Apr. 15, 2008 SDF VC PWC

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On Tuesday, January 15, 2008 in Palo Alto at Pillsbury Winthrop Shaw Pittman LLP and SDForum held the fifth quarterly Venture Breakfast Series in partnership with PWC. Text stolen from DJCline.com.

Sylvia Burks of Pillsbury Winthrop introduced Steve Bengston of PWC and moderated a panel with Richard Wong of Accel, Chad Kinzelberg of Scale Venture Partners, Brian O’Malley of Battery Ventures and Lars Leckie of Hummer Winblad.

Internet specific investments like Web 2.0 are at least four billion dollars per year in the U.S. Most of that venture capital will be in Silicon Valley, with New York and New England coming in second and third. No matter what region of the country, E-commerce leads the categories with VC’s involved in later stage investing in companies with proven business models needing money for expansion. The potential exits are averaging in the 70 to 80 million-dollar ranges.

The most active investors are Draper Fisher Jurvetson and Accel. Inexplicably, First Round Capital in Pennsylvania is in third place. Intel is the only large corporation in this category.

Chad Kinzelberg joked Web 2.0 companies have a web application, two guys and zero income.

Advertising is the dominant revenue model. Steve Bengston said “resistance is futile”. Richard Wong said that only eight percent of advertising is digital disrupting old media and generating billions of dollars in revenue. As more consumers spend more time online the money spent on ads will follow them. That tipping point will happen in the next few years. Lars Leckie pointed out that today you still have to go through several pages of ads in a magazine to get to the articles. Leckie said that if ad content is relevant and as good as the regular content customers would be happy. Brian O’Malley said the good news is that you will get ads that are more relevant to what you want.

The dark side of all this is that advertisers will gather this information in ways customers may not like. If the data is seen as misused, customers will complain or no longer use the service. The key is that information gathered be used in aggregate and not revealed to the public as seen in last year’s Facebook debacle. Wong said there must be a balance between utility and trust between the providers and users.

Other than ads, companies like LinkedIn offer a free basic service. If you want more, you pay more. Kinzelberg talked about Merchant Circle, which allows small business to have a limited online presence. Like the yellow pages, if they want bigger ads it will cost more money.

O’Malley looks for companies that know how many customers they can retain and how much revenue they can get from them. The model has to scale quickly to reach a critical mass. Evite has terrible user experience but so many people know about that they use it anyway. Some companies are not looking for VC because their models work without the infusion of capital.

Leckie looks for a technology play versus marketing plays. Marketing is much harder than technology. They must someone on board who understands the complexities of online ad revenue and get traction in the marketplace. Ideally the goal is to already have lots of users without marketing.

Kinzelberg looks for a compelling consumer value and a strategy to scale up to the largest number of users. Are there partnerships or hard numbers beyond one dollar per CPM? Build your business like you are going to run it forever and not sell out. If you do well someone will come along and buy it.

Wong looks for engagement with users spending loyal customers spending lots of time on the site. It has focus on a specific need that nails a vertical market. If you have to advertise to get ad revenue you are in trouble.

VCs are there to help companies scale to provide the kind of back office infrastructure to handle the traffic. Successful companies have to prepare for going global quickly.

If Microsoft buys Yahoo it could change the exit strategies for many investors. While IPOs were the standard way to make money during the dotcom boom, going public has more downsides lengthening the time you get money out by as much as three years. Being bought out for thirty million dollars is easier than an IPO. Companies hoping to be acquired by large companies like Yahoo will have one less whale to swallow their plankton. Old media companies will probably get in just to stay relevant.

Despite the downturn, VCs are optimistic. It’s who they are. One engineer at a large company may wait to leave their full time job to start a new company, but some other engineer will take that chance. New jobs come from new companies. A recovery comes from someone that taking that chance.

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