Ahead to the Pasts Tor Width Apr 2003

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1

Ahead to the Past!Next-Gen, Old-Fashioned Venture

Vinod Khosla

Kleiner Perkins Caufield & [email protected]

© 2002 The New Yorker Collection from cartoonbank.com. All Rights Reserved.

mailto:[email protected]




2

The VC “LANDSCAPE” in 2000

# of VC Firms in Existence

# of Professionals

# of First Time VC Funds Raised

# of VC Funds Raised This Year

VC Capital Raised This Year ($B)

Avg VC Fund Size Raised This Year ($M)

Source: NVCA Yearbook 2001; Venture Economics

1980

87

1035

24

57

2.08

36.5

1990

375

3794

14

82

3.20

39.0

2000

693

8368

164

497

105.05

211.4



3

The Illiquid Bulge

From 1995-2000:

14,463

9781,529

1,180

10,776

Companies funded

Went publicWere acquired

Went out of business

Remaining

Source: Venture Economics; Venture Source

-

-

-



4

The Beauty of Small Numbers(And Board Seats)

I n i t i a l i n v e s

t m e

n t :

$ 1 0 0 k t o $ 1 M

, b

o a r d Date

Jul-95

Jun-96Apr-97Sep-98Oct-98Apr-99Jun-00Jan-01

Apr-95May-96Jul-96May-97Apr-98May-98Jul-98Mar-99Sep-99

Nov-99Dec-99Dec-99Dec-99Jan-00Mar-00Aug-00Nov-00Jul-01

Company NameExcite (@home)

JuniperCerent (Cisco)CorioSiara (Redback)AseraCentrataInfinera

Concentric (XO)ViantCybermediaExtreme NetworksSilicon Spice (Broadcom)CorvisLightera (Ciena)CoSineBBO

ZapletValiantZambeelOnFiberCoreonKymata (Alcatel)CenixSS8Kovio

Red = Board Seat

< $1M (n=8)> $1M (n=18)

On board (n=16)Not on board (n=10)

Aggregate

Return*

192.7 x4.5 x

70.8 x8.0 x

Success

Rate*

100%67%

88%60%

* Numbers include current private companies at cost of fmv

I n i t i a l

i n v e s

t m e n

t :

$ 2 . 5

m t o

$ 1 6 M

Conclusions

– Attention matters

– Board responsibility = better due diligence

– Quick money makers don‟t work

– Too many passive deals last few years

– One seed per year works for me



5

Capital

Funding to Milestonesaka “Old-Fashioned Venture Capital”

Risk (ß)

Valuation

Idea isFeasible

TechnologyWorks

A CustomerBuys

SeedFunding

R&DCapital

Go-to-MarketCaptial

ExpansionCaptial

P(success) = 30%Req‟d IRR = 100%

P(success) = 40%

Req‟d IRR = 70%





6

The “Fully Funded” Folly

A CustomerBuys

FullyFund

IPO(……….pray……………….)

Capital

Risk (ß)

Valuation

Idea isFeasible

TechnologyWorks



7

A Generic Early 90‟s Model

RoundType Date

AmountRaised (MM)

Pre-MoneyValuation

(MM) IRR Multiple

1 Seed Jan-90 $ 0.50 $ 2 101% 32.53

2 1st Jan-91 $ 3.00 $ 10 70% 8.13

3 2nd Jan-92 $ 8.00 $ 32 50% 3.30

4 3rd Jan-94 $ 13.50 $ 100 32% 1.32

5 IPO Jan-95 $ 150

Total Private Capital $ 25 Million



8

A Generic Late 90‟s Model

RoundType Date

AmountRaised (MM)

Pre-MoneyValuation

(MM) IRR Multiple

1 Seed Jan-97 $ 5 $ 35 79% 18.37

2 1st Jan-98 $ 10 $ 100 65% 7.35

3 2nd Jan-99 $ 25 $ 200 59% 4.04

4 3rd Jan-00 $ 60 $ 600 52% 1.52

5 IPO Jan-01 $ 1000

Total Private Capital $ 100 Million

$200

?



9

Why “Ahead to the Past”?

• We can‟t make money with Early 90s IPO marketand Late 90s Cash Burns

• Some correction already – Private Valuations

– Rent (in Silicon Valley)

• Some corrections yet to occur – Salaries

– Focus

– Attention• VC Behavior

– Funding size?

– Corrections for the past bubble

– Entrepreneurial incentives



10

The Committed Capital Bubble

1995 1996 1997 1998 1999 2000 2001

$7.6$12.2

$17.0

$29.8

$50.5

$90.1

$48.2

$6.8 $9.8 $12.8

$17.6

$47.2

$91.6

$32.1

$0

$20

$40

$60

$80

$100

Investment Fundraising

Source: VentureOne

F undraising vs. Amount Invested



11


Source:

VentureOne

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001

UninvestedVenture Capital

Total Over-committed Capital for all Private Equity = $100B

A c c u m u l a t e d C a p

i t a l

O v e r - c o m m i t m e n t s

( $ B )



12


0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001

0

1

2

3

4

5

6Uninvested VentureCapital

Years of UninvestedCapital

Years of UninvestedCapital at 1995Investment Pace

Source:

VentureOne

A c c u m u l a t e d C a p

i t a l

O v e r - c o m m i t m e n t s ( $ B )



13

The VC Firm Model

• 1.5-2 ventures/partner/year

• $8-10M invested per venture (3 rounds)

• New fund every 2 years

• $12-20M per partner per year

• $24-40M per partner per fund



14

2001 IPO Companies Are MoreMature

4.5

3.12.92.83.13.1

4.14

0

1

2

3

4

5

1994 1995 1996 1997 1998 1999 2000 2001

Source: VentureOne

Time From Initial Equity Funding to IPO



15

What about the Telecom“Blowout”?

Category

Systems (Electronic)

Systems (Optical)

Services

Software

Systems (Electronic)

Systems (Optical)ServicesComponents

Software

Return IF HELD

300x14x228x*3.6xToo early12x*

Too early0.3x

0.9x14xToo early12x*0x0.7xToo early12x*0xToo early

Company

JuniperSiaraCerentCorvisInfineraConcentric

OnFiberCoreon

CoSineExtremeSS8LighteraValiantKymataCenixSilicon SpiceIPVerseSigma

O

n t h e b o a r d

N O T o n t h e b

o a r d

* Valued at time of acquisition



16

Case Study: OnFiber

• Management team saw a need to cut cash burnin January 2001

• Reduced burn from $5M plan to $1-1.5M permonth

• Turned down capital from investors pushing“get big fast” strategy

• Got out of obligations early

• Used 50% IRR hurdle on all new projects

• Focused on getting critical mass in 6 metrosrather than 26

• OnFiber Team‟s Results: – Current burn = <$1m/month

– $30M in the bank, no debt

– Acquiring assets for pennies on the dollar

http://www.onfiber.com/index.html



17

Bottom-Fishing Rarely Works

Old joke about a restaurant:

“The food is horrible…

but it‟s all-you-can-eat!”

• Too many “recaps” of uninteresting companies

• “Mercy killing” can be a good thing

• The good news: a handful of high-valuationprivate companies indicates quality is still beingchased.



18

Dot-Com Profitability: Less is More

• An Empirical Fact: Good financial results out ofseveral consumer-focused internet-basedcompanies

• Positive growth and EBITDA• Amazon

• Blue Nile

• eHealthInsurance

• Autotrader• Google



19

Wrong Goals: Time-to-IPO?

No optical systems boards from mid ‟98 to 2001

…



20

Avoid the “Conventions”

• Profits in telecom: Invest early & significantly• Less can be more - Small is Beautiful

• Attention (and board seats) matter

• Bottom fishing – does it work?

• Mercy-kill the uninteresting companies!

• “HOT” is NOT “good”: Dotcom, Telecom, Nano?

• IPO is NOT a “goal” : building a company is!

• Stock Market is not Validation: Corio

• Need to bleed off the oversupply of capital



21

How Did We Get Here?The Past Five Years

• Fundamental Opportunity

• Greed

• Funding the “ight-Lay”s

• Irrational Exuberance : IPO “goal”

• Escalating Expectations & Hype: The Khosla Bubble

• Fear

• Dislocated Business Plans

• Flight to Quality, Defensibility, Economic Contributions?



22

Many Companies Will Not Keep Up

Lucent

Nortel

Cisco

Tellabs

Alcatel

AT&T

Sprint

Worldcom

Leading CommunicationsVendors/Carriers

Leading Communications

Vendors/Carriers (Next Generation)

?

IBM

H-P

DataGeneral

DEC

Sperry

Univac

WangCray

Leading Computer Vendors

(Last Generation)

IBM

Sun

DellCompaq

H-P


(Current)



23

Old vs. New in theMainframe to PC Transition

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0 1 / 3 0 / 8 7

0 7 / 3 1 / 8 7

0 1 / 2 9 / 8 8

0 7 / 2 9 / 8 8

0 1 / 3 1 / 8 9

0 7 / 3 1 / 8 9

0 1 / 3 1 / 9 0

0 7 / 3 1 / 9 0

0 1 / 3 1 / 9 1

0 7 / 3 1 / 9 1

0 1 / 3 1 / 9 2

0 7 / 3 1 / 9 2

0 1 / 2 9 / 9 3

0 7 / 3 0 / 9 3

Microsoft

IntelCompaq

0.0

5.010.0

15.0

20.0

25.0

30.0

35.0

40.0

0 1 / 3 0

/ 8 7

0 7 / 3 1

/ 8 7

0 1 / 2 9

/ 8 8

0 7 / 2 9

/ 8 8

0 1 / 3 1

/ 8 9

0 7 / 3 1

/ 8 9

0 1 / 3 1

/ 9 0

0 7 / 3 1

/ 9 0

0 1 / 3 1

/ 9 1

0 7 / 3 1

/ 9 1

0 1 / 3 1

/ 9 2

0 7 / 3 1

/ 9 2

0 1 / 2 9

/ 9 3

0 7 / 3 0

/ 9 3

Digital Equipment Corp.

NCRAmdahl

Data GeneralCapital fledlegacy systems

New winners emerged

Source: Thomas Weisel Partners

This time the stakesare larger!



24

The Investors Dilemma

• Expect more losers than winners

• Many will lose everything

• More will be won than lost• The value of winners will exceed the

cumulative market cap of the entire

sector today• M&A Game is hard to predict



25

5 years out, the group‟s market

cap has grown…

Winners Take (Almost) All

Industry Structure Today

But leaders far exceed the also-rans



26

Fundamentals of Demand

• The Enterprise – Carrier services purchase decisions based on

payback period

– Paybacks< 1 yr => Continued demand

– 1% increase in IT = 1.5-2% decrease in G&A

– IT spending increased from 0.5% to 3.5% of sales in90‟s

• The Service Provider

– Enterprise demand => need for equipmentpurchases

– Consumption of bandwidth + shifting computingparadigm makes for new revenue opportunities

– Systems for old revenue don‟t support newrevenue & cost points =>new equipment purchases



27

Partial View: New Areas forInvestment

• Materials – But only with an economic advantage in an

application that matters

– Beware the Nano bubble!

• Probably more companies named “Nano______” in2002 than named “_____Light” in 2000

• Information Tech: removing the COW

• Personalized Medicine

• …….???



28

The HALF-EMPTY view

• Technology led slowdown

• Consumer Reaction pile-on

• Sept 11

• The WAR

• 2002 is history!

• Financings Unavailable

• Stay afloat, tread water, hunker down



29

The HALF-FULL view

• Less competition

• Time to develop technology

• Focus: sustainable advantage,

value-add

• Better critique, Better ventures,Higher Bar

• Longer Term View/Horizon• Lower Funding => Lower Risk



30

RECOIL: The New World

• Reaction to the excesses

• Unskilled, Unthinking “eBusiness” investment

• Skepticism & Negativism: Prolonged Cycle• VC Euphoria NOT

• Hard ROI – retrospective vs. prospective

savings

• Lack of Human Capital



31

The Weather Forecast …

• Rate of change will accelerate - life willbe more complex, busier . . .

• Adaptability, agility & momentum will be

the key to success!• Innovation, opportunities &

entrepreneurship will thrive

• Disruption will be the order of the day

• Fun, fortunes & failure will be inabundance



32

Wake Up Call

• What we take for Granted

• Irrelevance & the “other “ things

– Relationships: Friends & Family

– Satisfaction, Enjoyment & Contentment

– Feeling valuable: making a difference

• Value System

• Books: Don‟t Sweat The Small Stuff



33Comments? [email protected]

© 2002 The New Yorker Collection from cartoonbank.com. All Rights Reserved.



34

Tomorrow‟s Markets…



35

(ATM/FR)

(VOIP)

(IP/Bus Class IP)

(Broadcast)

The New IPInfrastructure

Network Issues & Trends

• Everything over IP

• Two layer network

• Value added services

• Internet based SW architecture• Skills shortage

• Mission critical technology

• Rapid, unpredictable growth• Legacy encapsulation



36

IT Issues & Trends

• Skills shortage

• Legacy architectures & “islands” vs dynamicarchitecture needs

• Mission Critical Technology

• Changing applications mix

• Systematic productivity : The Real-TimeEnterprise

• Random acts of productivity: everyday

processes• Technology based competition

• Operations Cost



37

Results: Market Opportunities

• Outsourcing & growth => a new (datacenter) infrastructure

• Value-added Services => new programmable network

• Operations cost & Complexity => OMAP focus

• A new IT architecture => “Real Time” information base

• Skills shortage & complexity => ASP, services

• Dynamic demand => Compute utilities

• IT going from 0.5% to 3.5% to ?% of sales

“



38

“Real Time” Enterprise “Ciscoize” and “Dellize” Every Business

• Adaptive architecture, evolvable applications

• Configuration NOT customization

• Federation NOT integration

• Architecture to connect architectures• Rapid , incremental implementation

• Beyond “database” to an “information base”

• Instantaneous “financials”, metrics, supply

chain, customer support .…

“Spontaneous transaction flow and information

transparency throughout the extended enterprise”



39

Operations Systems

• Cost of Operations:start/add/change/delete/operate/update

• Fluid Resource allocation

• Fluid “service” provisioning • Hard ROI: Cost savings & Revenue Generation

• Total Cost of Ownership



40

New network

operations systems must

be designed for adaptability and change

(new equipment,

multiple vendors, new

service offerings/

provisioning).

1970-1990 Minicomputer/

DEC era

1:1 people/machine ratio

1980- Workstation/

PC era


1990- Enterprise networks/

Cisco era

1:100? people/machine ratio

2000- Broadband packet

networks ?

1:1000? people/machine ratio

1960-1980

Time

Mainframe/

IBM era

Platform(s)


Network Operations Model

Source: Paul Johnson

Old network

management systems

were single vendor

solutions optimized for

cost in rigid five-year

preplanned networks.

One Analyst‟s Explanation:



41

New Area: “Virtual Computer”

• Networks of computers as the “Virtual Computer”

• Scalability of hardware - add & delete

• Self management

• Geographic distribution

• Load balancing, caching, COS, … services

• Resilience • “Network operating system”

SETI, Napster, Routers

A Computer Distributed Over the Internet



42

Case Study: Router Networks

• Behave as “one” machine

• System self-adjusts to “node” failures

• Capacity can be added/deleted -“self organizing”

• Geographically disbursed

• Managed failure modes



43

New Areas: Network Services

• Storage services

• Database services

• Web servers/HTTP servers

• TCP/IP session servers

• Application servers

• Composite services – Replication – Load balancing – Distribution

The “Decomposed” Computer Architecture



44

Other…

• Remote Services – multi-trillion global market

• Collaboration –Zaplet

• Nano



45

Investment Conclusions

• Internet is changing the model of computing• Software architecture of the internet will become the

software architecture for the enterprise

• Computing infrastructure (datacenter) will be the next

surprise; fueled by “ASP Services”, outsourced “compute

tone”, and internet “geoscale”

• The “real-time enterprise” will drive carrier demand at

increasing rates of growth & create Oracle/SAP scale

companies

• Operations systems to reduce operating cost & total costof ownership will be a major issue/opportunity

• Evernet – everyplace, every time, every device thru

“mobile IP” (but not a lot of money for new ventures)

Fundamental Contributors:



46

Fundamental Contributors:Investment Areas

• Semiconductors

• Software in hot boxes

• Physics / Optical /Nanotechnology

• ASP

• Nexgen telecom services

• Networks: the programmable network

• Real Time Enterprise• Infrastructure – revamping datacenter

architectures

• Operations Systems



47

But….

• Nano is approaching bubble status

• Storage has it‟s “Ightlay‟s”



48



49

The Storwidth Tsunami ?

Vinod Khosla

Kleiner Perkins Caufield & Byers

[email protected]

March, 2002





50

Hot New Startup: Orstay

•Orstay is pioneering a new breed of network storageserver that offers unlimited scalability and industry-leadingperformance in a system that is far easier and more cost-effective to manage than today's solutions

•By offering users the performance and functionality of aStorage Area Network (SAN) with the simplicity and easeof Network Attached Storage (NAS). Our product is anintegrated hardware and software solution that operatesover standard Ethernet networks and supports both blockand file transfers

•Our product team possess a unique understanding of the

requirements of the data center. In addition, we understandtoday's growing need for products that offer highperformance in the data center with a focus on highavailability, scalability and interoperability.



51

Hot Startup:

• ight-Lay is revolutionizing the future oftelecommunications by enabling high-bandwidth,low-cost optical MAN infrastructures that are robustand scalable enough to handle data and videotraffic, while also supporting legacy voice.

• ight-Lay combines the intelligence and switchingcapability of a data network with the reliability andprotection performance of SONET. The result ismultiservice access and transport withunprecedented scalability, provisioning flexibility andservice intelligence.

• With a significantly smaller capital outlay thancompeting products and fewer managementrequirements than other optical networkingproducts, ight-Lay delivers the solution carriersneed for the new optical age.



52

The Saga of Ight-Lay

• In 2000 at an “optical investmentconference”….

• Took one line from the website of each

metro optical company presenting• Concatenated them as “elevator pitch”for hot startup “Ight-Lay”

• Put presentation on KPCB website

• Got plenty of resumes and investmentinterest



53

How to Lose a Lot of Money

How I turned

$100,000 in

Stock into

$980 in Cash in

Just Six Months!

By I.M. Broke



54

Being Right is Insufficient

Be Wrong Be Right

Buy low,

Sell low

Buy low,

Sell high

JoinBandwagon

BeContrarian

Buy high,Sell low Buy high,Sell high



55

Avoiding the Bubble

Be Wrong Be Right

Buy low,Sell low

Buy low,Sell high

JoinBandwagon

BeContrarian

Buy high,Sell low

Buy high,Sell high

Is StorageHere??



56

5 years out, the group‟s market

cap has grown…

Even in HOT Areas …..Winners Take (Almost) All

Industry Structure Today

But leaders far exceed the also-rans



57

Avoiding the bandwagon

• What assumptions are others making?

• Are there scenarios where those assumptions

are wrong?• Cerent vs. Ightlay

• Brocade vs. Orstay

• Significant technical contribution

• Enabling a significant new capability



58

More Recent Assumptions

• All Optical Networks, higher speeds arecheaper

• No “vision” before it‟s time: MEMS, 40G

• Scalability is more important than cost – In optics

– In storage

• Storewidth: performance, SAN,

• Greenfield Networks• Cost of capital

O i l H V R li



59

Optical Hype Versus Reality

• Optics will transform the transport layer ONLY

• Since packet switching is necessary for any-any

interactive connectivity, an all-optical network

remains an optical illusion

• Value added services will be done electronically

• DWDM translate from long haul to metro?

S H V R li



60

Storage Hype Versus Reality

• Endless need and limitless opportunities

• Declining cost of storage: only in raw bits

• Big silicon, hot boxes, …

• SAN vs NAS

• The big COW• Revolution or Evolution: Insertion strategies matter



61

The Good News: Opportunities Exist

• The COW

•Insertion of Technology

•Googlizing

W t h th COW



62

Watch the COW

COW = Cost of Ownership

COW P t



63

COW Parts:

OperationalCostsAnnual*

$.08-$.10/MB

*Assumes one Sys Admin per 5 TB storage managed

20% Maintenance cost$1000/month std rack hosting cost

4 yr Cost of Storage:

$.45-.50/MB!

Filet Mignion: Operational Costs

make up 80% of total cost

(4X cost of initial investment)Baby Back Ribs: Not everybody

needs a steak (PFSB)

SystemSoftware$.08-$.10/MB

$. 025 Annual amortz.

Raw StorageCosts

$.01-.005/MB

Z b l



64

Filet Mignion: Zambeel

Zambeel‟s significant new technologycontribution attacks the priciest portion of theCOW

With 4 way independently scalable NAS

– Dynamic Capacity Allocation; Zero system downtimewhen changing capacity of user or system

– Fine grain and fluid assignment of throughputperformance at user or file level

– NFS file system to 100‟s terabytes

– 100‟s of simultaneous domains on same FS

B b B k Rib : P l Fil S t B k



65

Baby Back Ribs: Personal File System Backup

• Personal File System Backup (low QOS!)

– Super Low Cost, low performance , High Latency

Back Up

– Seamlessly convert data in repository from Windows

FS to a more scalable FS

– Snap Shot and delta Backup capability to reduce

backup processor/bandwidth requirements

– Management/Administration layer to handlecompilation of 1000‟s of desktops and provide search

capability.

I ti St t



66

Insertion Strategy

• More important than ever!

• Little customer urgency for new

technology

• Increased focus on COW, not just

equipment/software costs

• Risk Mitigation

“G li i ” th t i f t t



67

“Googlizing” the compute infrastructure

• Cheap PCs in parallel being a better outcomethan “expensive, specialized hardware”

– Grid computing

– Low cost units

• Why does that work for Google but Sun,NetApp, others are selling real product to smartpeople? – Why do enterprises not want “revolution”

– Linux, GE, … goal or a tactic?

R li bilit A N A h



68

Reliability - A New Approach

• The shuttle Challenger: designed not to fail

• Biological systems: designed to failgracefully

• Complex systems: “evolutionary approach”

C t Fi i l M k t D i



69

Current Financial Market Dynamics

• Funding the “Or -stays” and “ight-Lay”s

• Hype or reality – real markets? (Incubators, exchanges)

• Discrimination & typecasting (USIX, CRIO)

• Fear vs Greed ; Optimism vs. Pessimism

• Capital Supply – perception or reality? (CLECS)

• Analyst Phenomenon

– Escalating expectations : Guaranteed disappointment

– Whisper numbers : need for a new rationality

• Khosla Bubble : luck, values, belief system…

Valuation Rationalization



70

Valuation RationalizationKeep changing the denominator…

P/E

P/E/G

P/S

P/S/G

P/AM*

P/Cash

Time

M a r k e

t V a

l u e

*Price to Addressable Market

Press Release Bubble



71

Press Release Bubble

# N o n - F

i n a n c

i a l P r e

s s

R e

l e a s e s

( 3 m o n

t h r o

l l i n g a v e

r a g e

)

Source: Archived press releases from website of a public optical networking company

0

1

2

3

4

5

F e b -

9 9

M a y

- 9 9

A u g - 9 9

N o v - 9 9

F e b -

0 0

M a y

- 0 0

A u g - 0 0

N o v - 0 0

1 - F e b

1 - M

a y

1 - A u

g 1 - N o

v

2 - F e b

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Press ReleasesNASDAQ



72

Investor‟s Weather Forecast

How Did We Get Here?



73

o d e Get e eThe Past Five Years

• Fundamental Opportunity

• Greed

• Irrational Exuberance : IPO “goal”

• Escalating Expectations

• Fear

• Dislocated Business Plans

• Flight to Quality, Defensibility, Economic

Contributions?

New Technology has a History



74

New Technology has a History

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

C o n n e c t i o n s i n

L o n d o n

90 93 95 99

Source: When Old Technologies Were New

“In 1885, Yale students who were getting „more light

than they relished‟ chopped down an electric pole

erected at the corner of the campus…”

We Can‟t Predict What Will Happen



75

Walter Gifford, future President of AT&T, 1921

…We Can‟t Predict What Will Happen.

• “Nobody knew early in 1921 where radio

was really headed. Everything aboutbroadcasting was uncertain. For my

own part I expected that since it was aform of telephony, and since we were inthe business of furnishing wires fortelephony, we were sure to be involved

in broadcasting somehow.”




76


Lucent

Nortel

Cisco

Tellabs

Alcatel

AT&T

Sprint

Worldcom

Leading CommunicationsVendors/Carriers

Leading Communications

Vendors/Carriers (Next Generation)

?

IBM

H-P

Data

GeneralDEC

Sperry

Univac

Wang

Cray


(Last Generation)

IBM

Sun

Dell

Compaq

H-P


(Current)




77


NetApp

EMC

IBM

Hitachi

Brocade

Compaq

Zambeel

BlueArc

Sanera

Nishan

TrueSAN

Leading Storage New class of

Vendors Vendors

IBM

H-P

Data

GeneralDEC

Sperry

Univac

Wang

Cray


(Last Generation)

IBM

Sun

Dell

Compaq

H-P


(Current)

Some Won‟t

Make it

ER?

BrokeAid?

BlowUp?

Others Will Emergeas leaders

?

Old vs. New in the



78

Mainframe to PC Transition

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0 1 / 3 0 / 8 7

0 7 / 3 1 / 8 7

0 1 / 2 9 / 8 8

0 7 / 2 9 / 8 8

0 1 / 3 1 / 8 9

0 7 / 3 1 / 8 9

0 1 / 3 1 / 9 0

0 7 / 3 1 / 9 0

0 1 / 3 1 / 9 1

0 7 / 3 1 / 9 1

0 1 / 3 1 / 9 2

0 7 / 3 1 / 9 2

0 1 / 2 9 / 9 3

0 7 / 3 0 / 9 3

Microsoft

IntelCompaq

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0 1 / 3 0

/ 8 7

0 7 / 3 1

/ 8 7

0 1 / 2 9

/ 8 8

0 7 / 2 9

/ 8 8

0 1 / 3 1

/ 8 9

0 7 / 3 1

/ 8 9

0 1 / 3 1

/ 9 0

0 7 / 3 1

/ 9 0

0 1 / 3 1

/ 9 1

0 7 / 3 1

/ 9 1

0 1 / 3 1

/ 9 2

0 7 / 3 1

/ 9 2

0 1 / 2 9

/ 9 3

0 7 / 3 0

/ 9 3

Digital Equipment Corp.

NCRAmdahl

Data GeneralCapital fledlegacy systems

New winners emerged

Source: Thomas Weisel Partners

This time the stakesare larger!




79


• Expect more losers than winners

• Many will lose everything

• More will be won than lost• The value of winners will exceed the

cumulative market cap of the entire

sector today• M&A Game is hard to predict




80


• The Enterprise

– Carrier services purchase decisions based onpayback period

– Paybacks< 1 yr => Continued demand

– 1% increase in IT = 1.5-2% decrease in G&A

– IT spending increased from 0.5% to 3.5% of sales in90‟s

• The Service Provider

– Enterprise demand => need for equipmentpurchases

– Consumption of bandwidth + shifting computingparadigm makes for new revenue opportunities

– Systems for old revenue don‟t support newrevenue & cost points =>new equipment purchases



81

Comments?

[email protected]





82

Past Assumptions



83

“This wireless music box hasno imaginable commercialvalue. Who would pay for a

message sent to nobody inparticular?”

-David Sarnoff‟s associates in responseto his urgings for investment in Radio inthe 1920‟s

Past Assumptions

Past Assumptions



84

“Who the hell wants to hear

actors talk?” -Harry M. Warner, Warner Bros, 1927

Past Assumptions

Past Assumptions



85

“The „telephone‟ has too

many shortcomings to beseriously considered a meansof communication.”

-Western Union Internal Memo, 1876

Past Assumptions

Past Assumptions



86

“There is no reason for any

individuals to have acomputer in their home.” -Ken Olsen, President, Chairman andFounder of DEC, 1977

Past Assumptions



Documents

Ahead to the Pasts Tor Width Apr 2003