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The new tech bubble

Posted in Board Of Intellectual Capital, tagged , , , on June 2, 2011| Leave a Comment »

Article from The Economist.

Irrational exuberance has returned to the internet world. Investors should beware.

SOME time after the dotcom boom turned into a spectacular bust in 2000, bumper stickers began appearing in Silicon Valley imploring: “Please God, just one more bubble.” That wish has now been granted. Compared with the rest of America, Silicon Valley feels like a boomtown. Corporate chefs are in demand again, office rents are soaring and the pay being offered to talented folk in fashionable fields like data science is reaching Hollywood levels. And no wonder, given the prices now being put on web companies.

Facebook and Twitter are not listed, but secondary-market trades value them at some $76 billion (more than Boeing or Ford) and $7.7 billion respectively. This week LinkedIn, a social network for professionals, said it hopes to be valued at up to $3.3 billion in an initial public offering (IPO). The next day Microsoft announced its purchase of Skype, an internet calling and video service, for a frothy-looking $8.5 billion—ten times its sales last year and 400 times its operating income. And those are all big-brand companies with customers around the world. Prices look even more excessive for fledgling firms in the private market (Color, a photo-sharing social network, was recently said to be worth $100m, even though it has an untested service) or for anything involving China. There has been a stampede for shares in Renren, hailed as “China’s Facebook”, and other Chinese web giants listed on American exchanges.

Same again, only different

So is history indeed about to repeat itself? Those who think not point out that the tech landscape has changed dramatically since the late 1990s. Back then few people were plugged into the internet; today there are 2 billion netizens, many of them in huge new wired markets such as China. A dozen years ago ultra-fast broadband connections were rare; today they are ubiquitous. And last time many start-ups (remember Webvan and Pets.com) had massive ambitions but puny revenues; today web stars such as Groupon, which offers its users online coupons, and Zynga, a social-gaming company, have phenomenal sales and already make respectable profits.

The this-time-it’s-different brigade also points out that the 1990s bubble expanded only after numerous web firms were floated on stockmarkets and naive investors pumped up the price of their shares to insane levels. This time, there have been relatively few big internet IPOs (though that is likely to change). And there is no sign of the widespread mania in the high-tech world that occurred last time around: the NASDAQ stockmarket index, a bellwether for the tech industry, has been rising but is still far below its peak of March 2000.

In one respect the optimists are right. This time is indeed different, though not because the boom-and-bust cycle has miraculously disappeared. It is different because the tech bubble-in-the-making is forming largely out of sight in private markets and has a global dimension that its predecessor lacked.

The bubble is being pumped partly by wealthy “angel” investors, some of whom made their fortunes in the late-1990s IPO boom. Their financial firepower has increased and they are battling one another for stakes in web start-ups (see article). In some cases angels are skimping on due diligence to win deals. When it comes to investing in more established companies like Facebook and the bigger web firms, traditional venture capitalists now face competition from private-equity companies and bank-led funds hunting for profits in a bleak investment environment. Gucci-shod leveraged-buy-out kings may appear to be more sophisticated than the waitresses buying dotcom shares a decade ago—but many of the newcomers are no more knowledgeable about technology.

This boom also has wider horizons than the previous one. It was arguably started by Russian investors. Skype was born in Estonia. Finland’s Rovio, which makes the popular Angry Birds smartphone game, recently raised $42m. And then there’s China. Renren and Youku, “China’s YouTube”, supposedly offer investors a chance to profit both from the country’s extraordinary growth and from the broader impact of the internet on commerce and society. Chinese web start-ups often command $15m-20m valuations in early financing rounds, far more than their peers in America.

These differences will have important consequences. The first is that the bubble forming in the private market could be pretty big by the time it floats into the public one. Facebook may turn out to be the next Google, and LinkedIn has a fairly solid revenue plan. But they will be followed by less robust outfits—the Facebook and LinkedIn wannabes—with prices that have been dangerously inflated by the angels’ antics.

The froth in China’s web industry could also lead to unrealistic valuations elsewhere. And it may be China that causes the web bubble eventually to burst. Few of those rushing to buy Chinese shares have thought through the political risks these companies face because of the sensitivity of their content. A clampdown on a prominent web firm could startle investors and prompt a broader sell-off, as could a financial scandal.

And after the angels have fallen?

With luck the latest web bubble will do less damage than its predecessor. In the 1990s internet euphoria caused a dramatic inflation in the price of telecoms firms, which were creating the infrastructure for the web. When internet firms’ share prices plummeted, telecoms investors suffered too. So far, there has been no sign of such a spillover effect this time around. But the globalisation of the internet industry means that many more people could be tempted to dabble in web stocks in the current boom, adding to the pain of the bust.

When will that be? This paper warned about both the last internet bubble and the American property bubble long before they burst. Irrational exuberance rarely gives way to rational scepticism quickly. So some bets on start-ups now will pay off. But investors should take a great deal of care when it comes to picking firms to back: they cannot just rely on somebody else paying even more later. And they might want to put another bumper sticker on their cars: “Thanks, God. Now give me the wisdom to sell before it’s too late.”

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Uncovering and Leveraging Your Hidden Intangible Assets

Posted in Board Of Intellectual Capital, Gerbsman Partners, Inetellectual Property, Intellectual capital, Technology, Uncategorized, tagged , on May 31, 2011| Leave a Comment »

By:  Andrew J. Sherman, Jones Day & Member of Gerbsman Partners Board of Intellectual Capital

CEO’s and business leaders of growing companies inside and outside the Beltway are guilty of committing a very serious strategic sin:  the failure to properly protect, mine and harvest the company’s intellectual property.

From 1997 to 2001, billions of dollars went into the venture capital and private equity markets and the primary use of these proceeds by entrepreneurs was the creation of intellectual property and other intangible assets.  In many cases, five years later, however, emerging growth and middle market companies have failed to leverage this intellectual capital into new revenue streams, profit centers and market opportunities because of a singular focus on the company’s core business or a lack of strategic vision or expertise to uncover or identify other applications or distribution channels.  Investors and tech executives may also lack the proper tools to understand and analyze the value of the company’s intellectual assets.  In a recent study by Professor Baruch Lev at NYU, only 15 % of the “true value” of the S&P 500 was found to be captured in their financial statements.  This gap in capturing and reflecting points out the critical need for a legal and strategic analysis of on emerging company’s intellectual property portfolio.

To begin uncovering hidden value, entrepreneurs and senior executives of growing companies should go through the process of an intellectual property audit.  The intellectual property audit will examine the company’s intellectual asset management (IAM) system (if any), ensure that the intangible assets of the company have been properly protected and most importantly, will serve as the starting point for the strategic planning exercise which will be focused on identifying ancillary applications and markets for the company’s intangible assets, which could create new income streams and profit centers for the company via licensing, joint ventures, strategic alliances and even business format franchising.  The intellectual property audit and strategic planning process based upon the audit results will increase shareholder value by ensuring that the highest and best uses of the company’s intangible assets are pursued – which could also be part of the turnaround or restructuring plan of a troubled portfolio company or which could serve at the core of the value proposition in positioning a growing company for sale.

Understanding The Various Types of Intellectual Property

Intellectual Capital consists of human capital, intellectual property and relationship capital and are the key assets for driving business growth in all types of economic conditions.  As an entry point into the strategy of leveraging IP assets, an appreciation of the different types of assets and their licensing characteristics is useful.  The corporate intangible asset inventory may include trade secrets and know-how, trademarks and trade names, patents and patent applications, and copyrights.

Trade Secrets and Know-How

While trade secrets, considered collectively, often comprise the primary intangible asset a company owns, the protection regime for trade secrets, unlike patents, trademarks or copyrights, trade secret protection is not based on a federal statute.  Trade secrets are unpatented bodies of information that lay outside the public domain.  Formulations, such as the concentrate for Coca-Cola, may be immensely valuable trade secrets. The processes used by an enterprise to make products or to manage itself may qualify as trade secrets. For example, material sources, marketing plans, distribution techniques, customer information, product specification/tolerances, best methods and practices, franchise management protocols, all qualify as trade secrets.  Tweaks and modifications to improve equipment, even off-the-shelf equipment purchased on the open market, may qualify; as do the fruits of the R&D operations: blue prints, test results (even unsuccessful test results are protectable), designs, data bases. etc.  Know-how is a first cousin of trade secrets but far more difficult to inventory as a discrete intangible asset; it is an accumulation of information, knowledge and experience (some of which may qualify as trade secrets, some not) that enables its possessor to achieve practical results which can not be obtained by one not possessing it. Know-how is the essence of what make a company’s most valuable employees valuable.

Patents

A patent grants an inventor the right to exclude third parties from making, using or selling the subject matter of his or her invention throughout the United States for a defined period of time. Utility patents, which are the most common type of patents granted by the U.S. Patent and Trademark Office (USPTO), protect new, useful and non-obvious processes, machines, compositions of matter and articles of manufacture for a period of 17 years. Design patents, which stay in effect for 14 years, cover new, original, ornamental and non-obvious designs for articles of manufacture. And plant patents, which USPTO issues for certain new varieties of plants that have been asexually reproduced, are in effect for 17 years.

Trademarks, Servicemarks, and Tradenames

The Lanham Act of 1946 defines a trademark as any word, name, symbol, or device adopted and used by a manufacturer or merchant to identify and distinguish its goods from those manufactured or sold by others and to indicate the source of the goods. A servicemark serves similar purposes, but it protects the advertising and marketing of services rather than products. A tradename is the name a business or other organization selects to identify itself as a distinct entity. While it’s true that some companies do use their tradenames as trademarks or servicemarks, it’s important to treat the two varieties of intellectual property differently. A company cannot assume that its name has automatically acquired trademark or servicemark rights simply because it has been offering its goods or services under its particular company name. Tradename protection, which lasts 10 years, is granted by the USPTO.

Copyrights
Copyright protection is available to authors of original literary, dramatic, musical, artistic and certain other intellectual works that are fixed in any tangible medium of expression. In most cases, the owner of a copyright from the USPTO has the exclusive right to or authorize others to reproduce and/or prepare derivative works, distribute copies, perform or display the copyrighted work, during the author’s lifetime, plus 50 years.

ABOUT THE AUTHOR
Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide.  Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies.  Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years.  Mr. Sherman is the author of nineteen (19) books on the legal and strategic aspects of business growth and capital formation.  His eighteenth (18th) book, Road Rules Be the Truck.  Not the Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the Fall of 2008.  Mr. Sherman can be reached at  202-879-3686 or e-mail ajsherman@jonesday.com.

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Amidst Spotify Rumors, Facebook CEO Talks Music & Media

Posted in Board Of Intellectual Capital, Economy, Gerbsman Partners, internet, Investments, Market research, Social Networks, Strategy, Technology, tagged , , , , , on May 26, 2011| Leave a Comment »

Article from GigaOm.

“As rumors of a pending Facebook/Spotify deal swirled, Mark Zuckerberg took the stage at the e-G8 Forum in Paris Wednesday and reasserted that he has no plans to become the CEO of an entertainment company.

“We don’t have the DNA to be a music company or a movie company,” Zuckerberg said in an onstage one-on-one with Publicis CEO Maurice Lévy.

The comments come just as Facebook is reported to have deepened its partnership with Sweden-based startup Spotify to roll out a more fully integrated music-streaming service within the social networking site, according to a Forbes report published Wednesday citing anonymous sources. The report claims the feature will be called either “Facebook Music” or “Spotify on Facebook.” The new service will reportedly not be available in the United States, as Spotify has not yet cleared regulations to be used in the US.

However, a source familiar with Spotify denied the deeper integration when reached by GigaOM. The company already has a “Spotify on Facebook” feature that allows Facebook users to share links to Spotify songs on their profile pages. A Facebook spokesperson responded similarly, telling me “there’s nothing new to announce” and pointing to the existing integration between the two companies. “Many of the most popular music services around the world are integrated with Facebook and we’re constantly talking to our partners about ways to improve these integrations,” the spokesperson said. Both Facebook and Spotify have separately raised funding from telecom mogul, Li Ka-Shing.

Whether the Spotify/Facebook rumor du jour is true or not, Facebook is clearly keen to get more immersed in the media and entertainment industries. At e-G8, Zuckerberg noted that while Facebook had no ambitions to move the company from Silicon Valley to Hollywood, entertainment companies could do well to take advantage of all that social networking has to offer. “I hope that we can play a part in enabling… the companies that are out there producing this great content to become more social,” he said. “We’re going to see a lot of the transformation in these industries over the next three, five years.””

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LinkedIn raises IPO price – now $42 to $45 per share

Posted in Board Of Intellectual Capital, Economy, Investments, IPO news, tagged , , , , , on May 18, 2011| Leave a Comment »

Article from SFGate.

“LinkedIn Corp. raised the expected price of its initial public offering by $10, to a new range of $42 to $45 per share, making it even more overvalued by any conventional metric.

In my Sunday column (sfg.ly/k0PpDv), I pointed out that LinkedIn was going public at valuations that far exceed established tech companies such as Google, Apple and Amazon – and that was based on its previous expected IPO range of $32 to $35.

At $45 per share, LinkedIn would trade at roughly 17 times its 2010 revenues and 100 times its earnings before interest, taxes, depreciation and amortization, according to Morningstar analyst Rick Summer. That metric, dubbed EBITDA, is seen as a proxy for cash flow. With just $15.4 million in 2010 profit, LinkedIn’s price-to-earnings ratio is meaningless.

By comparison, Google is trading at just under six times revenue and about 14 times EBITDA, Summer says.

LinkedIn still plans to sell between 7.8 million and 9 million shares, which would raise up to $406 million and give it a market value of up to $4.3 billion.

The Mountain View company, which operates an online network for professionals, is expected to set a final IPO price tonight and begin trading Thursday under the ticker LNKD.

Investors are often willing to pay inflated price-to-sales or price-to-cash-flow multiples for fast-growing companies like LinkedIn, Summer says. However, for a higher-risk situation such as LinkedIn, you could argue that investors should be paying a lower multiple.

Less than 10 percent of the company’s shares will trade publicly, which could keep the price up in the short term if demand runs high. But eventually, the venture capitalists and insiders who own the rest of the shares will want to unload some and that could send the price down.

As the first major U.S. social-networking company to go public, LinkedIn could become a favorite of investors who like “pure-play investable themes,” Summer says.

But that also makes it hard to come up with an appropriate value for the company. “This is not an industry we understand incredibly well,” he adds.

Unlike the dot-com companies of yore, some investors argue that social-networking companies deserve lofty valuations because they have “real businesses and real business models,” Summer says. He agrees that LinkedIn has a strong business model and a competitive advantage. “But that’s like looking at a house and saying, ‘It’s livable, it has four bedrooms and two bathrooms. It’s worth any price because it’s a real house.’ ”

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Connecting The Dots On eBay’s Local Shopping Strategy

Posted in Board Of Intellectual Capital, Business models, Economy, Gerbsman Partners, Investments, Market research, Strategy, tagged , , , , , , , , , on May 16, 2011| Leave a Comment »

Article from TechCrunch.

It’s no secret that eBay has been heavily investing in a local commerce strategy.

The central core of this is trying to capitalize on the $917 million online-to-offline buying market, which Forrester estimates will eventually reach $1.3 trillion (although this number seems low) and account for nearly 50% of total retail sales by 2013. Virtually every acquisition in the past year (besides the company’s $2.4 billionpurchase of GSI Commerce) has been of a company that is dabbling in local payments or linking to merchants (Milo, RedLaser, Where, FigCard). If you look closely, a clear strategy is emerging that positions eBay at the center of mobile shopping, local commerce, and payments (through PayPal). Let’s connect the dots.

Online-To-Offline and Comparison Shopping

eBay’s first foray into the local commerce arena was though the acquisition of barcode scanning mobile app RedLaser last June. RedLaser’s barcode scanning technology allows users to comparison shop on the go. Anyone can scan a barcode on an item at a store and then automatically access any eBay listings of the product on the marketplace. Sellers can also use the scanning technology to scan an item and list the product in very little time. RedLaser’s technology was quickly integrated into eBay’s dedicated iPhone and Android apps.

The company then bought Milo for $75 million, which aggregates and lists real-time in-store product inventory for over 50,000 stores across the country; featuring over 3 million products from Target, Macy’s, Best Buy, Crate & Barrel and more.

Most recently eBay integrated Milo into a few of its core products, including RedLaser. So with a single scan of a product in a store, users can see which nearby retailers have a product in store, and at what price. eBay also integrated Milo’s results into its own marketplace, allowing users to include local shopping tab in search results to check a product’s local, or in-store, availability directly from the eBay search results page.

But surfacing local product results and integrating barcode scanning only scratches the surface of local and mobile commerce and its potential. There’s no doubt that eBay is reaping the benefits of mobile commerce (the company expects to do $4 billion in mobile gross merchandise volume in 2011).

Local Payments

And eBay realizes that in order to really capitalize on local and mobile in the ecommerce experience, the company also has to be a part of the point of sale for local merchants. And eBay has a player in this race—payments giant PayPal. PayPal has been making its own small forays into local commerce and late last year launched a new version of its popular iPhone app that allows users to find businesses near their immediate location that accept PayPal as a form of payment. The feature rolled out in San Francisco initially, but we haven’t heard much about the initiative since last November.

Why? Well, scaling this feature broadly to other cities is a challenge for even a large company like PayPal. Not only do they have to find the local businesses, but PayPal has to teach them how to use their mobile apps as a payment mechanism. Wouldn’t it be much easier to acquire a company that could help PayPal and eBay do this?

Enter Where, a geo-location service and mobile advertising company that already has millions of active users across many mobile platforms. The apps show local listings for restaurants, bars, merchants, and events, and also suggests places and deals for you based on your location and past behavior. Where also offers a location-based ad network, which allows advertisers to show their mobile ads only to people near their store, or perhaps near a competitor’s store (after the user opts in to see these types of ads). Currently, more than 120,000 retailers, brands and small merchants use Where’s network daily to reach new audiences and deliver real-time foot traffic to their doorstep.

eBay of course acquired Where a few weeks ago, and housed the company within PayPal. Not only does this give PayPal much more of a reach with its payments service, but it gives eBay a platform to to enter into the the local deals market. As Where’s CEO Walt Doyle told us after the acquisition, “eBay is about connecting buyers and sellers and Where is about connecting people with places.” Ebay can now tap into connecting consumers with local businesses and can be a part of the transaction with PayPal.

PayPal also just bought mobile payments startup FigCard, a Boston-based startup that allows merchants to accept mobile payments in stores by using a simple USB device that plugs into the cash register or point-of-sale terminal. All the consumer needs is the Fig app on his or her smart phone. The connection with PayPal is that when consumers setup their payment information, they could add PayPal as a payments option and pay for goods via their mobile phone.

Eliminating the need for an actual wallet has always been a goal for PayPal, and if the company can scale FigCard’s technology (perhaps to many of those merchants using Where?); PayPal could have a stake in the mobile wallet race.

The ‘Pivot’

In the past year, it’s fair to say that eBay and PayPal have spent over $200 million on the acquisitions I mentioned above. That’s a fair chunk of change even for a company that is making billions each year.

There’s no doubt that eBay is invested heavily in this strategy and believes that the future of the company is based on both online to offline purchases, local and mobile commerce. eBay VP of engineering Dane Glasgow recently told us that one of the challenges for eBay in this strategy is being on the pulse of technology, which is constantly evolving.

But as retail evolves, eBay is shifting its business as well, and it will undoubtedly be interesting to see if the company can connect the dots with all these acquisitions and technologies to create a powerhouse in mobile and local commerce. The challenge is that some of these initiatives aren’t really that complimentary to eBay’s core marketplace and auction business.

While eBay won’t be quitting the auction business anytimesoon, the marketplace business itself isn’t growing as fast as PayPal. PayPal now represents 39 percent of eBay’s total revenue, and nearly made $1 billion in revenue for the company in the first quarter of 2011, up 23 percent from the same quarter in the previous year. Marketplaces brought in $1.5 billion, up 12 percent from the same quarter in 2010.

Pivot is a word that tends to be over-used in the tech world, but in eBay’s case that is exactly what we are witnessing—a major pivot in the company’s business model to local commerce. It’s certainly not easy for any company to “pivot,” especially one as massive as eBay. If it manages to pull this off so late in the game, it could herald a whole new era of growth for the company.

As Glasgow tells us, “it’s a new retail environment, where the convergence of online and offline are coming to life through mobile and local experiences.” Can eBay position itself fast enough to flourish in that environment?”

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