Tag: VC

Early, and over-looked

Brenon Daly1 Comment

In times of uncertainty, investors tend to gravitate toward known companies. That’s seen in the public market, where large cap tech stocks have weathered the storm on Wall Street better than their smaller brethren. And, we’re getting word that phenomenon also played out in the private market.

Dow Jones VentureSource reported Monday that later-stage investments in the third quarter accounted for a larger share of overall VC dollars than a year ago (82% of all investments, up from 77%). Meanwhile, early-stage investments (seed and Series A) sank to just $1.3bn in the quarter – the lowest level in two years. Against that worrisome backdrop, IBF is set to open its 9th annual conference on early stage investment. The event, which runs Wednesday in San Francisco, brings together more than 300 early stage investors.

Symantec ‘discovers’ Kazeon?

Brenon Daly

We hear Symantec, which has already inked five deals so far this year, may be getting close to another acquisition. Several sources have indicated that Big Yellow is planning to bolster its e-discovery offering through a purchase of startup Kazeon Systems. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. Mountain View, California-based Kazeon has raised some $51m in venture backing from a handful of firms, including Redpoint Ventures, Clearstone Venture Partners and Menlo Ventures, which led the startup’s second round.

Several large technology vendors have already made e-discovery acquisitions, running up a tab of about a half-billion dollars in the past year alone. Most recently, Interwoven snagged on-demand e-discovery startup Discovery Mining. In the past, we have speculated that NetApp, which at one point accounted for more than half of Kazeon’s revenue through an OEM arrangement, would be a logical buyer of Kazeon. (We would note, however, that NetApp’s share of total sales at Kazeon has declined in recent months.)

While the e-discovery marketplace is relatively crowded, there are also several key challenges for companies looking to sell in this space. For starters, e-discovery products don’t immediately appeal to departments that must budget to buy software, such as IT or finance. The end user of the e-discovery software, which in many cases is a company’s general counsel, may not have the authority to write a check for an offering that can run $100,000 and up. We recently spoke with a venture capitalist who pulled the plug on an e-discovery startup in his portfolio. He pointed out that e-discovery projects are still largely taken on by service providers and companies have been slow to move that work in-house with purchased software. Recognizing this last fact, Kazeon has inked a number of service partners for its e-discovery products.

Selected e-discovery deals over the past year

Date Acquirer Target Deal value
July 2008 Interwoven Discovery Mining $36m
March 2008 Hewlett-Packard Tower Software $100m
February 2008 Dell MessageOne $155m
December 2007 Seagate Metalincs $74m
October 2007 Iron Mountain Stratify $158m

Source: The 451 M&A KnowledgeBase

Spending the ‘divestiture dividend’

Brenon Daly

On the same day it closed the divestiture of its authentication business, Secure Computing said it will pay $15m for Securify. The deal, which is expected to close in the fourth quarter, also has a potential $5m earnout. Secure said it plans to add Securify’s identity-based monitoring and control technology to its firewall. The majority of Securify’s customers are government, and Secure Computing plans to cross-sell into that market. Founded in 1998, Securify had raised more than $70m in VC. However, it only generated about $13m in revenue last year. Secure Computing indicated the acquisition would boost earnings next fiscal year.

Try, try again — then liquidate

Brenon Daly

Born from the ashes of a burned-out company, agami Systems may well have landed back in an ash heap. Several reports have indicated the NAS storage specialist wound down operations recently. (We were unable to raise anyone in several calls to their Sunnyvale, California, headquarters.) Just before agami emerged from stealth three years ago, we noted that the company’s core IP – along with a pair of primary VCs and handful of employees – came from NAS startup Zambeel. That company flamed out in 2003, after burning through some $72m in funding. (For its part, agami incinerated about $85m, which included $45m raised earlier this year.)

If indeed agami has gone the way of Zambeel, we highly doubt the sale of agami assets (if that comes) will go the way of Zambeel’s assets. Having lost now on both go-rounds with this technology, Kleiner Perkins Caufield & Byers and New Enterprise Associates probably aren’t interested in stepping in for a third time.

Still, there’s undoubtedly some interesting technology at agami, particularly for block-level vendors that have ambitions for their own NAS products. For instance, Dell, which recently made a significant push into storage, might want to look at agami’s IP. The same is probably true for Compellent Technologies, which has a heap of money from its IPO last year, and for fast-growing LeftHand Networks, a privately held company with some 3,300 customers.

Meanwhile, NetApp, which agami sought to undercut on price, might want to do a ‘buy & bury’ to knock out any future threat. (Keep in mind that NetApp has done graveside deals for NAS technology in the past, buying the patent portfolio of Auspex five years ago during a bankruptcy auction.) In any case, whoever picks up the bits of agami that come up for sale is likely to get a bargain. In fact, we’d be surprised if agami garnered even one-tenth of the $85m that went into it over the past three years.

Selected NAS deals

Date Acquirer Target Price
Sept. 2007 Sun Microsystems Cluster File Systems undisclosed
August 2007 F5 Networks Acopia $210m
Nov. 2003 NetApp Spinnaker $300m
June 2003 NetApp Auspex (patents) $9m

Source: The 451 M&A KnowledgeBase

Steady flow of online video deals

Emerging online video markets have been keeping investors and acquirers busy, with Google making the latest move through its recent purchase of tiny startup Omnisio. The California-based startup, which received seed funding from Y Combinator, launched in March and offers an online video editing widget that enables users to slice and mash existing online videos, add text and audio commentary and create proprietary slideshow presentations. Google plans to integrate Omnisio’s technology and its three Australian ex-pat founders into its YouTube platform.

In the past two years, companies have spent more than $7bn on more than 50 deals in the (broadly defined) online video space. The largest of these was Google’s purchase of YouTube for $1.65bn in October 2006. Rival Yahoo has also been active. It picked up video sharing site Jumpcut two years ago, as well spending $160m for video distribution platform Maven Networks earlier this year and a total bill of nearly $1bn for related advertising networks BlueLithium and Right Media in 2007.

Meanwhile, traditional media bigwigs are also banking on online video and advertising markets. In March, News Corp and NBC launched their $100m joint TV venture, Hulu, just month after picking up Chinese startup Mojiti, which serves as the TV streaming platform for Hulu. Although professional video streaming services such as Hulu are expected to be able to secure ad dollars quicker than user-generated video sites, it’s still early in that market.

One market where we see tremendous opportunity is for ad-based mobile services. Consider nine-year-old MobiTV, which has been streaming to mobile devices since 2003. Operating on a subscription-based revenue model, MobiTV claims profitability. Last year, the company received $100m in its latest round of VC funding, and is actively looking to use that cash to buy its own advertising network. In this crowded and bustling marketplace, the top Internet and media behemoths would do well to pay attention to well-footed upstarts like MobiTV.

Selected online video deals

Date announced Acquirer Target Deal value
July 30, 2008 Google Omnisio $15m (reported)
Feb. 12, 2008 Yahoo Maven Networks $160m
Sept. 12, 2007 Hulu Mojiti not disclosed
Oct. 9, 2006 Google YouTube $1.65bn
June 27, 2006 Yahoo Jumpcut not disclosed

Netezza’s bogeyman

Brenon Daly

When Microsoft gets into a new market, the impact on the existing vendors tends to be in line with the software giant’s gargantuan size. After all, fears among startups over getting ‘Netscape-d’ have often been realized. That’s particularly true in the days before the convicted monopolist started putting on a softer face on its business. Gone are the days when Microsoft would threaten ‘to cut off the air supply’ of other companies, as it famously did to the Internet browser pioneer. Maybe it’s middle-aged softness at the 33-year-old company, but Microsoft’s bite often seems a little toothless these days. (Does anyone really think Microsoft – with or without spending $45bn on Yahoo – will be able to narrow the gap to Google in search advertising?)

Still, there was a moment last week when it appeared the Redmond, Wash.-based behemoth once again looked like it had the power to scare the bejesus out of a company (and its investors) by buying its way into a market. Last Thursday, as it was holding its annual meeting with Wall Street, Microsoft said it was purchasing Datallegro, a data-warehousing startup that we estimate was running at about $35m in sales. A market source indicated that rumors of the deal started percolating late Wednesday, a day before official word of the acquisition. Almost immediately, shares of data-warehousing vendor Netezza came under pressure. After hitting an intra-day high of $13.36 on Wednesday, Netezza stock slumped as much as 8% and closed basically at the low of the day. It opened even lower Thursday and sunk the entire day, finishing the session at $11.48. From its peak to its trough in those two sessions, Netezza lost 14%, with trading on Thursday about 50% busier than average.

However, as easy as it may be to point to Microsoft’s competitive move as the reason for Netezza’s decline, the two events are linked only by coincidence rather than causality. According to two market sources, Netezza actually distributed shares back to its VCs, meaning the stock’s slump can be attributed to the supply side, rather than demand side. (There have been no SEC filings about the move, and calls to the company to verify the information weren’t immediately returned.) Maybe Microsoft isn’t the big, bad company we all thought it was?

Paid for potential

Expanding its operations into US markets, UK media giant Guardian News & Media – publisher of The Observer and The Guardian – picked up B2B blog network ContentNext Media earlier this month. Founded in 2002, ContentNext is the creation of ex-Silicon Alley Reporter managing editor and business journalist Rafat Ali. Its ad-supported online network includes the content-centric blog paidContent.org, mocoNews.net, ContentSutra.com and the UK version of paidContent.

We understand that ContentNext, which now employs 23 people, sold for around $30m, and we estimate the company was running at $4m in trailing revenue. For financial advice, ContentNext tapped Mark Patricof, managing director at MESA (Media & Entertainment Strategy Advisors), marking MESA’s third M&A advisory in online media this year. To date, ContentNext has kept its finances in the family. In 2006, the blog network raised its first and only round of financing, for less than $1m. Interestingly, its first and only investor also happens to be private equity patriarch Alan Patricof through his VC outfit Greycroft Partners.

Still, a 7.5x trailing revenue multiple had us scratching our heads at first, especially considering that the content network fetches only one million page views per month. But, looking closer, we see the deal being more about future potential and figure that an additional earnout is likely. In addition to a larger geographic reach for both publications (ContentNext will continue to operate independently), potential revenue from conferences also drove the deal. Further, ContentNext was not out shopping itself, but looking for a second round of funding, and we understand the deal was very ‘friends and family’ in nature. Judging from laudatory comments Rafat Ali and Simon Waldman, director of digital publishing, make about each other online, this certainly seems to be the case.

Star-crossed companies?

Brenon Daly

Having already made a pair of profitable on-demand investments, venture firm StarVest Partners has decided to take a larger bite in its most recent software-as-a-service (SaaS) deal. The New York City-based firm recently led the majority acquisition of Iron Solutions, which provides online information about used farm and industrial machinery. (Want to buy a John Deere tractor? There are nearly 2,900 of them for sale on the Iron Solutions site.) StarVest put up $8.5m of the $15m for 90% of Iron Solutions, with the remaining money coming from Dublin Capital Partners, Spring Mountain Capital and GVIC Communications.

The deal caught our eye because StarVest was also an early investor in NetSuite, owning 5% of the company according to the S-1 filed ahead of NetSuite’s IPO in 2007. (StarVest’s other SaaS exit came when Dell paid $155m in cash for portfolio company MessageOne, an on-demand email archiving company run by Michael Dell’s brother.)

StarVest’s interest in NetSuite dates back to May 2000, when it led a Series C investment in the SaaS applications suite vendor together with Oracle head honcho Larry Ellison. (Ellison, of course, is the co-founder and majority owner of NetSuite.) Iron Solutions and NetSuite teamed up in October 2007 to provide industry-specific applications for agricultural equipment dealerships, and the on-demand player often uses that example to illustrate how its software can be tailored to a specific industry.

Does StarVest’s simplification of the capital structure at Iron Solutions make a sale more likely, perhaps making the firm a broker in a deal between a pair of portfolio companies? (We would note that Oak Investment Partners recently played matchmaker in an inter-portfolio marriage of two SaaS companies.)

Speculation about a possible purchase of Iron Solutions by NetSuite may be a bit of a stretch. However, it’s worth noting that NetSuite’s only acquisition so far has been a vertical deal: the $31m purchase of OpenAir, which helped boost NetSuite’s services industry expertise.

Perhaps NetSuite could broaden the focus of Iron Solutions’ online marketplace, appraisal and valuation services to a much wider market. The applications vendor has already begun to offer applications tailored for light manufacturing and has voiced a desire to add in heavy manufacturing in the future. If it’s serious about those moves, NetSuite may well find that Iron Solutions’ equipment marketplace and other know-how come in handy. The two sides, and their backers, certainly know each other well enough.

Selected StarVest exits

Company Event
MessageOne Sale to Dell for $155m
NetSuite IPO in December 2007

Assembling the deliverable

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Comcast’s digital content delivery software subsidiary ThePlatform made its first acquisition this week, picking up tiny social networking startup Chirp Interactive. Founded just one year ago, the San Francisco-based company has developed an interactive screen saver that collects updates from websites like Facebook and Flickr. Structured as an asset acquisition, ThePlatform will use the VC-backed company’s technology and select employees to build similar social features into its own content distribution and management system.

Comcast bought ThePlatform in 2006, early in its efforts to build a viable online video distribution business, and operates the business as an independent entity. Since 2006, it’s been reported that the cable giant has shelled out nearly half a billion dollars on five online deals since the beginning of 2006, including its purchases of movie review and ticketing website Fandango in April 2007 and social networking site Plaxo in May 2008. Comcast’s VC arm, Comcast Interactive Capital, has also been banking heavily on online startup. One recipient of Comcast’s capital is tiny video and advertising distribution company Revver, which incidentally was picked up by LiveUniverse in February.

Going forward, we ask where Comcast and its VC arm will be setting their sights. Well, mobile content distribution, of course. In fact, Comcast participated in a $12.6m seed-round funding of Boston-based mobile WiMax startup Cartiza earlier this month. It also joined Google, Time Warner and other industry behemoths in a $3.2bn round in WiMax company Clearwire in April. After building up a healthy reserve of content, a video and advertising distribution platform and increasing social networking capabilities, the need to converge these platforms on mobile devices is clear, and Comcast is making the moves to do just this.

Selected Comcast acquisitions

Date announced Target Target description Deal value
May 14, 2008 Plaxo Online address book synchronization $160m*
April 11, 2007 Fandango Online movie tickets & reviews $192m*
June 28, 2006 ThePlatform Digital media publishing & delivery $90m*

Source: The 451 M&A KnowledgeBase *Reported values

Architects of the new Web

Since 2004, Amazon and its founder Jeff Bezos (through his personal investment fund Bezos Expeditions) have been banking big on Web services infrastructure companies. This week, Amazon.com participated in a $15m VC investment in San Francisco-based Engine Yard. Founded in 2006, Engine Yard hosts software that enables enterprises to build and manage open source Ruby on Rails applications. The investment also comes on the heels of adopting SnapLogic’s open source data integration framework into its Amazon Elastic Compute Cloud (EC2) service.

In addition, Bezos has been actively investing in the applications that run on top of its service. On Monday, Bezos Expeditions contributed to a $15m round for Social Gaming Network Inc, which distributes games on Facebook and other social networks. The fund also participated in a $15m series C for Twitter in May. That same month, Bezos made another $15m series B for Seattle-based Pelago, which sports the popular mobile social networking app Whrrl, and whose founders Jeff Holden and Darren Erik Vengroff have solid roots in Amazon.

On top of its VC spending spree, Amazon has made eight acquisitions of Web companies since 2004. This rapid expansion has landed the Internet behemoth next to Google in the Web services business. Interestingly, Bezos Expeditions also injected $12.5m in San Francisco-based Wikipedia search startup Powerset last summer, which was picked up by Microsoft two weeks ago for a reported $100m. Incidentally, Powerset is deployed by Amazon’s EC2 service. While looking for ways to catch up to its rivals on the Web, Microsoft might benefit by partnering with, or (we daresay) buying the Web infrastructure Jeff Bezos and company have been so insightful to build.