% in 1Q11, less than the 61% increase registered in 4Q10, but still a very healthy increase.  This was also the seventh quarter in a row in which the Barometer was positive.
  • Interpretive Comment regarding the Barometer.  When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money this quarter compared to their prior round of financing, which was in general 12‑18 months prior.  Given that venture capitalists (and their investors) generally look for at least a 20% IRR to justify the risk that they are taking, and that by definition we are not taking into account those companies that were unable to raise a new financing (and that likely resulted in a loss to investors), a Barometer increase in the 30-40% range should be considered normal in a healthy venture environment.

The results by industry are set forth below.  In general, the software and internet/digital media industries had the best valuation-related results in 1Q11, followed by the hardware industry, while the life science industry continued to lag.

We also note anecdotally that we are seeing an increasing number of early stage companies being funded in a more substantive way by angels, and accordingly delaying their first venture capital round, especially in the internet/digital media space.  For a copy of our initial angel/seed financing survey, please go here.

There was a significant increase in commitments to venture capital funds in 1Q11 – a welcome result given that venture capitalists had invested $68.3 billion, while raising only $55 billion, over the past three years.  That said, the funds raised were concentrated in a few large funds such as Bessemer, Sequoia and JP Morgan, which together accounted for over 55% of the total amount raised.

Liquidity results for venture-backed companies in 1Q11 were solid but not extraordinary.  There are however signals that the IPO market will continue to improve.

Detailed results from third-party publications are as follows:

  • Venture Capital Investment.  Venture capitalists invested $6.4 billion in 661 deals in the U.S. in 1Q11, compared to $7.6 billion in 735 deals reported in January 2011 for 4Q10, according to Dow Jones VentureSource (“VentureSource”).  Although this represents a 16% decline in dollars and a 10% decline in deal volume from 4Q10, the 1Q11 results were generally flat with the average of $6.6 billion raised per quarter in 2010.

The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported venture investment of $5.9 billion in 736 deals in 1Q11, a 5% increase in dollars and an 11% decrease in deal volume from 4Q10. Unlike results in recent quarters, the cleantech and life science industries saw the largest percentage increases in investment compared to 4Q10, and the internet sector lagged.

  • Merger and Acquisition Activity.  Acquisitions of U.S. venture-backed companies in 1Q11 totaled $9.8 billion in 104 transactions, compared to $10.5 billion in 109 transactions in 4Q10, according to VentureSource.  Although this represents a 7% decrease in dollars and a 5% decrease in deal volume, it is approximately 10% above the average of $9 billion of acquisitions per quarter in 2010.
  • The MoneyTree Report reported an increase in M&A transactions from 97 in 4Q10 to 109 in 1Q11, and a slight decrease in average deal size.
  • Initial Public Offerings.  VentureSource reported that 11 venture backed companies went public in 1Q11, raising $768 million, a decrease from 14 IPOs raising $1.1 billion in 4Q10, but flat with the quarterly average of 11.5 IPOs in 2010.

Close to half of the 1Q11 IPOs were healthcare related. The MoneyTree Report reported that 14 venture-backed companies went public in 1Q11, raising $1.4 billion.  The quarter marked the strongest Q1 for IPOs since 2007, and unlike 4Q10, was dominated by U.S.-based companies who comprised 10 of the 14 deals.

With 45 companies in registration at the end of 1Q11, there is reason to believe that 2Q11 will show improvement in IPO activity.

  • Venture Capital Fundraising.  VentureSource reported that U.S. funds raised $7.7 billion in 1Q11, in 25 funds.  This was the highest amount raised in a first quarter since 2001, but the lowest number of individual funds raising money in a first quarter since 2003.

Similarly, VentureSource reported that U.S. venture funds raised $7.1 billion in 1Q11, in 36 funds.

  • Sentiment.  The Silicon Valley Venture Capital Confidence Index produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.91 on a 5 point scale, an increase from the prior quarter’s reading of 3.75 and the highest reading since 3Q07.
  • Nasdaq.  Nasdaq increased 5% in 1Q11, but has decreased by 4% in 2Q11 through May 27, 2011.

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Article from GigaOm.

“The tech industry’s initial public offering waveis showing no signs of slowing.

CafePress filed its S-1 with the Securities and Exchange Commission on Friday. The San Mateo, Calif.-based company is looking to raise up to $80 million in an IPO to be underwritten by J.P. Morgan, Cowen and Company, and Jefferies, according to the filing.

CafePress was founded in 1999 and sells user-customized products such as clothing, accessories, posters, stickers, and housewares through its flagship website CafePress.com. The company also owns a portfolio of other sites, such as CanvasOnDemand, which turns photographs into canvas artwork, and Imagekind.com, which sells artwork from independent artists.

CafePress is profitable and apparently growing. According to the filing, the company made $2.7 million in net income on $128 million in revenues in 2010. In the first three months of 2011, CafePress made $32 million in revenues, about 45 percent more than the $22 million it made in the first quarter of 2010. Last year, the company posted adjusted earnings before interest, taxes, debt and amortization (EBITDA) of $14.5 million.

But while the company’s financials are certainly solid, one could argue they’re not exactly spectacular. CafePress’ average order size has hovered around $47 for the past three years. The company’s top-line annual revenues have see-sawed recently, from $120 million in 2008, down to $103 million in 2009, and back up to $128 million in 2010. In the filing, CafePress blamed the 2009 dip on “macro-economic conditions in our primary markets that reduced discretionary spending by our customers coupled with the absence of election year sales.”

CafePress is just the latest in a recent series of Internet companies making moves toward the public markets. In the past month, LinkedIn, Yandex and Fusion-io have gone public, Groupon filed an S-1, and Kayak and Pandora have issued optimistic S-1 updates. Whether the activity represents another tech bubble or just a healthy and growing economy, it’s certainly shaping up to be a very busy summer for Silicon Valley.”

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