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 (www.venturecapitalupdate.com )


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 -
• EBAY
• Skype
• Kazaa
• Joost
• 2nd Life

THE RISK
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.

THE VC ISSUE

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:-

ADITLAST And BOOKING ANGEL
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 estate.com; 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!!