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©Charlie Federman
Investing in Software, Internet & Technology Enabled Services
Venture Association of NJ
January 15, 2008 Crossbar Capital
©Charlie Federman
Agenda
• The dynamic of my business• Market leadership lifecycle• Investment opportunities• Summary investment strategy
©Charlie Federman
The Venture Business
• Raise a ‘blind’ pool of capital• Invest the money over 5 years• Diversify risk by creating a portfolio • Hope to return capital AND 20+% compounded return
(net of fees) over 10 years
©Charlie Federman
Market Leadership Lifecycle
©Charlie Federman
Opportunity Knocks- IT Market Lifecycles
• Always start small with vendor denial and few competitors
©Charlie Federman
Opportunity Knocks- IT Market Lifecycles
• Always start small with vendor denial and few competitors• Steep growth ramps attract many competitors, VC’s and exits
©Charlie Federman
Opportunity Knocks- IT Market Lifecycles
• Always start small with vendor denial and few competitors• Steep growth ramps attract many competitors, VC’s and exits• Aligning performance with investment timing is essential
– Capital too early – run out of oxygen– Capital too late – roll-up or sell to gorilla– Just in time – proper execution and market momentum will drive hyper-growth
©Charlie Federman
Opportunity Knocks- IT Market Lifecycles
• Always start small with vendor denial and few competitors• Steep growth ramps attract many competitors, VC’s and exits• Aligning performance with investment timing is essential
– Capital too early – run out of oxygen– Capital too late – roll-up or sell to gorilla– Just in time – proper execution and market momentum will drive hyper-growth
• Returns predicated on leadership attained via– Category creation– Existing category disruption
©Charlie Federman
Opportunity Knocks- IT Market Lifecycles
• Always start small with vendor denial and few competitors• Steep growth ramps attract many competitors, VC’s and exits• Aligning performance with investment timing is essential
– Capital too early – run out of oxygen– Capital too late – roll-up or sell to gorilla– Just in time – proper execution and market momentum will drive hyper-growth
• Returns predicated on leadership attained via– Category creation– Existing category disruption
• Investors challenge is to have a process that efficiently identifies and then participates in the right ones in a timely manner
©Charlie Federman
“Traditional” IT Lifecycle
First Movers
©Charlie Federman
“Traditional” IT Lifecycle
Best of B
reed First Movers
©Charlie Federman
“Traditional” IT Lifecycle
Growth PhaseBest o
f Bre
ed First Movers
Growth
©Charlie Federman
“Traditional” IT Lifecycle
Integrated
Growth PhaseBest o
f Bre
ed First Movers
Growth
Consolidation
©Charlie Federman
“Traditional” IT Lifecycle
Consolidatio
n
Growth PhaseBest o
f Bre
ed
Integrated
First Movers
Growth
Consolidation
Winners
©Charlie Federman
“Traditional” IT Lifecycle
Consolidatio
n
Growth PhaseBest o
f Bre
ed
IntegratedWinners
MSFT Oracle SAPIBM ?
PeopleSoft SAPSiebel Retek Symantc
MSFT JD Edward Lawson I2Informatica Webmethods Navisoft Great Plains
Oracle
©Charlie Federman
Internet 4C’s Experiencing Similar Dynamics
Best of B
reed
Integrated
Growth Phase
Consolid
atio
n
WinnersWinners
Digg Hotmail Oddpost Skype MySpace Dialpad Kazaa Usendit
Pando Flickr del.ici.ous Pyra Labs Picassa Dialpad
Yahoo eBay MSFT
ICQ
©Charlie Federman
Explosion of ‘New’ Affecting Internet Markets
• Too numerous and fast moving to properly identify, but formally arcane markets include:– Phishing, Clickfraud, Blog, Vlog, p2p, Voip, Rss, Wiki, Soa, Ajax, Open
Source, On Demand, Virtualization, Social Networks, Mash-ups
©Charlie Federman
Explosion of ‘New’ Affecting Internet Markets
• Too numerous and fast moving to properly identify, but formally arcane markets include:– Phishing, Clickfraud, Blog, Vlog, p2p, Voip, Rss, Wiki, Soa, Ajax, Open
Source, On Demand, Virtualization, Social Networks, Mash-ups
• How many $1B market cap realizations from these segments?
©Charlie Federman
Explosion of ‘New’ Affecting Internet Markets
• Too numerous and fast moving to properly identify, but formally arcane markets include:– Phishing, Clickfraud, Blog, Vlog, p2p, Voip, Rss, Wiki, Soa, Ajax,
Open Source, On Demand, Virtualization, Social Networks, Mash-ups
• How many $1B market cap realizations from these segments? • Not every investment requires a $ billion exit
©Charlie Federman
Market Opportunities
©Charlie Federman
The Enterprise is Ripe for Business Model Disruption
• Sales and Marketing “S&M” inefficiency issues are being addressed…by learning from the consumer– Acceptance of downloads– Thriving industry, geographic, and market blogs– Remote support (to lower cost regions) or automated support
©Charlie Federman
The Enterprise is Ripe for Business Model Disruption
• Sales and Marketing “S&M” inefficiency issue are being addressed…by learning from the consumer– Acceptance of downloads– Thriving industry, geographic, and market blogs– Remote support (to lower cost regions) or automated
• S&M has the potential to move down from 50-60% of vendor spending to 30-40%
©Charlie Federman
The Enterprise is Ripe for Business Model Disruption
• Sales and Marketing “S&M” inefficiency issue are being addressed…by learning from the consumer– Acceptance of downloads– Thriving industry, geographic, and market blogs– Remote support (to lower cost regions) or automated
• S&M has the potential to move down from 50-60% of vendor spending to 30-40%
• Broadband enables small(er) vendors to efficiently reach global customers
©Charlie Federman
The Enterprise is Ripe for Business Model Disruption
• Sales and Marketing “S&M” inefficiency issue are being addressed…by learning from the consumer– Acceptance of downloads– Thriving industry, geographic, and market blogs– Remote support (to lower cost regions) or automated
• S&M has the potential to move down from 50-60% of vendor spending to 30-40%%
• Broadband enables small(er) vendors to efficiently reach global customers
• Challenge is weighing lower ASP’s and deferred maintenance/support revenue with capital requirement to support market share scale
©Charlie Federman
Across all Segments, Disruptive Factors Decrease Initial Capital Thirst
• Early stage software/internet investing becoming LESS capital intensive– S&M leveraging the Internet communication paradigm– R&D leveraging open source tools
©Charlie Federman
Disruptive Factors Decrease Initial Capital Thirst
• Early stage software/internet investing becoming LESS capital intensive– S&M leveraging the Internet communication paradigm– R&D leveraging open source tools
• Ready supply of 2nd time entrepreneurs– Experienced the boom/bust– Know how to prioritize resources– Don’t need the initial cadre of VP’s
©Charlie Federman
Disruptive Factors Decrease Initial Capital Thirst
• Early stage software/internet investing becoming LESS capital intensive– S&M leveraging the Internet communication paradigm– R&D leveraging open source tools
• Ready supply of 2nd time entrepreneurs– Experienced the boom/bust– Know how to prioritize resources– Don’t initially need the cadre of VP’s
• Users acclimated to remote or computer generated support
©Charlie Federman
What this Means for Investors and Entrepreneurs
• Opportunity to invest within the explosion of niches that are rapidly growing into viable exit markets (e.g. Vocus IPO)
©Charlie Federman
What this Means for Investors and Entrepreneurs
• Opportunity within the explosion of niches that are rapidly growing into markets (e.g. Vocus IPO)
• Be wary of timing; two profitable entrance points are– at the ‘top of the triangle’ or – consolidate at the midpoint
©Charlie Federman
What this Means for Investors and Entrepreneurs
• Opportunity within the explosion of niches that are rapidly growing into markets (e.g. Vocus IPO)
• Be wary of timing; two profitable entrance points are– at the ‘top of the triangle’ or – consolidate at the midpoint
• Align capital consumption with leadership/exit– Lead, or exit, to the leader or contender– Know the ecosystem
©Charlie Federman
Investment Strategy
©Charlie Federman
Summary Core Investing Principles
• Invest only where the potential exists to be a market leader― IP Driven- Market creation through fundamental technology shifts― Business Driven- Market disruption through business model shifts ― Marketing Driven- Niches which will emerge into markets
©Charlie Federman
Summary Core Investing Principles
• Invest only where the potential exists to be a market leader― IP Driven- Market creation through fundamental technology shifts― Business Driven- Market disruption through business model shifts ― Marketing Driven- Niches which will emerge into markets
• Primary investment strategy is the identification of new markets expected to experience ‘tornado’
― Initial value creation driven by market growth― Exit timing determined by ability to seize/maintain leadership position (execution)― Exit alignment with founder(s) is essential― Technology and competitive environment moving so rapidly that real-time
involvement is critical (for leadership execution and exit)
©Charlie Federman
Summary Core Investing Principles
• Own enough of the winners– Capital efficiency and rapid time to market minimizes large capital early
stage risks– Build a portfolio of early stage/high ownership situations. Blend of IPO
disrupters, Market and IP disrupters– Disciplined process to determine which are entitled to deeper support
• Exit Early from market share laggards
