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Once-flush start-ups struggle to stay alive as investors get picky

  • Eighteen months ago, Beepi was rapidly expanding its online used-car business to 16 US cities where people could buy cut-rate vehicles adorned with giant shiny bows.

Beepi doesn’t exist anymore. After burning through more than $US120 million ($158m) in capital, the start-up failed to raise more cash and shut down in February. Its roughly 270 employees cleared out of the cavernous Mountain View, California, headquarters leaving behind the ping-pong table and putting green.

Beepi’s rapid demise offers a glimpse into the changing fortunes of Silicon Valley start-ups, many of which struggled to adjust as a two-year investment frenzy came to an end.

In 2014 and 2015, mutual funds, hedge funds and others pumped billions into companies that they now see as overvalued, and unlikely to pull off an initial public offering. As venture capitalists became more discerning, investment in US tech start-ups plummeted by 30 per cent in 2016 from a year earlier.

For some, demand is still robust. Much of the money still being invested is pouring into the upper echelon of highly valued start-ups like Airbnb and WeWork or younger ones with clear paths to profit.

“There are companies that everybody wants to invest in and there are a large set of companies that almost nobody wants to invest in,” said venture capitalist Keith Rabois of Khosla Ventures.

Venture capital firms remain flush with cash. They raised $US44 billion last year, the most since the dotcom boom.

But investors are staying away from scores of well-funded start-ups that once looked like relatively safe bets, forcing these companies to fight for survival as they burn through their stockpiles of cash and scramble for new money or buyers.

“They’re like the walking dead,” said David Cowan, a partner at Bessemer Venture Partners, who expects a steady stream of failures.

In 2014 and 2015, more than 5000 US tech start-ups collectively raised about $US75bn, according to Dow Jones VentureSource — the largest amount in a two-year period since the dotcom boom.

Much of that money went to a small share of tech start-ups: 294 such companies raised at least $US50m apiece. Almost three-quarters of those companies — 216 — have neither raised money nor been acquired since the end of 2015. Such companies tend to raise funding every 12 to 18 months.

Seemingly every week lately, a well-funded start-up is slashing jobs or pulling the plug. In recent months, mobile-search start-up Quixey shut down after raising more than $US100m, health-benefits broker Zenefits — which raised more than $US500m — laid off nearly half its staff, and blogging platform Medium cut one-third of its employees after raising $US132m.

Such closures and cutbacks were rare two years ago when venture capitalists encouraged start-ups to expand rapidly to edge out competitors. Then when capital became scarcer, investors urged companies to turn profitable, which isn’t easy.

Take start-up Luxe Valet, whose app lets people summon parking valets in bright-blue track jackets. Founded in 2013, the San Francisco company had by early last year had ploughed into eight markets and raised more than $US70m.

Two competitors shut down. But expensive contracts to park cars in garages in big cities like Boston soaked up Luxe’s cash, according to a person familiar with the finances. The start-up has had to retreat to three markets. Luxe didn’t respond to requests for comment.

“There’s going to be a shake-out” for companies that can’t show a profit, said James Beriker, the chief executive of meal-delivery service Munchery. Mr Beriker joined the company in January after a rocky period that resulted in top executives leaving, including the co-founders.

Munchery, which has spent much of its $US120m in funding, is raising a $US10m lifeline from existing investors. The company is cutting costs and aims to be profitable by year-end.

For Beepi, profitability proved too distant for investors to wait.

Founded in 2013, Beepi caught on in San Francisco by giving people a fail-safe way to sell used cars online. Beepi guaranteed sellers a price, and if it couldn’t find a buyer in 30 days, it purchased the car. Beepi marked up the price and pocketed the difference.

Venture capital poured in, and its valuation surged from $US12m in early 2014 to $US525m by mid-2015. Beepi moved out of its cramped office and into a glassie building where the chief executive zipped around on his own Segway. Staffers enjoyed quinoa salad and turkey meatball lunches and dinners when they often stayed late, and unwound with ping-pong or Nerf guns.

The company’s strategy was a common one: blanketing the US to thwart competitors rather than focusing on a few cities.

Beepi spent a fortune to entice buyers and sellers through radio and Facebook ads, spending an average of $US1730 on advertising per vehicle in most of its markets.

Beepi was whipsawed by cars that sat unsold for a month, and that Beepi therefore had to purchase. Losses on those cars could reach more than $US5000 per high-end car, former employees said.

Revenue for the first half of last year was $US50m, up about 40 per cent from the previous six months. But with little revenue from add-on services like car repair, Beepi was losing up to $US5m a month last year, the documents show. Costs were falling, but profitability wasn’t forecast until 2018.

By mid-2016 CEO Ale Resnik hunted for cash to stanch the losses, but investors were spooked. Most of Beepi’s staff was laid off in December.

Employees say they believed the business would have proved sustainable if they were given more time.

“It was clear to us internally how to get there,” said Tyler Infelise, Beepi’s head of product.

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Venture Capitalist Sounds Alarm on Startup Investing
Silicon Valley Has Taken on Too Much Risk, Gurley Says

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By YOREE KOH and ROLFE WINKLER CONNECT
Updated Sept. 15, 2014 3:17 a.m. ET

Venture capitalist Bill Gurley, shown in 2010, says cash-burn rates at tech startups are alarmingly high. Bloomberg News
Silicon Valley is a risk-driven place. But over the past year, it may have taken on more than it can handle, according to one prominent venture capitalist.

“I think that Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now—unprecedented since ’99,” said Bill Gurley, a partner at Benchmark, referring to the last tech bubble.

Mr. Gurley, who often voices his opinions on his blog, Above the Crowd, sat down with The Wall Street Journal as part of a Journal event series called “Tech Under the Hood.” The investor in Uber, Zillow, OpenTable and other Web startups spoke on a wide range of topics. What follows is an edited excerpt of a conversation specifically about potential cracks in the tech-startup investing scene.

WSJ: I want to read you something from your blog. You quoted Warren Buffett’s famous quote, “Be fearful when others are greedy and greedy when others are fearful.” And then you wrote: “Although we may have not reached the level of observing obvious greediness, there is most certainly an absence of fear. Those that managed companies in 2008, or 13 years ago in 2001, know exactly how fear feels. And this is not it.” What did you mean by that?

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Mr. Gurley: Every incremental day that goes past I have this feeling a little bit more. I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since ‘’99. In some ways less silly than ’99 and in other ways more silly than in ’99. I love the Buffett quote because it lays it out. No one’s fearful, everyone’s greedy, and it will eventually end. And there are reasons, which might take all night to explain, why this business is cyclical over time, and the more chance you have to see different cycles and to see how it slips away, you can see it.

There’s a phrase that I love: “discounted risk.” Do people discount risk? Right now you’ve got private companies raising $200, $400, $500 million. If you’re in a competitive ecosystem and you raise that amount of money, the only way you use it—because these companies are all human-based, they’re not like building stores—is to take your burn up.

And I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that’s a form of discounted risk.

In ’01 or ’09, you just wouldn’t go take a job at a company that’s burning $4 million a month. Today everyone does it without thinking.

WSJ: Because the equity looks so valuable?

Mr. Gurley: Yeah, it’s a whole bunch of things. But you just slowly forget, and half of the entrepreneurs today, or maybe more—60% or 70%—weren’t around in ’99, so they have no muscle memory whatsoever.

So risk just keeps going higher, higher and higher. The problem is that because you get there slowly the correcting is really hard and catastrophic. Right now, the cost of capital is super low here. If the environment were to change dramatically, the types of gymnastics that it would require companies to readjust their spend is massive. So I worry about it constantly.

WSJ: You used the word silly—a lot of silly stuff going on since ’99. Give us an example.

Mr. Gurley: I’ll give you something that’s tactical. Part of it is why it’s cyclical right. For the first time since ’99, in the past 12 months, I’ve been in board meetings where the company says, “Our only option is a 10-year lease,” at record pricing on a per square foot basis here in San Francisco, which is two or three times what the rent was three years ago. And so this is why it’s all cyclical—because the landlords get greedy. They wouldn’t do a 10-year lease if they thought that the rates were low. So they’re implicitly telling you they want to lock this in for 10 years, which is its own form of greed because what happened in ’99 is half the companies went bankrupt and they couldn’t pay the lease over the 10-year period.

Anyway, it’s those kinds of things that happen. The most obvious one is just the acceptable burn rate. And that can be seriously, negatively reinforced by the capital market. In the software-as-a-service world, where the risk is potentially among the highest, Wall Street has said it’s OK to lose tons of money as a public company. So what happens in the board rooms of all the private companies is they say, “Did you see that? Did you see they went out and they’re losing tons of money and they’re worth a billion. We should spend more money.” And there are people knocking on their door saying, “Do you want more money, do you want more money?”

So it takes the burn rate up.

WSJ: As a result, is Benchmark pulling back?

Mr. Gurley: There are two types of answers to that question. How do we go about investing on a day-to-day basis in terms of new things? And I happen to believe that innovation happens more continuously, even though there are financial cycles, so you can’t afford not to be out on the field. But I do think you want to look out for what is the long-term viability of something. I’d much prefer to do a Series A [funding deal] right now than I would later-stage because of this type of risk. So that’s one type of answer.

The other type of answer is what you advise your companies to do. That’s really difficult because if you have a competitor that’s going to double or triple down on sales and you just decide, “Oh, well I’m not going to execute bad business decisions, I’m just going to sit back,” you lose market share. So, choosing not to play the game on the field doesn’t work, so you’re left with trying to advise someone to be pragmatically aggressive with some type of conservative backdrop or alternative strategy in case the world shifts. But it’s hard.

WSJ: And you see people apps like Yo or Snapchat. These things get hefty valuations but in reality what we’re talking about right now is eyeballs. And once upon a time I remember people were really intrigued by eyeballs, and that didn’t work out.

Mr. Gurley: I don’t have that criticism as much simply because we’ve seen so many proven cases now of taking huge market share and then monetizing. That was said against Facebook, FB -3.74% and that was said against Twitter. TWTR -5.24% I think the jury is out on our sale of Instagram and whether we sold it too soon. And so I don’t necessarily buy into the well, you’re not monetizing so it’s not valuable.’ And I guess [WhatsApp’s sale to Facebook for $19 billion] is another data point.

But I think it’s different to employ a bunch of people when you don’t have the wherewithal to fund yourself through and what type of risk are you taking (in that situation). Anyway, it’s something I think about constantly. And, unfortunately, I’ve come to believe that bad business behavior is coincidental with the best of times in our field.

WSJ: What do you mean by that?

Mr. Gurley: So, the crazier things get, the worse people execute. I was thinking of writing this so I’ll test it out on this group.

So I took my family down to the Galapagos this summer and read this book on the way down there called “The Beak of the Finch” which is about this couple that has lived on Daphne Island for 40 years studying the finch. And, amazingly, when there are huge El Niño years and floods bring tons of food to this island, the finch population goes up like three or four times. Inevitably, when the rains are normal the next season there is massive death. Simply because once you get the food level back to a sustainable level. So, from a fitness perspective, excessive amounts of food lead to a lower average fitness and I think the same thing happens here.

Excessive amounts of capital lead to a lower average fitness because fitness, from a business standpoint, has to be cash-flow profitability or the ability to generate cash flow. That’s the essence of equity value. And so I think we get further and further away from that in the headiest of times.

WSJ: So who loses? Who is way ahead of themselves? Name some names.

Mr. Gurley: That’s obviously loaded. I do think there is a high likelihood that we’ll see some high-profile failures in the next year or two. I actually think that could be healthy for the ecosystem. You remember in March when the IPO window closed for like three weeks and everyone thought that the world was coming to an end? Like you really have to work hard to remember it because it reversed itself so quickly. I think having events like that can lead to sanity.

And another element is—that most people don’t think about—liquidation preference. This is pretty technical, but liq preference piles up on a startup. It’s not common stock, it’s preferred, and it has a debt-like element on the ability to get your money back. So if your liq-preference stack gets so big it makes it is really hard to raise the next incremental round of financing, unless you have some kind of financial behavior that says it definitely should be worth more. They calcify a bit. That’s probably the right metaphor.

WSJ: So what does that mean exactly? Last in, first out?

Mr. Gurley: Sometimes that happens when terms shift. But at the very least, your return horizon might be impacted by, you know, now we’ve got private companies raising between $200 million and $1 billion. If the company ends up being worth not that much, then you don’t even get your money back. And your return payout at different points on the horizon may be negatively impacted by the fact that so many people could take their money back instead.

So one of the first things that happens when that starts to become a problem is that you start to see derivative terms, which gets to what you were talking about—first money out. And those things are guaranteed returns against an IPO or some type of debt. You have creeping PIK dividends (dividends paid in preferred stock), that kind of thing. And that then starts to change your return profile for everyone underneath it.

Write to Yoree Koh at yoree.koh@wsj.com and Rolfe Winkler at rolfe.winkler@wsj.com

 

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July 21, 2014, 8:51 p.m. EDT

Apple to suppliers: Gear up for the next iPhone

 By Lorraine Luk

 

Apple Inc. is preparing for its largest initial production run of iPhones, betting that larger-screen models will lure consumers now attracted to similar phones from Samsung Electronics Co. and others.

The Cupertino, Calif., company is asking suppliers to manufacture between 70 million and 80 million units combined of two large-screen iPhones with 4.7-inch and 5.5-inch displays by Dec. 30, according to people familiar with the matter.

Its forecast for what is commonly called the iPhone 6 is significantly larger than the initial order last year of between 50 million and 60 million versions of the iPhone 5S and 5C–which had a display measuring 4-inches diagonally, these people said. Both of the coming models are expected to feature metal cases similar to the iPhone 5S and likely come in multiple colors, these people said.

Apple stuck with smaller displays on iPhones even as rival smartphone makers rolled out bigger screens and customers clamored for larger phones. Demand for larger-screen smartphones boosted Samsung, which started offering a 4.8-inch display in its Samsung Galaxy S models in 2012 and introduced an array of bigger phones.

Apple is scheduled to report its fiscal third-quarter results on Tuesday and provide a financial outlook for the current period ending Sept. 28. Historically, Apple has released a new iPhone in mid-September.

Analysts are forecasting Apple will report sales of about 35.9 million iPhone units for the three months ended June 30. That would be up about 15% from a year earlier.

For Apple, one possible hiccup with the larger screen is that display makers for the new iPhones are struggling to improve the production of the larger 5.5-inch screens, people familiar with the matter said. The production is complicated because the displays are using in-cell technology, which allows the screens to be thinner and lighter by integrating touch sensors into the liquid crystal display and making it unnecessary to have a separate touch-screen layer.

To factor in the possibility of a higher failure rate for displays, Apple has asked component makers to prepare for up to 120 million iPhones by year-end, the people familiar with the matter said. It made a similar request last year to prepare enough parts for a combined 90 million iPhones to provide some slack in its supply chain.

The 5.5-inch iPhone screen would face an additional manufacturing complication if it uses a cover using sapphire crystal, a more durable but costly alternative to glass, people familiar with the matter said.

Apple’s iPhone production forecast assumes a surge in demand from Apple’s partnership with China Mobile Ltd., the world’s largest carrier, which started offering the iPhone earlier this year. Bigger-screen smartphones are also popular in China and other emerging markets where the smartphone is replacing the personal computer as a main computing device.

As Apple competes against Google Inc.’s Android operating system, larger screens are now common in Apple’s core mobile market–high-price phones. In May, 98% of Android smartphones that sold globally at the equivalent of $400 or above featured a display greater than 5 inches, according to Counterpoint Research.

The new iPhones are coming to market as Samsung’s smartphone business is showing signs of sluggishness. Earlier this month, Samsung warned that its earnings would fall for a third straight quarter due to a glut of unsold smartphones. It is feeling the pinch in emerging markets where its low- to mid-end smartphones are facing intense price competition from rival Asian handset makers including Lenovo Group Ltd. and Xiaomi Inc.

Every year, Apple faces a delicate balancing act. It is critical for Apple to ensure that it has enough supplies of a new iPhone during the holiday season when demand is greatest. Shortages can often result in sales for its rivals, although too much inventory also is a concern.

Apple disappointed investors in last year’s December quarter when iPhone sales rose 7% from a year earlier, falling short of Wall Street expectations of a 15% increase as it struggled to fulfill demand for the 5S and failed to move enough 5C units. The slump proved temporary, with Apple reporting a 17% increase in the following quarter.

Michael Walkley, an analyst at Canaccord Genuity, said there is “strong pent-up demand” for the iPhone 6 because customers have held off on upgrading from older iPhone models.

To fulfill Apple’s demands, the company’s two main iPhone assemblers— Pegatron Corp. and Hon Hai Precision Industry Co., also known as Foxconn–are on a hiring binge at their respective manufacturing sites in China. Foxconn, for example, is hiring workers by the hundreds a day to staff production lines at their respective manufacturing sites in China, said people familiar with those companies.

Foxconn and Pegatron plan to start mass producing the 4.7-inch iPhone model next month and Hon Hai will begin making the 5.5-inch version exclusively in September, the people said.

Often, Apple’s production forecasts are adjusted based on early demand, according to people familiar with the matter. For example, Apple tweaked its initial forecasts for the iPhone 5S and iPhone 5C last year when the more expensive 5S initially sold better than expected and the 5C slumped in the first few months, these people said.

Apple Chief Executive Tim Cook has also warned that the supply chain is “very complex” and that it is impossible to take a data point from a supplier and extrapolate a broader meaning for Apple’s business.

Suppliers also say that Apple likes to build up inventory heading into the new year, because it is difficult to keep production lines humming at full capacity since many workers go home during Lunar New Year, which is in February next year.

Write to Lorraine Luk at lorraine.luk@wsj.com, Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com and Eva Dou at eva.dou@wsj.com

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Article from WSJ Online.

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s.

But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites.

About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.

The Wall Street Journal reveals its third annual ranking of the top 50 start-ups in the U.S. backed by venture capitalists.

Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. “We’re just getting more light on the entrepreneurial process,” he says.

His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says.

Venture capitalists “bury their dead very quietly,” Mr. Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.”

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh’s research.

Failure often is harder on entrepreneurs who lose money that they’ve borrowed on credit cards or from friends and relatives than it is on those who raised venture capital.

“When you’ve bootstrapped a business where you’re not drawing a salary and depleting whatever savings you have, that’s one of the very difficult things to do,” says Toby Stuart, a professor at the Haas School of Business at the University of California, Berkeley.

Venture capitalists make high-risk investments and expect some of them to fail, and entrepreneurs who raise venture capital often draw salaries, he says.

Consider Daniel Dreymann, a founder of Goodmail Systems Inc., a service for minimizing spam. Mr. Dreymann moved his family from Israel in 2004 after co-founding Goodmail in Mountain View, Calif., the previous year. The company raised $45 million in venture capital from firms including DCM, Emergence Capital Partners and Bessemer Venture Partners, and built partnerships with AOL Inc.,  Comcast Corp.,  and Verizon Communications Inc.  At its peak, in 2010, Goodmail had roughly 40 employees.

But the company began to struggle after its relationship with Yahoo Inc. fell apart early that year, Mr. Dreymann says. A Yahoo spokeswoman declined to comment.

In early 2011 an acquisition by a Fortune 500 company fell apart. Soon after, Mr. Dreymann turned over his Goodmail keys to a corporate liquidator.

All Goodmail investors incurred “substantial losses,” Mr. Dreymann says. He helped the liquidator return whatever he could to Goodmail’s investors, he says. “Those people believed in me and supported me.”

image

Daniel Dreymann’s antispam service Goodmail failed, despite getting $45 million in venture capital.

How well a failed entrepreneur has managed his company, and how well he worked with his previous investors, makes a difference in his ability to persuade U.S. venture capitalists to back his future start-ups, says Charles Holloway, director of Stanford University’s Center for Entrepreneurial Studies.

David Cowan of Bessemer Venture Partners has stuck with Mr. Dreymann. The 20-year venture capitalist is an “angel” investor in Mr. Dreymann’s new start-up, Mowingo Inc., which makes a mobile app that rewards shoppers for creating a personal shopping mall and following their favorite stores.

“People are embarrassed to talk about their failures, but the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures,” Mr. Cowan says. “I believe failure is an option for entrepreneurs and if you don’t believe that, then you can bang your head against the wall trying to make it work.”

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work, Harvard’s Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship. Both studies counted only incorporated companies with employees. And companies that didn’t survive might have closed their doors for reasons other than failure, for example, getting acquired or the founders moving on to new projects. Languishing businesses were counted as survivors.

Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

Read more here.

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Article from DOW JONES NEWSWIRES

Hewlett-Packard Co. (HPQ) is following the lead of rival International Business Machine Corp. (IBM) in possibly shedding its personal-computer business and focusing more on higher-margin operations like analytic software–but the transition is not likely to be easy.
H-P is significantly farther behind in the software market than IBM was when the Armonk, N.Y., company sold its computer business to Lenovo Group Ltd. (LNVGY, 0992.HK) in 2005. And since then, the value of PC assets has declined, meaning the world’s biggest computer maker may not get the cash boost needed to catch up with the software leaders ahead of it.

For IBM, its move last decade has worked out well. While other tech companies have seen volatility from their consumer exposure, IBM has posted consistent results, even during the depths of the recession. The company last month boosted it outlook for the year, helping send shares to an all-time high.

“IBM is the best-positioned of the big tech companies by far,” Gleacher analyst Brian Marshall said. “The majority of revenue comes from high-margin, annuity-type revenue streams such as software and services. … IBM has a phenomenal business model, and H-P is trying to follow in those footsteps.”

H-P is taking a big step Thursday by agreeing to buy U.K. data-analytics firm Autonomy Corp. (AUTNY AU.LN) for more than $10 billion. Analytics software, a fast-growing area, helps companies sift through massive amounts of information to solve business problems or make predictions.

“It’s the beginning of the transformation of H-P today,” Chief Executive Leo Apotheker said.

IBM has focused on analytic software for a while. Among the company’s dozens of acquisitions over the past five years, IBM has spent $14 billion on 24 analytics-related purchases. IBM expects the market for analytics to be over $200 billion by 2015, of which it sees getting about $16 billion.

Transitioning out of one big business and into another takes time and money. Since 2001, IBM has bought more than 127 companies for a combined total of $33 billion. Those earlier acquisitions helped to give IBM a strong software business–second only to Microsoft Corp. (MSFT)–when it sold the PC operations.

As a result, in IBM’s recently reported quarter, the company had software revenue of $6.2 billion, 23% of its total revenue. In comparison, H-P Thursday reported quarterly software revenue of $780 million, 2.5% of its total revenue.

IBM decided to get out of the PC market because the company viewed it as a commoditized industry where companies can only compete on price. Chief Executive Sam Palmisano said last year during an interview with the Wall Street Journal that he wouldn’t be able to give away IBM’s PC business today.

“We got a reasonable valuation for the company, and today I’d have to pay them to take it,” he said. “And the reason being is that the technology shifted, and we wanted to get out before it was obvious to everyone.”

During the same interview, he also criticized H-P, saying he’s not worried about a company that no longer invests in innovation. About 6% of IBM’s 2010 revenue went to research and development, compared to only about 2% at H-P.

H-P has said in recent months that it’s increasing its research spending.

Meanwhile, Mark Dean–one of the creators of the first IBM PC–said in a blog post last week that the PC age is essentially over, going the way of the typewriter and incandescent lightbulb.

“While many in the tech industry questioned IBM’s decision to exit the business at the time, it’s now clear that our company was in the vanguard of the post-PC era,” said Dean, who currently serves as chief technology officer of IBM Middle East and Africa.

Read more here.

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With IBM reportedly in talks to buy Sun Microsystems, industry experts say the two tech giants — both of which earned early fortunes by selling expensive hardware — are looking to a future based on a much broader range of computing gear, software and tech services.

“It’s about the whole data center,” said Chris Foster, a veteran analyst at Technology Business Research, noting that a deal would give IBM control over Sun’s cornerstone Java programming language and other valuable software, as well as access to hardware customers and highly profitable contracts for consulting and other services.

Both companies declined to comment Wednesday on reports that IBM is negotiating a possible $6.5 billion purchase of Sun — a deal that would shake up the global tech industry and spell the demise of a venerable but now-struggling Silicon Valley pioneer. After its founding in 1982, Sun built a hugely successful business selling powerful computer workstations and later the servers behind much of the first Internet boom.

News of the talks first surfaced Wednesday in The Wall Street Journal, which cited unnamed sources familiar with the discussions. While those sources said a deal could be struck this week, analysts said it is by no means certain, and even suggested Sun might entertain offers from other suitors.

Read the full article from siliconvalley.com here.

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mk-au416_shutdo_ns_20090211185403WSJ reports: As Funding Dries Up, Fledgling Silicon Valley Firms Are Shutting Down; Fears of Chill on Innovation

“Many start-ups survived last year by slashing costs and deferring development projects. But as demand for their products continues to deteriorate and funding dries up, these young firms are now running out of lifelines. Many are calling it quits, recalling the dot-com bust earlier this decade.

Venture capitalists pulled back sharply in the fourth quarter as credit markets seized and stock markets collapsed. Venture capitalists invested $5.54 billion in U.S. start-ups in the fourth quarter, 27% less than the third quarter, according to data compiled by VentureSource.”

Another excellent take on the same theme is Stacey Higginbotham´s analysis at GigaOm:

“The crisis in the financial market is coming home to roost for startups of all kinds. Today’s Wall Street Journal has an article detailing the death or firesale of several startups in the last few weeks. It’s grim, but this is only the beginning for many venture-backed companies, as we reported back in October. Over the next few months, we’ll see continuing news of businesses giving up the ghost as their venture backers take a hard look at upcoming cash needs and decide to prune.

Venture capital is a cyclical business that follows the fate of the stock market, so it depends on where a startup is as the cycle turns from boom to bust. Unfortunately, many of these unlucky startups are getting crushed under the wheel as it rolls through the downturn. Right now is a good time to work on an idea, but a bad time to be selling things.

However, innovation won’t just stop.VCs are still making selective investments in early stage startups at newly reasonable valuations, hoping those deals are ripe by the time the economy reaches the next boom.”

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. In the past 60 months, Gerbsman Partners has been involved in maximizing value for 51 Technology, Life Science and Medical Device companies and their Intellectual Property and has restructured/terminated over $770 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.2 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in Boston, New York, Washington, DC, San Francisco, Europe and Israel.

For more information on Gerbsman Partners, please visit our website at www.gerbsmanpartners.com

By way of Stacey Higginbotham article at GigaOM. For the full WSJ article, please click here

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