Soaring on Ridgelift

Did Oracle buy SUN to stop Cisco getting software?

Startup ideas tend to come in waves.

Generally (but not always! the ultimate winner tends to be one of the early entrants so I'm always alert for emerging trends. One of the latest trends I see is of tighter coupling between application and data - streamlined access to all sources of data whether on the network or storage. This holds true for both virtualized and high performance applications – at least so far!

I'm still connecting the dots to see how the trend matures, but it got me thinking about Oracle's acquisition of Sun Microsystems.

Given Cisco's entry into the server world and with their sights so obviously set on the Data Center, did Oracle acquire SUN to stop Cisco getting it's hands on software like MySQL and Linux?

If the trend for tighter integration between application and data continues, new leaders could emerge in both the virtualized and high performance spaces. The odds favor an incumbent vendor like a Cisco or Oracle moving into an adjacent segment and extending their dominance – however, a startup has a chance assuming it can leverage agility, deliver overwhelming benefits and overcome the enterprise manta of "I don't buy from startups".

For Cisco to extend its dominance, it needs to leverage its ability to develop solutions that benefit from tighter integration with the network – the ultimate source of all data whether from remote locations or storage (memory or disk). It doesn't take too much imagination to see the benefits that could have extended from taking MySQL, a stable Linux implementation plus a lot of networking/high performance know-how to build a killer data center solution.

Ironically, several of the early stage companies I work with have migrated away from MySQL because of changes the SUN made to the license agreement. PostgresSQL emerged as a very viable alternative for many of these companies. Perhaps this is a viable alternative for Cisco – time will tell!

If I'm right about the trend, Oracle will need to extend it solution set by acquiring substantial networking experience – just as Cisco still needs to get higher level software and expertise.

Assuming this is a trend and not a line drawn between two data points, the future M&A market for startups in this space could be very lucrative!

We will see!

[Apologies if you saw an incomplete version of this post earlier! Finger trouble with the iPhone TypePad application on my part!]

Back in the slot…

It's been almost a month since my last post – time has flown, consumed with intense work with one particular company followed by the last two weeks on vacation. So now I'm back in the slot and back to writing on my blog.

The inspiration for today's main post comes from meeting with a bunch of early stage companies over the last few days. A common thread ran through all of them which I wanted to capture. As I read through the list of issues that I highlighted there's almost a blog post in every bullet item… maybe I'll follow up on some of these topics over the next few days. Let me know if there are particular one's you'd like me to cover.

Better weather on iPhone

As I've written here before, I'm a weather geek – born in the UK alone makes for being weather passionate but add being a pilot on top… well, you get the picture.

One of the best weather sites just got even better – surprised by some unexpected light rain today; I dialed up the Weather Underground on my iPhone to check the weather. They've added an iPhone specific formatted weather page that is accessible via http://i.wund.com which is also hyperlinked from the top of the Wunderground home page.

Check it out! It has a great summary of the weather for a specific location including current conditions, the METAR (surface observation) of the nearest airport, current NEXRAD and the 5 day forecast. Loads in about the same time as the much less useful weather information accessed from the iPhone icon for Weather.

You can access the iPhone page as a summary from a regular web browser but it's much better on the iPhone.

Excellent addition!

Death of the village

Part of my family moved to the village of Hodnet, Shropshire about 75 years ago and as a result, it's a place that I've visited frequently during my life. Hodnet used to be a village community – a church, pub, gas station and a core of shops for food and other necessities. It was an active village in the midst of a mostly farming community.

Hodnet sat on a busy road between Shrewsbury and Market Drayton – the road was narrow even by UK standards and in places, very accident-prone especially dealing with all the heavy trucks. The County Council talked for years about making a new road around the village – the "Bypass". Finally, about 8 years ago, the Bypass was built and peace descended on the village.

Unfortunately, the peace brought by the Bypass also accelerated the decline of the village's stores. The village had slowly declined in population as young people chose to move away rather than following their families into farming. The Bypass removed traffic passing through and the business that it brought from travelers.

The decline of Hodnet coupled with my forced loss of connectivity to the Internet, drew a parallel for me. Just as the Bypass has led to the decline of the village, those people and businesses not connected to the Internet are being bypassed and becoming less accessible.

It's sad in both cases… We can work to eliminate the digital divide but the long term fate of Hodnet is uncertain

The private equity bubble, and what it means for start-ups

There are storm clouds gathering in the buyout world, which could see a big retrenchment. In the long-run, this could be good for the Silicon Valley start-ups.

The amount of money raised by U.S. leveraged buyout funds in 2006 is staggering when you compare this to two years ago (see graphic).

Some forecasts suggest 2007 will be another record year.

Many institutional investors are worried that the LBO funds are "writing checks like crazy" and that "…this may be a great time to sell companies, not a great time to buy," Kelly DePonte of Probitas Partners, a highly respected placement agent active in the LBO space, told Reuters last month.

The argument used by those raising large LBO funds sounds familiar – "the opportunities for LBO deals are very strong," — and hence they say larger funds can be put to work. But if the opportunities are so good, why not raise the bar for investments – selecting only the best ones — to reap the largest returns possible? That would mean discipline, something that is rare in a market where investors, en masse, swing between fear and unrealistic expectations.

The staggering amount of money being raised by LBO funds brings back memories of 2000 with over $100B raised by venture funds. Can the LBO funds responsibly deploy the money they have raised, given their investors' expectations for returns and the competition for deals? Or, just as importantly, will there be a robust enough "exit" environment to allow the kind of returns the Limited Partners have come to expect?

The current environment would suggest not. LBO funds generally invest in mature companies with substantial cash flows and revenue – and so can be patient and bide their time for a liquidity event. But those longer time horizons eat into effective returns. An investment that takes a decade to bare fruit is less valuable than one that takes four or five years. The sheer amount of money that has flowed into LBO funds in the last two years creates its own challenge. Generating a 20% return over five years requires doubling the invested capital, so over the next 3 to 4 years, the LBO funds have to generate over $750B (and that's not counting the debt used to leverage the majority of deals) – but there was only $43 billion last year in IPOs. The math doesn't add up.

The inevitable conclusion is that LBO returns are headed lower – much lower.

It took VC funds five years to recover from the fund raising excesses of 2000. That correction was precipitated by the collapse of the Internet bubble and has been very painful. The venture industry has been much more careful in the size of funds being raised as a result and I suspect we haven't seen the end of next generation funds being driven smaller as more VC funds come back to the market.

As the VC funds proved in 2000, there are limits to the amount of capital that can be deployed in a particular investment strategy. What will spark the correction for the LBO funds?

Increasing competition for LBO deals will lower returns and make it harder to deploy the larger funds. The 2000 correction in VC fund sizes started with the larger funds being cut in size, as it became clear money couldn't be invested in a reasonable timeframe. Will 2007 see some of the larger LBO funds take the same action?

If this happens, will it spill over to the related hedge-fund industry? And will this, in turn, lead to public markets that values fast-growing venture-backed start-ups instead – because of their long-term potential?

For those of us here in early stage investing, it's time to paraphrase Mel Brooks' "It's good to be da King" in his movie History of the World, Part I.

"It's good to be an early stage investor!"

Originally posted at VentureBeat.

Happy New Year - 2007

It's New Year's Eve… in a few hours it will be 2007.

I want to take a moment and thank all of you for reading my blog – for the comments, feedback and interesting ideas that have come from these interactions.

I'm looking forward to all the ideas and opportunities that 2007 will bring – there's sure to be no shortage of creativity and new business plans! That's one prediction for the New Year that seems a sure bet!

Wishing you all the very best for 2007!

Stu

UnPlugged!

It's been a long time since I was disconnected from the Internet for any length of time - whether on vacation, business travel etc. I was always on-line.  It's not just about email (I get that on my Treo) - it's being able to access news, information, blogs - in short, being part of the Global Village.

The last few days I've been visiting family who weren't part of the global village when we arrived - part of the trip mission was to connect them up to the 'net.  Despite having email access and being able to deal with the "important" stuff (truth be known, it could all have waited :-), the worst was not be able to access the stuff I view every day or be able to search for information - even stuff as simple as how to get to the next place to visit!

Well, mission accomplished.  We got the family up on the 'net and helped them send their first email message.  We've added another person to the global village and seen the light in their eyes at being able to communicate with their sons, daughters and grand-children.

If you get the chance, help bring someone new to this global village of ours - it's too easy to forget the capabilities and freedoms that the Internet brings when you use it everyday - adding someone new to the 'net will bring freedom to them and remind you of the tremendous asset we use everyday.

Welcome to the global village folks!

Weekend - to blog or not to blog?

When I started writing this blog I noticed that its readership stats have a pronounced weekly pattern - fewer readers on the weekend than during the week.  Hardly profound, you can see this pattern in a lot of blogs.  Some of this has to do with the readers having weekend activities while the other contributory factor is that I tend to blog less at weekends (also due to weekend activities).

So, I thought I'd make an effort and write articles at weekends for a while to see if the pattern can be influenced!

While on the topic of blogging, I found an interesting article by Christina Kerley who surveyed a group of 30 marketing blogger's asking them what they got out of blogging.  It's an interesting read - check it out here.

The cross section of reasons for blogging are interesting and resonated for me as it came hot on the heels of my post earlier this week about VC blogging.

The key takeaway for me?  Blogging is about writing down you point of view and putting out there to be tested and measured.  Reality feedback!

 

Technorati tags: Venture Capital, Blogging, Ridgelift Ventures

Welcome to my new home!

After thinking about a lot of the things I wanted to do with my blog, I decided to move the blog from it's old location at Blogger.com to this new location here on Typepad.  If you had bookmarked the old blog location, please remember to update with a new bookmark to this site.

If you are using RSS to pick up the feed of the site, then no worries!  The old feed was abstracted using Feedburner and I updated the Feedburner link to get the RSS from this new site.

If you'd like to subscribe to the Feedburner feed, click on the large orange icon that's in the right sidebar on the page.

I've added a new feature to my blog - Stu's Hotlist.  You can access this feature by clicking on the link in the right column.  Stu's Hotlist is powered by the Personal Bee - I wrote about the Personal Bee in my very first blog article where I lamented the absence of an editorial view of the blogging world.  Well, the Personal Bee let's anyone become an editor - so I've started Stu's Hotlist as my editorial view of interesting articles and developments in the areas that interest me.  The hotlist will be updated several times each week so check back from time to time to see what's on my mind.

Thanks for reading my blog!  I appreciate those who have taken the time to add their comments - they are always inciteful!