Friday, July 20, 2007

WEB 2.0 and VC

I was part of a panel at the Churchill Club on 17th July

People on the Panel
Ben Barren - a blogger and futurist/satirist extraordinaire - this guy should be on the stage.... he writes and says what people would wish they had written and said!! Setting the stage - you have to read bens blog!!

Rob Antulov of 3eep web 2.0 start up entrepeneur - ex head of strategy at fairfax multimedia

Mike Cannon - Brookes Founder of Atlassian - young entrepeneur of the year - sharp mind - and selling his enterprise wikki solution to a gazillion countries!!

Campbell Sallabank - CEO of Linkme - web2.0 community for people in the work place, who post their resumes, that can be accessed by recruiting firms and headhunters.... a powerful model that can only succeed!! Sensis have backed them

and Me!!

Attached are my notes and thoughts on Web2.0 and VC

WEB 2.0 is Hot

Web 2.0 – the facilitation of user created content – network and collaboration softweare and the creation of commnities seems to be the next wave of innovations coming through the innovation system.

WEB 2.0 will be major competition for existing advertising/tv and way people spend there time and hours in the day.

People will pay for time saving and specialized information – even small amounts.
Micro-payments will be a key to the growth of WEB 2.0 Companies.

In 2006 VCs invested $844m into 167 web 2.0 deals – 2X 2005 – in fact deals have been doubling every year. (EY Dow Jones Report)

In June 2007 $635m has been funded in 31 Deals ( )

VCs are interested in WEB2.0…. the issue is that do Web 2.0 Companies need VCs?

WEB 2.0 companies are a lot different to WEB1.0 companies in that they have
• Low start up costs
• Little infrastructure (can be virtual)
• Speed to market can be done cheaply through effective viral marketing

The average precap valuation for an investment in a web 2.0 was 6.5m (last year 3.3m)

Technologies and Ideas are not the constraints to Succeed today…. The winners in my view will be the
• Brand Builders
• Effective teams and Managers who will be able to build communities, network and run effective businesses

Youtube, My Space and Facebook – there were 100s of similar Technologies and ideas…. it was the ability of the management team to build the brand and get the company to market –

If the companies get this right – I believe they will cash out for multiples!!

VCs who have the ability to assist companies with identifying the brand managers and providing the transitional managers to these WEB 2.0 companies , will be worth their weight in gold.

WEB2.0 Exit Strategies

Exit 1
There is an opportunity to build a low cost web 2.0 company with the exit strategy in mind to sell to the Search Engines and Whales such as Google, EBAy, MSN and YAHOO. They are constantly looking for communities and are actively looking to acquire WEB 2.0 Companies with strong communities.

This strategy does not need a whole lot of money, and would probably suit an Angel/Incubator or Small Fund.

Example – small company with $50k investment – built a web app technology, built a 100k community in 3 months and google bought it and the team for an undisclosed amount.

My view is that is where the majority of successful exits will occur for Australian Web 2.0 Companies in this way.

Exit 2
Those companies who will scale, whose objective is not to sell to the whales and become one, will need significant investment. This is where I believe the VC s will play.

Examples of some returns are
• My Space – Murdoch 500m – now many $b
• Bebo - Benchmark recently invested 15m
• Facebook – VC $40m – will get great returns
• Zillow – Real Estate
• Jobster -
• Skype
• Kazaa
• Joost
• 2nd Life

Is that VCs have huge $s that they need to put to work – will throw money at these companies that do not need the $s and WEB 2.0 will turn into BUBBLE 2.0.

Based on the low cap valuations ($6.5m) we seem to be a long way off bubble territory.

Providing an Entrepeneur with too much money spoils them. WEB 2.0 companies seem to have learned from the previous bubble…. Companies are tending to commercialise quickly and cheaply.


VCs with large $s to invest have a major issue
If they have $200m to invest… why bother investing 500k into a venture that will give you a 10 times return – it will only affect the portfolio by 2.5%.
Rather invest $50m in a company that can give you a 3 X return.

The question is – how many WEB 2.0 companies will be able to effectively use this quantum of funds effectively in the business?

What is the Ideal Size Fund for A Web 2.0 Fund – Will there be Specifically formed WEB 2.0 Funds?

Is it better to have a $20m – $40m fund to invest in WEB 2.0 companies which will enable these funds to invest relatively small amounts in WEB 2.0 opportuities with a view to exit to G,Y,MSN, EBAY?

Or Have a $200m fund with view to spend 50m – 100m in a company that will scale….

In Australia my view is that there should be a $40m fund taking advantage of this space.

WEB 2.0 will create a new kind of VC – with a focus on Brandbuilding and Recruiting effective managers for their portfolio companies. My view is that before long there will be funds specifically focused on acquiring WEB 2.0 companies

Having said this – the fundamentals of investing by a VC are still the same…

• Is the management team passionate and effective – can they fulfil their plans
• Whats the USP – how are they going to reach customers
• How is the company going to scale the business and make money
• Show me the model that can scale cheaply, be profitable and throw off lots of cash!

What does this mean for Australian Companies?

This technology and Internet has effectively eliminated the Australian Constraint of “the “Tyranny of Distance” – In fact , a USA company having a partner in another timezone can be seen as a Positive.

Australians are a tech savvy group of people, who are innovative , have amazing ideas and are inherent entrepeneurs – ready to give it a go!!

ADI and Information City are 2 Incubators who we are aligned with and are actively focusing on WEB 2.0 companies – they are in our space. We only invest small amounts, and are comfortable on getting returns on an investment basis verses a portfolio basis.
WEB 2.0 Fits the incubator/small fund model with a view to Exit 1.

In fact in 2 weeks time ALWAYS ON – is having their annual Silicon Valley Conference with 900 people… and there will be at least 10 Australian Companies – many in the WEB 2.0 space presenting – with 2 having been chosen for the Always On top 100 Innovations:-


Other Web 2.0 Australian Companies that come to mind include
• Swapace – swapping community
• Red Bubble - art community
• FunkySexyCool -
• Martian Logic – B2B recruitment Software
• Webit – Webinars and Eventmanagement Online
• Globaltainment - Online Nightclub with Avatars in China
• Oztion; Seek; Real; RSVP; iSHeriff; DVD Trivia; Bcode; Global IP Video; Emailcash

and I am sure there are hundreds of others

WEB 2.0 is HOT - Money is flowing into this space in a big way, and it seems that the money tree is starting to sprout!!

The reality is that there will be a few winners, some stayers and many companies that will either be acquired or fall by the wayside.

It is early days for WEB 2.0 and it usually takes at least 10 years to become an overnight success!!

Fast 100 talk to Young Entrepeneurs about BSI's Journey

BSI Started when I left the accounting profession and said to myself that I would never fill another timesheet!

Everything that I did was based on some form of success fee based on a successful outcome for clients. Accessing Government grants was a major focus.

The grants that I focused on were was

• the EMDG – where for every $ spent on marketing and promoting your product overseas, the company gets 50c in the $ back up to $150k per annum.

• Import Credits in the Textile Industry – also export related

• R&D Tax Concessions and Grants – Incentives given to companies who innovate.

These companies had a huge need for business planning, capital, management advice and management accounting services.

2001 -
Enter an old school friend of mine, Alan Milwidsky, who was at the time a partner in a BIG 5 company, specializing in Growth Strategies – looking for a change…. I said Al… come spend a week in our business, have a look at our deal flow, join me in the business and you will make a lot more money and have a lot more fun… I was ½ right…. We have a lot more fun!!

We developed the BSI business plan – the Vision being “To Help Companies Grow” and “ To be a “one stop shop for the entrepreneur”
Providing Grants, Growth Strategies, International Gateways, Capital Raising.

We believed that in order for us to leverage our skill base, we would take equity stakes in Innovative Companies and back Motivated People, and over the years help there companies grow with the objective of getting a return on our investment.

We worked out the money that we needed to grow the business, identified a number of strategic investors and pitched our plan to them.
We were fortunate to raise the money that we were looking for from these parties, together with some of our own money.

With the money raised, we acquired
• A Bizcap team Specialising in Early Stage Capital Raising
• The leading R&D Tax Concession Firm, being run by an old friend of mine,
• a Recruitment Business (which acquired a few more recruiting businesses)
• a Training Business ((which acquired a few more training businesses).
• As well as making a number of Investments in Innovative Companies.

Our model was to set up different Companies with a common brand and Philosophy, whereby each Head would be a stakeholder, and a group policy of X referring Clients, people and knowledge with a common culture.

It was 2001, and the dot com crash happened…. And there was no environment for the SME innovator looking to raise between 200k and $2m….
Alan M developed the
“BSI Investor Forum” – where every 3 months we showcase 8 innovative companies to 200 HNI and Funds in Sydney, Melb and Brisbane.
Over the past 4 years…. We have had 15 forums, showcased 120 companies, of which +40m have been raised for more than 60 of them.

This year we have set up a USA office as part of our International Gateway Strategy, and are having our first forum in Silicon Valley at the end of July, where we will be showcasing 10 Innovative Australian Companies at “ALWAYS ON” – the key Silicon Valley Conference – where 900 people are expected.

Our Investment Fund
In 2003, an amazing opportunity presented itself…..
We had the opportunity to acquire a small BITS fund, sponsored by the Federal Government, from a group looking to get out of the early stage marketplace.
This Fund was a dream come true for us…. It gave us Capital to co-invest with our HNI and Funds, and we would not have to use our working capital to invest in these Innovative Companies.

We have subsequently merged with another fund, and together have made in excess of 30 Investments in what we believe that some will be successful world beating companies.

Since 2001 – we have grown from a turnover of 1m – 15m ….
Did I do this…. I have pretty much done nothing besides picking guys who are brighter than I am, passionate at what they do, with the right incentives to help them achieve their goals and objectives.

Where to from here?
We are currently working on a number of projects that will hopefully take us from $15m – 150m over the next 10 years.

Lessons Learned:-

• Have a Vision – “help companies grow” and “ be a one stop shop for the entrepreneur
• Be passionate – if you aint passionate get a job
• Get the brightest and best people, and make sure you look after them like gold. Your people are your assets
• Be able to sell and network
Keep communication lines open – our biggest failures have been through an inability to communicate
Cash Flow, Cash Flow, Cash Flow – hire people based on your actual needs , not your projected needs – be nimble and ensure you have adequate cash resources to achieve your objectives.
Avoid FTI – take action – make a decision and implement it – even if it is the wrong decision – you can always change it
Your Database is an valuable asset keep it updated, respect it and guard it. Use it for networking
X referring clients throughout the service lines – providing a holistic service to clients has been important
Build your Brand – this is where you will get leverage and credibility – update your website, provide links, use professional mweb marketers, create your blog, have events, seminars, attend seminars. Become “the college of knowledge” in your field of expertise. If people perceive you as a leader, performer and creator – then that is reality – PERCEPTION IS REALITY.