New York VC

Be Careful of Painting with the Same Brush

Last week there was an article in the Wall Street Journal titled "In Silicon Valley, Start-ups Begin Hitting the Brakes".  The article struck a very negative tone that as the economy slips into a recession that VC-backed start-ups are very worried about slowing sales and hence are rushing out to raise wads of cash in case of a downturn.  The article's tone made it seem like a new bloodbath is on the way for VC-backed companies.  As usual, the press looks to paint the entire picture with the same brush.  I can hear the editor at the WSJ saying - hey, let's go talk to some start-ups and VCs to get feedback on why the recession will hurt them and what they're doing to make sure they survive a downturn in the economy. 

In any recession a number of industry sectors suffer from a poor economic environment and start-ups are no different.  I'm sure we'll see our share of failures if the economy continues to falter.  However, I expect we'll also see quite a number of companies thrive in a bad economic environment and I've always felt that the greatest tech-related companies are usually born during the worst economic times.  In a bad economy a young company becomes battle tested, has more time to get their business model right with less competition nipping at their heels, are forced to focus on only what matters to be successful and are able to recruit higher quality talent more easily. 

This brings me to the story of KnowledgeStorm, an online lead generation company I invested in back in 2001 only a few weeks after September 11th.  If you recall that period, the tech industry was being written off, online marketing was being written off and the internet was considered dead.  Very few venture deals were getting done at all.  The entire KnowledgeStorm management team had to rent a van and drive almost 20 hours to our offices for a final presentation to our entire partnership for investment approval.  There were no planes flying yet at the time and the country was still in fear.  The truth is I knew I would fund the company before they even walked into our conference room.  Having the whole team leave their families during that time to travel and drive 20 hours in a cramped, rented van showed me they would have the guts to persevere during the toughest times.  They could have rescheduled for a later date but the team wanted the financing now and they couldn't know for sure when the airlines would be flying again.  For me the investment was a no-brainer and Kelly Gay and her entire team proved my instincts to be right.  KnowledgeStorm built a good business which was sold successfully last year earning us a solid return on our investment.   

At the time we invested, KnowledgeStorm only had $300k-$500k of revenues.  Despite the economic environment and the fact that I couldn't find another venture firm to co-lead the deal with me I was convinced it was the ideal time to make the investment.  KnowledgeStorm essentially offered technology marketers the highest quality leads and a compelling ROI during a time that tech marketing budgets were being cut dramatically.  A registered user would search tech solutions and opt-in to have the vendor contact them to provide more information.  They were offering hot, buyer initiated leads during a time when tech companies felt like they were wandering the desert for months in search of water.  Essentially, KnowledgeStorm had a countercyclical product and was able to provide the perfect offering at the perfect time.  Tech companies pulled back on B2B magazine ads and trade shows and subscribed to the KnowledgeStorm directory to acquire leads. 

KnowledgeStorm experienced tremendous growth from 2001-2004 and continued to scale once the economy turned positive again.  This brings me back to today.  In 2007 we invested in 3 new lead generation companies: BDMetrics, BestContractors and ReachForce.  All three companies are focused on a different area of lead gen but have one common thread - they provide a compelling, measurable ROI to the marketer that can't be easily achieved through alternative marketing channels.  We didn't make these investments knowing that the economy might move into a recession during 2008, however, if that happens I expect all 3 companies to see even stronger top line growth.  We'll be more likely to step on the gas, not hit the brakes. 

Lead gen isn't the only sector that does well during an economic downturn.  I'm not going to name them all here but there are a number of sectors that are either countercyclical or have absolutely no correlation to the economic environment (health care). 

And for those companies that are operating in more vulnerable sectors.  My advice is to use poor economic times to focus on what's most important so that you'll come out the other side even stronger.  Remember the old saying - what doesn't kill you makes you stronger.  For evidence see Google, Microsoft and countless other tech companies that built their commanding market share and tremendous value during a weak economy.   

   

I love the Acela

I'm typing this post from the Acela Express train from NY to Baltimore.  I'm headed down there this morning for a board meeting.  High speed train travel sure beats the hassle of flying commercial.  No long security lines and I get to keep my shoes on before boarding.  Most importantly, with my Verizon broadband card I have high speed internet access and can log into my network to work as efficiently as I do in my office. 

I wonder if the cost of building high speed train service across the U.S. would be worth the productivity gains we'd see nationwide as a result.  Food for thought.

Build a Company, Not a Product or Cool Feature

Over the last 18 months at Greenhill SAVP we've seen an alarming increase in the number of business plans claiming to be the next big thing in web 2.0, social media, mobile (fill in your own "hot" space here).  It's really beginning to remind me of the last time this happened in our industry - 1999. 

It's always a bad sign in our business when entrepreneurs are:

1.  pitching unproven products or platforms they're planning to build in order to leverage other unproven products or platforms. 

2.  pitching businesses that really only offer a product feature that should be part of an existing product at an existing company. 

To cite a general example without calling out any specific companies - online video has seen tremendous growth with YouTube as the clear market leader so far in terms of usage.  Despite YouTube's impressive usage Google is still trying to figure out how to monetize the platform and hasn't gotten very far to date.  Many other video sites have seen good usage rates but have little revenue to show for it so far.  Users (eyeballs in 1999 vernacular) are not enough to make a real business.  Having a better video player, a different method to package ads or a viewing feature that's new doesn't make a great company or investment opportunity.  Sure 2-3 of these companies may see successful exits to larger companies in a frothy, bull market but that's not a formula for success. 

We like to call these momentum plays in our shop.  Google, Yahoo and others have made a number of small acquisitions of companies that I would call momentum plays.  When the market is hot and stock prices are rising that's what happens.  Luck and timing become the most important factor for success during these periods.  Some VC funds are masters at taking advantage of momentum and buzz to create value but this isn't a sustainable model for our industry and will end up hurting entrepreneurs and the VC industry in the long run (I'll save the reasons why for another post).  In normal markets (70-80% of the time) companies create value by growing revenues rapidly and producing significant cash flow or having a clear path to producing significant cash flow (see Microsoft, Google, eBay, Amazon, Cisco, etc.).  This applies to every industry - not just technology.  At the end of the day, a business is a business and it must produce sales growth and real cash flow to have lasting value.  Companies that can't do both over time are non-profits or hobbies. 

I know this post will likely upset a few people because it's more fun to write and talk about how every new company is going to revolutionize their market.  The media enjoys writing about new company buzz because its more sexy and they make more money reporting about it.  Some VCs and some entrepreneurs use this buzz to create quick "hype value" for their companies in order to sustain funding, perceived momentum or to create exits for otherwise unsustainable businesses.  Congrats to those who get lucky and hit the lottery or time the market right, but the odds are against you if this is your planned path to success.  Instead I would offer the following advice....   

Before you start a company really ask yourself a few important questions:

1.  Does what I'm creating really matter and why?

2.  Can what I'm creating be a REAL business or should it just be a feature in someone else's product? 

3.  Can I really monetize what I'm creating by producing sustainable and increasing revenue and cash flow over time?

4.  Am I offering a unique solution that solves a problem or fills a true need, want or gap in the marketplace?

If you're building a great company and need a true financial and strategic partner that can help you achieve your vision our door is open and we're ready to help.  Shoot me an email or give me a call.   

If you're looking to make a quick buck off of market buzz and momentum then I wish you the best of luck - you'll need it.   

Intercontinental Exchange acquires YellowJacket

On Thursday Intercontinental Exchange (NYSE: ICE) announced they agreed to buy our portfolio company YellowJacket.  We made an initial small investment in YellowJacket in November 2006 and made a larger follow-on investment into the company in May 2007.

Greenhill SAVP is only 16 months removed from our first investment in our new fund and only 14 months removed from our initial investment in YellowJacket.  While I'm very pleased to be able to provide an excellent early return for our investors, this acquisition is bittersweet for me as I've really enjoyed working with two talented founders in Jacob Pechenik and Greg Campbell as well as the rest of the management team.

The team's strategic vision, foresight and technical competence to create innovative technology to power a peer-to-peer, bi-lateral communications and trading network for the highly complex OTC energy derivatives market has been a key to the company's early success and has led to the creation of so much value in such a short period of time. 

While we're confident YellowJacket could have continued to created a large, successful company on its own we feel YellowJacket's strong management team, powerful technical platform and loyal customer base combined with ICE's vast distribution, asset class diversity and broad customer set will lead to very rapid growth for the foreseeable future.

I'd like to congratulate Jacob, Greg, Michelle, Andy and the rest of the team at YellowJacket on a great result so far and expect the team will continue to fulfill its vision and exceed its goals as a member of the ICE family.  I'd also like to thank Matt Gorin from Contour Venture Partners for being a terrific co-investor, fellow board member and partner on this investment.   

   

      

Google Execs Should be Dancing on the Ceiling...

If I worked for Google and had to hatch a great plan to create a setback for my biggest competitors I would do whatever I could to get Microsoft to acquire Yahoo.  Here's why:

1. Microsoft and Yahoo both operate struggling online advertising operations that have stumbled time and time again over the last few years.  In any type of business combining two struggling operations is usually a recipe for disaster.  This time will be no different.

2. By the time the deal receives regulatory approval, a coherent strategy is formed, executives jostle for power and position in the combined operation, technology is integrated (search, portals, ad platforms, etc) and operations are combined the market will have moved quickly and MSFT/YHOO will need a new plan.  The internet business in general, and the online ad world specifically is innovating at a rapid pace.  Keeping up with the market changes requires focus and determination.  When employees are forced to focus internally and employees are more concerned with where they stand in the new organization than how to progress the business and gain more market share, bad things usually happen. 

3. Google only needs to aim one large gun in only one direction making it easier now to further leverage their market position and increase their reach and power.  I expect almost immediately for Google's share of search to increase and for MSFT to continue to lose share and for YHOO to start losing share.  While MSFT and YHOO will lose focus, Google's will increase.

4. Microsoft is a seasoned company that is unseasoned at making and integrating large, transformative acquisitions.  To date, Microsoft has prided itself on building a large company while making only relatively small acquisitions.  As a result, the company's DNA isn't conducive to this sort of deal further increasing execution risk.  Add the smaller acquisitions MSFT and YHOO are still in the process of integrating (Blue Lithium, RightMedia, FAST, etc.) and the risk inherent in a MSFT/YHOO combination skyrockets.

5. Brain drain - our fund has seen a steady flow of YHOO resumes over the last year.  Many of the best brains have already left YHOO for greener pastures (Google), new ventures or retirement.  Will the remaining stars at YHOO want to stay to see this deal through or will they be picked off?  If they do stay, how much money will MSFT need to hand out to retain them?

So turn up the music..............................

While Google execs should singing Lionel Ritchie's Dancing on the Ceiling:

Man what in the world is happening down
At the end of the hall'
I don't have a clue'
Let's check this thing out!

What is happening here
Something's going on that's not quite clear
Somebody turn on the lights
We're gonna have a party
It's starting tonight
Oh, what a feeling
When we're dancing on the ceiling
Oh, what a feeling
When we're dancing on the ceiling

Microsoft and Yahoo execs should be singing Simon and Garfunkel's Slip Slidin Away:

Slip slidin away
Slip slidin away
You know the nearer your destination
The more youre slip slidin away