This was a mostly in-line
quarter for our SaaS portfolio companies, very much along the lines of what we
have gotten used to seeing every 1Q. It
started slower than our adtech and enterprise SaaS companies would have
preferred but ultimately ended on the right note. The mid-upper enterprise market segment that makes
up the primary target of our enterprise SaaS companies, remains concerned about
the macro environment. As a result,
companies in this segment have generally been delaying significant purchases,
particularly during the first part of the quarter. In last quarter’s commentary
I had warned that 2013 application budgets might be tighter than they were in
the last couple of years. First quarter
results provided more validation to this statement. The adtech platform companies remained top
performers for the quarter, and several exceeded their board-approved
budgets. But even these companies
started slow in January and part of February.
on the results announced to date by the public SaaS companies we monitor, e.g.,
Netsuite, Demandware, ServiceNow, Jive, Cornerstone OnDemand, their performance
during 1Q13 remained strong, in-line with analyst expectations. Workday is also
expected to report in-line results, based on analyst predictions. Valueclick and Millennial Media, two public
online advertising platform companies we follow, are expected to announce
results this week but analysts are already projecting strong results. Though the results are in-line we also hear
that the public public SaaS companies continue to be impacted by the global
macro environment and the decreasing IT spending.
IPO market didn’t produce any significant exits during 1Q13. There were a few acquisitions worth
mentioning, most notably Google’s acquisition of Channel Intelligence and
AthenaHealth’s acquisition of Epocrates.
The rest, acquisitions by Jive, Opera Software and Twitter can be
characterized as tuck in transactions in the $50M range or below.
Positive aspects of our SaaS portfolio’s performance:
Strong license revenue growth of 10-30% QoQ
for the online advertising platform companies, and 10-15% of the remaining SaaS
companies. Adtech companies are seeing
more opportunities for yearlong contracts around their platforms and fewer
campaign-based contracts, indicating that large brands are becoming comfortable
employing such platforms on an ongoing basis.
The enterprise SaaS companies saw the revenue increase coming primarily
from upsells that are due to increased penetration within their existing
customer organizations and to the sale of additional modules to these
organizations. In general, we’ve also
seen more unbundling of functionality allowing customers to start with a lower
ARR but then expand quicker to add more of each solution’s modules. The strong upsells are also indicative of the
strong ROI corporations are seeing from these solutions and their increasing
comfort in using them.
Steady renewal rates (90%+) and improvement
on the churn we had seen in the social application companies.
Sales pipelines grew well, indicating
continued interest in SaaS applications in general and online advertising
platforms. We see continued interest for solutions for the CMO and also in
Improving environment for partnerships
between larger IT vendors and our portfolio companies. Of note, 8thbridge’s partnership with GSI (a
division of eBay) and eXelate’s partnership with IBM.
Negative aspects of our SaaS portfolio performance:
The negative macro environment, the
relatively slow growth of the US economy, the continued issues with European
economies, and the slower than expected growth in the other world economics
(Asia, Latin America), continue to create headaches for the customers and
prospects of our portfolio companies. During
the first quarter our companies faced slow January and February. Sale activity started picking up in the
latter part of February and really peaked in March, allowing many to surpass
their booking targets though revenue will be impacted negatively because of the
Social enterprise solutions continue to face
headwinds as corporations continue to assess the ROI and overall utility of the
solutions they have already adopted and find shelfware and low ROI. It is interesting that neither Salesforce nor
Oracle, which during 2012 made big acquisitions in this area, continue to
promote social enterprise solutions in the way they did last year.
While the sales pipelines are expanding, the
sales process remains lengthy for the mid-upper enterprise negatively impacting
sales productivity. Our companies
continue to invest heavily in sales and marketing in anticipation of increasing
demand in their target segments.
Talent acquisition remains difficult,
particularly in the west and northeast.
As a result, our portfolio companies have to offer packages that are
higher than those planned, negatively impacting their operating margins.
We are off to an OK start. We
are still very bullish on the growth prospects of all our SaaS portfolio
companies (enterprise and adtech) and continue to look for additional
investment opportunities even in in these types when the investment conditions are
not ideal due to the terms expected by management teams.
I have been trying to reconcile two
trends I'm seeing. First, large
companies are acquiring venture-backed startups to accelerate their innovation
efforts. Even as the R&D budgets and
associated efforts of large corporations are increasing,
they have not been keeping up with the accelerating pace of technology and
business model innovation. These
acquisitions fall in two categories.
First, acquisitions as a means of jump-starting corporate innovation
efforts and getting corporations into the “innovation flow.” Good examples of such venture-backed company
acquisitions include Avis’
acquisition of Zipcar, Walmart’s acquisition of Kosmix and of
Small Society, Wellpoint’s acquisition of Resolution Health, and Home Depot’s recent acquisition of Black Locus. These
acquisitions are less about the technology being acquired and more about the
innovations the startup employees will be able to create once they are part of
the acquiring company. Second,
acquisitions as a means of staying in the forefront of innovation. Companies in this category are acquire
frequently in order to enter a new sector or grow a sector they are already
working on. Good
examples include VMWare’s
acquisition of Nicira, and Facebook’s
acquisition of Instagram. Finally, a growing number of corporations from
American Express to P&G, from BMW to GE, and Walmart to Best Buy
establishing operations in innovation centers, such as the Silicon Valley, in
order to tap into the startup and innovation flow.
Second, while the number of
seed-stage companies is increasing dramatically because their founders see
opportunities for a quick exit based on the first observation, the number of
companies that can receive expansion rounds and make viable acquisition
candidates remains small. This is
Many of the seed-stage startups that number
in the thousands and are funded primarily by non-institutional investors, i.e., entrepreneurs themselves,
angels, super-angels, friends and families, are not
innovating, don’t have no product roadmap, hypotheses of viable business
models, or even ideas of how to acquire and retain customers.
number of management teams that can be backed by institutional VCs for scale,
give the “escape
velocity” and make it a viable candidate for an exit that provides high returns
to a venture investor has remained small. As
shown below, the number of companies that receive additional rounds of funding
by institutional investors has remained largely unchanged in the past 2-3
number of institutional VCs who can fund and materially help these early stage
companies is getting smaller. Fewer of
these institutional venture firms are able to raise new pools of capital particularly
capital that can be used for earlier stage investments. The Limited Partners (LPs) that provide the
capital to the venture firms want to take on less risk with the capital they
provide and they want returns faster. The thinking is that investing in later
stage companies shortens the time to liquidity while reducing the risk of the
investment. Because of the overall
venture industry’s returns have been low over the past 10-12 years, the
allocations LPs are making to venture funds have decreased and are now about
25% of their peak in 2000. LPs want to
invest in only a few venture funds that they consider as having the right deal
flow of early stage companies that have higher probability for meaningful
exits. So we are moving from an industry
with a broad investor base to an industry of specialists (SaaS specialists,
biotech specialists, consumer internet specialists, etc.).
because the number of the desirable startup acquisition candidates will remain
small, large corporations will need to find ways to foster innovation from
within. Corporations must also become
better at selecting which companies to acquire.
In this way will be able to identify companies that can provide the
desired innovation in the short term but also have the teams that will stay
with the acquiring company thus providing long-term benefits. The capacity of institutional VCs to invest
in seed-stage startups will not increase.
In fact, it may continue to decrease further. Rather than creating as many seed-stage
startups with weak teams, dubious innovations and no long-term prospects,
entrepreneurs must seek to form strong teams that can innovate and build large
and enduring companies.
advertising is helping corporations monetize the Internet by transforming the
way corporations are interacting with and marketing to their customers and
prospects. The effectiveness of online advertising
is so dramatic that corporations are constantly shifting their budgets to the
digital channel, taking share away from other forms of advertising such as
print and radio. Corporations are attracted by the improved targeting, ability
to easily experiment with formats and messages, rapidly adapt to changing
market conditions, transparency (through measurement and attribution) and
cost-effectiveness offered by the various types of online advertising (search,
display, social) and the channel through which it is delivered (desktop,
mobile, digital radio). At the core of
these attributes is big data management and analytics.
is about acquiring, retaining and growing the
value of customers.
Online advertising is proving very effective in achieving these goals.
It is proving particularly effective for demand-generation
through increasing awareness and interest.
As a result, and as is shown below, the share of spending for online (or
digital) advertising as a percent of total amount being spent on
has been increasing and is projected to continue to increase.
with every other form of marketing, for customers and prospects to want to
engage through online advertising they expect to receive through appropriate
channels contextually relevant messages that are specific to them. In a recent study conducted by Forrester,
consumers showed that they notice online ads more than other forms of
advertising even if they don’t click
Big data is playing an increasingly important role, perhaps
the central role, in the improving effectiveness of online advertising. This is
because over the past couple of years online advertising has been moving to programmatic buying. Programmatic buying refers to the practice of
automating the buying of online ads by using algorithms to drive the best
possible price for each impression. This occurs in real time, on demand and on
an impression-by-impression basis. Real-time
bidding, RTB, refers to the impression-by-impression buying. As it is shown below, programmatic buying saw
a significant influx of activity in 2012, growing over 100% in the US to
$2.2bn, according to IDC, now represents close to 16% of display advertising,
and is expected to grow to over 30% by 2016.
The share of programmatic buying is increasing because of:
Premium ad inventory becoming
available through exchanges developed by public and private companies,
including the Facebook Exchange and Turn’s exchange. We expect additional platforms to enter
the market such as the one being built by Amazon.
The creation of private
exchanges created by brand advertisers.
Improved transparency in
The availability of video
and mobile ad inventory, in exchanges such as Brightroll’s.
Programmatic buying in general and RTB in particular are
generating big data. Interestingly, it is not the volume characteristic of big data that is important in this case. The challenge comes from the velocity and variety of the data that is being used in order to make
decisions. In RTB decisions have to be
made in milliseconds. To make a bid decision,
the RTB system must not only use one of more predictive models that have been
developed using machine learning techniques, but it must also combine and
consider data that is produced, and often changes, at different speeds; some data
changes very fast, other less so.
Management Platforms, called DMPs, are starting to be used by programmatic
buying systems to address the issues relating to volume, variety and velocity
of the data. They integrate, manage, and
online and offline data that is used to significantly improve the targeting of online advertising,
increase the ability to measure advertising effectiveness by performing more
detailed attribution. As online
marketing budgets are increasing, and the number of marketing channels is
multiplying (for example, for online marketing alone we use email, search,
display, social, mobile, video), the importance of attribution is
increasing. Marketers are not longer
satisfied with last-click
attribution but they want to understand which marketing channels
contributed to a customer’s decision and by how much. Marketing channel attribution analysis
requires sophisticated big data analytics.
online advertising can benefit significantly from the use of big data management
and analytics technologies, digital marketers are facing significant issues applying
these technologies effectively. There
are two reasons for that.
Big data technology is ahead of the use cases, even in online
advertising which has been one of the first sectors that starting using these
While we all want to believe that the world is moving from
Mad Men to Math Men, the truth is that it has not moved there yet. Marketers today are asked to make decisions
based on data and information presented to them via a multitude of dashboards and
other increasingly sophisticated analytic solutions that are based on
technologies such as big data, machine learning, real time analytics, etc. But they struggle with the proper use of
these solutions often focusing on the wrong metrics, taking a short view of
performance data, optimizing quickly on metrics such as clicks and “actions”
but often ignoring more predictive metrics such as customer lifetime value
(CLTV). Unfortunately, the ad agencies
the marketers use, which are primarily staffed with creative people rather than
data scientists, are not in much better position to help them.
succeed in effectively using online advertising solutions and getting the best
possible ROI particularly from programmatic buying and RTB, marketers must develop the right big data strategies.
These strategies must begin with the development of the appropriate understanding of
the big data that is becoming available and being utilized by these increasingly
sophisticated solutions, i.e., the “new big data,” rather than by just trying to
process the marketing data the organization may have stored and used in the
past, the “old big data,” using modern big data analysis techniques. These strategies must provide the proper
balance between under-utilization and over-reliance on the new big data. Finally,
these strategies must provide the ability to leverage the new big data in a
sustainable way to produce repeatable
Mobile World Congress (MWC) is the world’s largest conference focused on
mobile technologies with over 70,000 attendees
The conference marks a unique opportunity to get a truly global
perspective on the trends that will shape the growth of the industry in the coming
year. This was my fifth year attending
as part of Trident Capital and below are some of the takeaways that I had from
meetings with attendees from various carriers, handset manufacturers and
No News Can Be Good News
The most noteworthy news to come out of MWC ’13 was a lack of
noteworthy announcements. Past years
have almost universally included some announcement about a seemingly major
change to the mobile ecosystem. Last
year was the release of Windows 8, the previous year it was really the coming
out party for Android as it ramped from an upstart to the leading mobile OS
provider. Yes, there was an announcement
of the Firefox OS and yes there was some sabre rattling from Intel/Samsung over
Tizen, but for the most part, there was a notable lack of notable news. While the lack of sea change might seem like
a net negative, I would argue that the maturation of the market is a net
positive for players in the ecosystem.
Carriers, handset providers and software / app developers are all more
likely to allocate significant resources behind longer term R&D efforts and
true innovation with the improved visibility in the mobile landscape.
Impact For Investing: App developers (both consumer and enterprise)
are getting more comfortable with supporting two OSs for at least the near
term. We view this as a net negative for
app development platforms that have been solely focused on solving
fragmentation problems but a positive for other enablers of the app ecosystem
(app security vendors like Mocanaand Arxan, API management vendors, developers of vertical
Reaching the Next Billion
Lots of discussion from carriers and handset makers about the
opportunity to capitalize on further penetrating developing markets. Manoj Kohli, CEO of Bharti Airtel (4th
largest carrier in the world) told his audience at MWC that the next billion
mobile subscribers are going to come from markets like Asia and Africa. Kohli and others pointed to the increased
penetration of 3G networks and the dramatic drop in smartphone prices (as low
as $30). This was a theme that was
opened by the announcement by Safaricom leading up to MWC that they have
started to phase out feature phones altogether. While the penetration of smartphones in
developed markets like the US and Europe (the penetration rate in both of these
markets surpassed 50% last year) has been an important one, the penetration in
developing markets has the potential to be much more disruptive. Access to smartphones and mobile broadband represents
the first opportunity for many of these individuals to have any access to
computers or the Internet. The potential
impact for how goods and services are bought, sold and delivered will be massive.
Impact for Investing: This
should be a positive across the board as consumer focused app developers see
continued 30%+ organic growth. Secondary
markets like mobile advertising (Appia, mBlox, Brightroll) that enable this expansion are also likely to
see continued growth. Look also for apps that “hack” heretofore
analog processes in developing markets (bill pay, government services,
Rise of the Phablet / Handset
Makers Continue to Try To Break Into Content
A Huawei banner at Barcelona’s airport proudly announced that they were
the manufacturer of the “World’s Largest Smartphone”. While it is worth taking a moment to
appreciate the irony of this announcement from an industry that spent the last
20 years trying to shrink the size of phones, it does imply an interesting
trend as more and more manufacturers release crossover “Phablets” or hybrid
tablet / phones. These supersized phones
reflect an increased interest from mobile subscribers in consuming media,
shopping and richer mobile apps.
Carriers, recognizing the importance of this (and the increasing
difficulty in differentiating through hardware) to consumers are working hard
to find content deals or applications that appeal to consumers. Both of these themes were highlighted in
January in Evangelos’ blog posting on the Consumer Electronics
Show (CES) in Las Vegas.
Impact for Investing: This
may mark a (relative) return in importance for content providers as goliaths
like Samsung, Google and Apple look to drive handset sales through content
deals. This is also a continuing
positive for online retailers and the t-commerce market. Companies like CatalogSpree and Revel Touchthat drive great tablet experiences for
consumers will likely see the benefits of the continued rise in the
market. Second order benefits will
likely include players who help monetize the rich video experiences that are
being consumed on tablets (Brightroll) as well as driving mobile app downloads
Game On For the Mobile Security
One of the news items most talked about in the hallways of MWC was the
$200M in capital raised by Airwatch and the reported $5M that they spent on
their booth (which was almost as large as Samsung’s). There has been significant speculation both
last year and this year that consolidation is coming in the MDM / mobile
security market as the market matures and vendors start to shake out. This announcement of Airwatch raising a
massive war chest (while IPO / other fundraising rumors for Good and Mobile
Iron also swirl) may mark the start of this consolidation.
Impact for Investing: There is a tremendous amount of noise in the
mobile security space (Trident tracks over 75 vendors in the space). Consolidation in this market and a focus on
best in class solutions may be just what the market needs to allow the leading
vendors to break out. We view this as a
positive for our investments in Mocana, Arxan and Airwatch who are leaders in their respective markets.
Internet of Things
Over the last five years, “The Internet of Things” is likely only
rivaled by mobile payments in terms of a meager reality vs hype ratio. Last year featured Vodafone’s connected house
and this year was MWC’s Connected City.
The big announcements in this space were Qualcomm’s AllJoyn open framework for
connected devices (hoping to facilitate discoverability, interoperability and
security) and GM’s decision to embed LTE modules in cars starting in 2014
(powered by AT&T). Rajeev Chand at
a good summary of both of these in his research note, but the takeaways can be
summarized as: 1) Still a lack of clarity around business model for M2M - until
this and consumer willingness to pay is clarified I remain skeptical on the
potential for this market 2) GM’s
announcement was impressive in that it involves clear guidance on timing of the
roll out and which cars would be involved (including lower end models like the
Malibu). To me the GM announcement was
the most interesting. There is lots of
potential for app distributors like Pandora and Yelp as in car apps represent a
real opportunity to create value for consumers - which is core to successful
mobile deployments. GM’s Vice Chairman
Steve Girsky was on stage to make the announcement but his discussion with
moderator Rajeev Change seemed to lack an understanding of the full potential
of the business opportunity around connected cars. Girsky all but wrote off the opportunity,
saying that GM generates $150B in revenues and this “would not move the needle
for them.” Steve should note that GM’s EBIT was only $2.8B for 2012 and the
potential to get a piece of the profits from reselling broadband connectivity
or access to mobile apps through advertising could very easily move the needle
at the bottom line.
Impact for Investing: It is likely best to take a “wait and see”
approach in this market. While companies
like Nest have made tremendous strides in this
market, there are many others who are stuck in the starting gates.
Trident Mobile Investment
Our investment thesis for the mobile space focuses on mobile as a
disruptive force- rather than looking at mobility as a vertical market, we look
at it is a medium for delivery of information and applications that has the
potential to change how business is conducted across the enterprise. This change is both internal (impacting how
employees access information and improve productivity through mobile applications)
as well as external (how the enterprise interacts with consumers and engages in
marketing). We break these opportunities
for disruption down into vertical markets and horizontal markets. The vertical markets include Education,
Healthcare, Adtech, Retail / e-Commerce and Logistics / Workforce
Management. The horizontal markets include
CRM, HR Tech, Collaboration, Security and Mobilization of Enterprise Apps. While this list is by no means inclusive (and
we expect it to evolve over time), these are the markets we believe are most
prone for disruption within our investment horizon of 4-6 years. A more thorough overview of our investment thesis
can be reviewed in a subsequent post that includes a presentation at the SEVC
Conference that I gave in March (link to follow).
Several of the MWC themes discussed above are important for our
investment initiatives and support the opportunities we are pursuing:
Vertical Market Applications - the stabilization
of the ecosystem should have a very positive impact on vertical apps. The ability to focus on two OSs significantly
decreases the complexity and cost of developing and maintaining apps. We also believe that the further penetration
of mobile into developing countries will also drive global companies like P&G
and Citi to further extend productivity tools into the workforce.
Retail / e-Commerce - the decreasing price of
tablets lowers the bar for putting these tools into the hands of retail
employees. We are already seeing tablets
displace the traditional POS in stores like Nordstrom and JC Penney. Retailers are also increasingly focused on
developing apps that drive consumers into retail locations (clicks to bricks
strategies) and then help them in their decisioning process while in the
store. Companies like Walgreens have
been leaders in this market with mobile apps that allow consumers to refill
prescriptions and see specials going on in stores. We are excited about companies that are giving
retailers the tools they need to compete against e-commerce.
Adtech - The rise in rich media devices and the
further penetration of emerging markets both represent strong tailwinds for the
adtech space. Improved monetization of
mobile users is grist for the mobile advertising mill. We are focused on companies in the mobile
adtech space that understand how to leverage the mobile medium to deliver
effective ads that consumers find to be valuable rather than intrusive. We are also focused on companies that are
effective across multiple platforms.
With individuals now consuming media across multiple devices (tablets,
laptops, phones and computers) it is more important than ever to be able to
understand the consumer’s behavior across these devices and the most effective
way to reach those consumers.
Horizontal Enterprise Applications - The same
trends that apply for vertical market applications also apply for horizontal
markets within the enterprise like HR, Collaboration and CRM. We view the opportunity for investment here
as both companies that develop apps for these markets with a “mobile first”
approach as well as companies that help enterprises manage the process of
managing the integration of new mobile apps with legacy apps and systems of
record. Companies in the later space are
typically grouped into either BaaS (backend as a service) or API management.
Trident Portfolio Companies See
Trident was well represented at MWC by portfolio companies mBlox, Appia,
Brightroll, Turn www.turn.com and Bytemobile (as part of
Citrix). mBlox enjoyed lots of buzz from
the launch of their Engage product which is focused on broadening their mobile
messaging platform to include in-app messaging.
The Company received great response from customers and ecosystem
partners that were interested in broadening their mobile customer outreach to
include in-app messaging and the targeting / tracking capabilities that the
Engage product offers.
Bytemobile was front and center as Citrix made a big push to expand
their footprint into the mobile carrier market.
The $430M acquisition was announced in June of last year following a
partnership between the two companies that allowed Bytemobile to integrate
Citrix’s load balancers into its mobile solution that was deployed across its
130 operator customers. The merger looks
to be a rousing success as evidenced by the Bytemobile signage in the Citrix
booth and the amount of foot traffic.
Mobile advertising continued to be a big part of
the conference and Trident portfolio companies Appia, BrightRoll and Turn were no
exceptions. Turn has enjoyed strong
traction in the mobile space since their announcement last year of a
partnership with AT&T to combine Turn’s DSP with AT&T’s AdWorks ad
network. Appia has also been the beneficiary of telco
carrier partnerships, powering app stores for AMX across 18 countries as well
as deployments with Vodafone and Airtel. All three of these companies continue to
enjoy triple digit growth in mobile advertising in 2012 and 2013.
The physical world (from goods to equipment) is becoming
digitally connected through a multitude of sensors. Sensors can be found today in most industrial
equipment, from metal presses to airplane engines, shipping containers (RFID),
and automobiles (telematics devices).
Consumer mobile devices are essentially sensor platforms. These connected devices can automatically
provide status updates, performance updates, maintenance requirements, and
machine-to-machine (M2M) interaction updates.
They can also be described
in terms of their characteristics, their location, etc. Until recently these sensors have been
interconnected using proprietary protocols. More recently, however, sensors are starting
to be connected via IP, to form the Internet
of Things, and by 2020 50B devices will be connected in this way. The connected physical world is becoming a
source of immense amount of low-level,
structured and semi-structured data, e.g., big data.
Collecting and utilizing sensor data is not new. For example, GE
uses data from sensors to monitor the performance of industrial equipment,
locomotives, jet engines and health care equipment. United Airlines uses sensors to monitor the
performance of its planes on each flight. And government organizations, such as
collect data from the various scanners they use at airports. The key applications that have emerged
through these earlier efforts are remote service and predictive
While our ability to collect the data from these
interconnected devices is increasing, our ability to effectively, securely and
economically store, manage, clean and, in general, prepare the data for exploration, analysis, simulation, and
visualization is not
keeping pace. Today we seem to
be pre-occupied with the goal of trying to put all of data we collect into a
single database. Even in this task we
are not doing a particularly good job. The
existing database management systems are proving inadequate for this task. They may be able to process the time series
data collected by sensors, but they cannot
correlate it. The effectiveness of newer
database management systems (NoSQL), e.g., Hadoop, MongoDB, Cassandra, is also proving
inconsistent and depends largely on the type of application accessing the
database and operating on the collected data.
The new generation of applications that will exploit the
big data collected by sensors must take a ground
up approach to the problem they are trying to address, not unlike that taken
by Splunk. In Splunk’s case, the
application developers considered the ways the sensor data being collected from
data centers must be cleaned, the other data sets with which it must be
integrated/fused, the approach to interact with the resulting data sets,
etc. Splunk’s developers were able to
accomplish this and deliver a very effective application because they
understood the problem, the spectrum of data that must be used to address the
problem, and the role the low-level data is playing in this spectrum. They also appear to have understood the
importance of providing effective analyses of the low-level data as well of the
higher-level data sets that resulted when several different data sources are
The Internet of Things necessitates the creation of two
types of systems with data implications.
First, a new type of ERP system (the system of record) that will enable organizations
to manage their infrastructure (IT infrastructure, human infrastructure,
manufacturing infrastructure, field infrastructure, transportation
infrastructure, etc.) in the same way that the current generation of ERP
systems allow corporations to manage their critical business processes. Second, a new analytic system that
will enable organizations to organize, clean, fuse, explore and experiment, simulate
and mine the data that is being stored to create predictive patterns and
insights. Today our
ability to analyze the collected data is inadequate because:
sensor data we collect is too low-level; it needs to be integrated with data
from other sensors, as well as higher-level data, e.g., weather data, supply
chain logistics data, to create information-richer data sets. Data integration
is important because a) high-velocity sensor data must be brought together and
b) low-granularity sensor data needs to be integrated with other
higher-granularity data. Today integration
of sensor data is still done manually on a case-by-case basis. Standards-based ways to integrate such data,
e.g., RESTful APIs, other types of web services, have not yet adopted broadly
in the Internet of Things world and they need to. We need to start thinking of sensor data APIs
in the same way we have been thinking about APIs for higher-level data. And once we start defining these
standards-based APIs we also need to start thinking about API management.
don't yet know the range of complex analyses to perform on the collected sensor
data because we don't know yet what enterprise and government problems we can
solve through this data.
for the analyses we perform, we often lack the ability to translate any
analysis results to specific actions.
Finally, along with these two types of systems we will need
to effectively manage the IP addresses of all devices that are being connected
in these sensor networks. IPV6 gives us
the ability to connect the billions of sensors using IP. We need better ways to manage these connected
devices. Most organizations today manage
them on spreadsheets.
The big data
generated by the Internet of Things is opening up great opportunities for a new
generation of operational and analytic applications. Creating these applications will require
taking a ground-up approach from the basic sensor technology and the data
sensors can generate to the ways sensors and managed and data is integrated, to
the actions that can be taken as a result of the analyzed data.
The year ended well for our SaaS portfolio companies, and particularly
well for our online marketing and advertising platform companies. While Europe remained soft, NA more than made
up for it. All of online advertising
platform companies exceeded their budgets, in some cases by as much as
40%. We also saw margin expansion as
several of our SaaS companies were able to continue raising license
prices. However, these companies
continue to hire aggressively (sales, engineering, customer support) as they
try to keep up with the accelerating adoption of SaaS. Based on the end of the
year activity it became obvious that, as I had written,
the enterprise buyers were holding back in previous quarters and, once again,
flushed their budgets during 4Q. The
buying activity and our interactions with solution buyers led us to conclude
that 2013 is starting with strong optimism around online marketing solutions,
as well as general SaaS solutions for the mid-upper enterprise. We are more circumspect about the 2013
application budgets of global enterprises where we, and investment analysts
from Morgan Stanley, Piper Jaffray and other banks, continue to see very modest YoY
increases. We expect 2-2.5% for the year
for the global enterprise but 4-6% for the mid-upper enterprise and over 10%
for online marketing and advertising solutions, in particular.
on the results announced to date by the public SaaS companies we monitor, e.g.,
Netsuite, Demandware, ServiceNow, Jive, Cornerstone OnDemand, Qualys (Trident
portfolio company) their performance during 4Q12 remained strong, in-line with
analyst expectations. Brightcove less
so. Valueclick and Millennial Media, two
public online advertising platform companies we follow, announced strong 4Q12. The public SaaS companies continue to be
impacted by the global macro environment and the decreasing IT spending. We continue to see moderating revenue growth
for these companies, compared to the explosive growth we had seen in the
past. Based on the announced results, I
expect that for 2013 these companies, and our corresponding portfolio
companies, will show consistent YoY growth in the range of 25-50%.
the number of M&A technology transactions, and the value of those
transactions, during 2012 were slightly down from 2011, but cloud computing in
general attracted more of the acquirers’
attention. However, 4Q12 was another
active quarter for SaaS M&A. Oracle
bought Eloqua, as it continues to bolster its marketing technology solutions
portfolio, Synchross bought Newbay from RIM, and Citrix's acquisition of
In 4Q12 we invested in Fruition
Partners. This is our first investment
in a tech-enabled services company that has built its business around a SaaS
solution, in this case ServiceNow’s solution.
We were impressed by Fruition’s growth trajectory, capital
efficiency, and differentiated IP that is built on top of ServiceNow’s
Positive aspects of our SaaS portfolio’s performance:
Strong license revenue growth of 30% QoQ for
the online advertising platform companies, and 15-20% of the remaining SaaS
companies. Our portfolio companies saw
contracts with higher ARR (due to broader corporate deployments) and fewer
multi-year contracts (which we liked). During
the quarter our companies also saw less pressure for discounts, an issue that
was a concern in 3Q12. 4Q is typically
the strongest quarter for the advertising platform companies, and this year was
no exception. Based on our direct checks
regarding advertising budgets for 2013 we are starting the year being very
Steady renewal rates (85-90%) with strong
upsells in 15-20% (similar to last quarter) of the renewing customers, with the
exception of social application companies where, as I had also written when I
was reporting the 3Q12 results, we continue to see higher than expected churn (15%
MRR churn) by mid-market clients.
Sales pipelines grew well, indicating continued
interest in SaaS applications in general and online advertising platforms. We
see continued interest for solutions for the CMO and also in data-driven
During the quarter our SaaS portfolio
companies saw increasing interest for partnerships by large IT vendors. Many of these partnerships are driven by
large enterprise customers that want to see SaaS applications, particularly
social business applications, integrated into larger enterprise platforms,
e.g., CRM, HRMS, eCommerce. We expect
that these partnerships will start taking shape during the 1H13.
Negative aspects of our SaaS portfolio performance (none of these are
new compared to what we reported in the past):
Higher than expected revenue and customer
count churn in social business application companies. We see this as
the result of customers having
difficulty establishing the ROI for many applications of this type. It
also follows a more general, and important to follow, trend we
observed during 4Q12 regarding social in the enterprise. In particular,
that enterprises started merging their social interaction
departments/organizations, which during 2011 and 2012 operated as
entities, into their marketing departments, presumably to better
their overall marketing efforts and thus try to achieve better ROI from
Lead generation and nurturing remains uneven. Lead generation is becoming more effective
due to the strong interest in SaaS solutions.
However, nurturing these leads and converting them into sales qualified
opportunities still requires too much field sales involvement.
We have been pleased with the end of the year performance of our entire
SaaS portfolio and particularly our advertising and marketing platform
companies. 2012 was a transformative
year for many of them as they entered the growth stage of their lifecycle,
aided by the overall market’s growing appetite for SaaS solutions.
The Consumer Electronics Show (CES) this year attracted about 153K
attendees (flat compared to last year) and had 3000 exhibitors (about a 15%
increase over last year). Building from
last year’s trend, this year CES was dominated by mobility and wireless Internet
connectivity solutions. My focus
continues to be on the implications of these themes on the consumerization of
the enterprise and the monetization of the Internet.
Walking the floor I was struck by how
much PCs had been displaced by tablets and smartphones. The tablets and
smartphones introduced far
outstripped the PC variants that were introduced. Eventhough
manufacturers introduced a spate of Windows 8 PCs, mobile devices took
the center stage in
manufacturers’ booths while PCs (laptops, ultrabooks) were given less
positions. Microsoft was absent from CES
for the first time but I don’t think that this was the reason for the
lack of PC display prominence. It's just that the world is moving
irreversibly towards tablets and smartphones of various sizes. CES
include any “big” mobile device introduction.
We saw a continuing evolution in terms of what the mobile devices can
do. The mobile device market is maturing,
particularly in the US and parts of Asia, so the manufacturers don’t
see revenue growth just through additional device shipments. Instead
the growth will come from the
increasing value of the applications and content found in each smart
the discussions I had with IT executives I expect a continued trend for
and CYOD (Choose Your Own Device, from choices offered by corporate
IT). The content offered in the various devices
being demonstrated is not yet driving replacement or upgrade cycles. I
saw an improving trend
on the use of mobile devices to monitor health and fitness. It was
reported that 50% of US online
consumers are now using a single- or multi-sensor devices to monitor
health and fitness. This represents a continued
opportunity to collect and correlate data and combine with other
data; though this is not happening yet mostly because of closed
rather than privacy concerns.
TV. TV manufacturers introduced the
first models of Ultra HD TV sets (or 4K as is also called). While the resolution is significantly better
than HDTV, everybody I spoke to admitted that the US consumers and corporations
are not ready for a TV upgrade cycle and mentioned the failure of 3D TV as an
example. Many believe that Ultra HD will
have the same fate, at least in the short term.
In addition, there is a lack of content for these new TVs. However, the improved Internet connectivity
offered by new TVs (not only the high end ones) is of greater interest,
particularly to advertisers. The
improved connectivity enables these sets to offer richer interactions with
mobile devices such as tablets and smartphones which, particularly younger consumers
appreciate, and provide Internet style ad targeting of the consumer. Remember that during 2012 mobile advertising
proved particularly successful. It will
be interesting to determine how older TV sets can be retrofitted to offer this
improved connectivity. I imagine that TV
manufacturers will need to start componentizing their systems and offer a
connectivity box that is separate from the monitor, rather than cramming
everything on the same chassis, as it is done today. CE manufacturers will also need to develop publicly
available APIs and more open systems.
This again runs counter to the current trend of creating closed
agencies and brands. In all the years I’ve been coming to CES I’ve never
seen as many representatives from ad agencies and brands in attendance. In addition to being a rather unique
opportunity for meetings because of its size and diversity of attendees, ad
agency executives and brand representatives attended the show in order to
better understand consumer technology trends particularly around the wireless
and multi-screen world and its implications to multi-channel marketing and
targeting. I saw many agencies giving
tours of the show floor to their clients and I’m sure they used the opportunity
for meetings with their clients. I
certainly took the opportunity to meet with several ad agency and brand
While manufactureres introduced several mobile devices running Windows 8, CES 2013 showed once again that
Android and iOS remain the two dominant mobile platforms. However, the variability among the versions of
Android available in the market, the proprietary extensions created by each
manufacturer and the lack of well-defined and robust APIs will continue to present
problems for application development, integration and security. HTML5 is not having yet the type of impact I
was expecting. The mobilization of
enterprise applications, i.e., connecting enterprise applications to mobile
front-ends, will remain a problem for the next couple of years and present
The incorporation of tablets, and
smartphones into business processes will further accelerate the enterprise’s cloud
adoption for the provision of content and services, e.g., applications, storage,
training, etc. We expect to see major
enterprise initiatives particularly around mobile commerce and multi-channel
marketing and will continue to look for opportunities.
Connected TVs and the deeper
integration between TV sets, tablets and smartphones, will lead to online
advertising emerging as the primary way for monetizing content and
The human-to-machine and machine-to-machine
interactions that result from the increasing device connectivity will result in
larger, more complex, and shorter “half-life” data sets (big data) that will
need require increasingly sophisticated analytics.
Year! After a longer than normal holiday break, I’m taking this
opportunity to reflect on 2012 and provide my early thoughts regarding investment
activities in 2013.
During 2012 50
companies went public, the most of any year since 2007, but only 8
venture-backed companies during 4Q12, the lowest number in any quarter since
2009. The $11.2B raised through these
IPOs was the most since 2000, though most of it came through Facebook’s IPO. M&A proved a little more disappointing
than in 2011 with 433
deals valued at $40.3B completed, compared to 548 deals valued at $49.8B that
were completed during 2011. Because of
the uncertainty surrounding the US economy, due to the “fiscal cliff” and the
associated tax issues, corporations appeared to be holding back on
acquisitions, especially during 2H12, despite their healthy balance sheets. I don’t see the liquidity environment
changing materially during 2013.
Late last year I wrote
about the overall VC
investments during 2012, and the financing terms (including valuations)
that private companies with certain characteristics were able to negotiate
putting entrepreneurs and management teams in the driver’s seat. However, by the end of the year it also
started becoming apparent
that during 2013 seed-stage startups will face a financing crisis and most
won’t be able to raise new capital. Over
the past 3-4 years angel investors (casual and experienced) funded too many
companies that have weak teams, undifferentiated
IP and debatable business models.
Therefore, in my opinion, the expected “pruning” of early stage startups
will be welcome.
Many venture and
private equity firms will attempt to raise new funds during 2013. The LPs
remain skeptical of the ability of venture and private equity to provide
them with yield. Because many investment firms will be in fundraising and even
more firms have reached the end
of their funds with no hope of raising new pools of capital, I expect that
during 2013 we will see an investment slowdown with fewer new financings
overall compared to what we saw in 2012.
Investors will focus their investments on existing portfolio companies.
portfolio consists of enterprise applications, including social and mobile
enterprise applications, and adtech platforms.
In most of these solutions big data management and analytics play a
central role. During 2012 we saw the
emergence of a few important trends, which I expect will continue in 2013.
Accelerating adoption of cloud in
general and SaaS applications in particular by the global enterprise. The SaaS market is projected
to grow by 25 percent in 2013 to $59B and could
reach $75B in 2014.
Strong adoption by brands and their
advertising agencies of cloud-based adtech platforms and of programmatic
buying for online advertising. Of
particular interest has been the exploding
usage of online video whose monetization is now primarily coming through
Enterprise mobility initiatives started
moving from experimentation to production.
The incorporation of tablets in many business processes, e.g., sales,
quality control, collaboration, the BYOD
policy that many corporations have already adopted, the broader adoption of
smartphones and tablets by consumers who want to use these devices to interact
with enterprise applications, e.g., banking transactions, purchase
transactions, are the reasons for this move.
Big data initiatives are slowly moving
from experimentation to deployment but remain driven mostly by
rather than innovation goals. I still believe that the adoption of big
data management and analysis technologies can be transformational in the
enterprise and may even become a bigger opportunity than SaaS and cloud
have proven to be. But for the time being most enterprises don't
exploit the opportunities they have for data collection, e.g., few
collect data that is generated from machine to machine interactions, or
various forms of unstructured and semistructured data, e.g., social
graph data, and more importantly for data analysis, insight creation and
action. Of course, a major reason for the the slow creation and
adoption of big data
analytic solutions, particularly of solutions that utilize predictive
prescriptive analytics rather than just descriptive analytics, is due to
the shortage of
big data analysis talent (from data scientists to business analysts with
good understanding of big data).
As we look
into 2013, we also take into account the following observations from 2012:
SaaS alone is not sufficient to make a private
company interesting for venture funding. Maybe with a few industry-specific
exceptions, most applications today are developed to run in a cloud
environment. So SaaS has become
table-stakes. Perhaps this is a sign of
the model’s maturation
process. To be interesting for an investment
that has the potential of “venture returns,” a company developing application software
needs to utilize a variety of appropriate technologies, e.g., single instance multi-tenancy,
cloud delivery, big data analytics, social, etc., to solve an important problem
for which a buyer (corporate or consumer) would be willing to pay significant
amounts to have it solved. We are seeing
venture investors transitioning from being SaaS technology-centric, to becoming
problem-centric as they consider investment opportunities.
Enterprise SaaS is emerging as a
separate category. The SaaS model
proliferated enough where we can no longer treat it in a monolithic way. I think that it is time that we start differentiating
enterprise SaaS from SaaS
applications aimed at smaller companies.
Enterprise SaaS applications are sold by hybrid teams that consist of field
and inside sales personnel. These teams use
novel technology-driven demand generation methods and sales models, e.g.,
freemium, to achieve their goal. Enterprise
SaaS is characterized by sales cycles that are similar to other forms of
enterprise software. Such applications
are often available in private, public and hybrid cloud configurations, and are
licensed in multi-year contracts.
Security is the biggest impediment to
the broad adoption of enterprise SaaS and big data solutions. All CIOs I have spoken with list enterprise
data security as their top issue in moving more of the applications and IT
workloads to the cloud, as well as in adopting new applications, including
social, mobile and cloud-based big data applications. This issue is even more central in regulated
industries such as financial services, insurance, utilities where customer data
needs to be moved to the cloud. We
expect that this concern will continue to drive CIOs to adopt hybrid and
private clouds. Interestingly enough,
uptime is no longer as big of an issue as it was as late as last year. CIOs have come to accept that like every
system, cloud computing systems will also have issues and breakdowns.
With the increasing use of mobile
devices, mobile application development may become a big issue during
2013. The magnitude of the issue will
depend on how many mobile applications corporations will need to develop on
their own, and how many of their existing enterprise applications will need to
be accessed via mobile devices.
Based on the number of big data startups
that have been established and funded in this area we expect 2013 to be the
year when the big data bubble will burst but also the year that we could see a
small number of acquisitions of big data infrastructure companies by large data
management incumbents such as IBM, Oracle and Microsoft.
these trends and observations I expect that during 2013 we will continue to
focus on investments in companies that develop:
Solutions for customer understanding, mcommerce particularly as it impacts industries such as retailing, travel and financial
enablement and Internet monetization using cloud computing, mobile, social and
big data analytics technologies. All these solutions emphasize the increasing role of the CMO in setting a big part of the corporate application strategy.
Data security solutions for cloud and mobile environments that will add to our already extensive security portfolio
This time I waited longer than usual to write my commentary on the performance of our SaaS portfolio because I wanted to have the benefit of the quarterly results announcements by the public SaaS companies so that I can better compare it to that of our own portfolio. Also, starting with this post I will start including in my commentary our adtech platform companies, e.g., Turn, Brightroll, Exelate, Appia, JiWire and Sojern, which, as I mentioned in my previous post, we view as part of our cloud computing portfolio. These companies offer SaaS platforms that are being used by enterprises, either directly or through large advertising agencies representing them, use subscription and transaction business models, and typically sign term contracts.
My overall conclusion from the quarterly results posted by our SaaS portfolio companies is that during 3Q12 the macro environment, in conjunction with the slower procurement environment that is typically encountered during the summer months, resulted in moderate growth, in several cases below budget, for those of our SaaS portfolio companies addressing the more traditional business processes. Our adtech platform companies performed very well, in all cases exceeding their budgets. We will need to adjust our growth expectations for 2012 and 2013 for at least part of our SaaS portfolio. The enterprise continues to hold back on its IT investments and is trimming its IT budgets for the remaining of the year. By the end of the quarter, many of our SaaS portfolio companies heard what we had heard from our SaaS advisory board a few weeks before (and had found it hard to believe): enterprises have more unallocated capex budget, which can be used for on-premise applications, and not as much opex budget which is used to license SaaS applications. We found that hard to believe and we are in the process of trying to understand what is really going on. These trends will undoubtedly impact the financial performance of our SaaS portfolio. I expect that we will see slower growth in the 2013 IT budgets than we had projected in 2012, i.e., closer to 2-3% YoY growth.
Based on the results announced to date by the public SaaS companies we monitor, e.g., Netsuite, Brightcove, Demandware, ServiceNow, Jive, their performance during 3Q12 remained strong, in-line with analyst expectations. They continue to be impacted by the global macro environment decreasing IT spending. We follow smaller cap SaaS companies that are selling to the mid -upper enterprise and the global enterprise, i.e., their characteristics match those of our own SaaS investments. The announced results led me to two observations. First, these companies are starting to show consistent YoY growth in the range of 25-50%. Therefore, as we continue to monitor the breakout SaaS company metrics (see also here) that we have established for our own SaaS portfolio companies, we take this into account. I expect that for 2013 we will consider YoY growth above 60% as being indicative of breakout performance. Second, despite this more moderate growth, compared to what we’ve seen in the recent past, public SaaS companies continue to spend aggressively on sales and marketing, and their COGS remain higher than one would have expected particularly given the accelerating adoption of SaaS applications.
This was another active quarter for SaaS M&A. The biggest SaaS transaction during the quarter was IBM’s acquisition of Kenexa and VMWare’s acquisition of Nicira (thought this was cloud infrastructure than SaaS application). We’ve also see several smaller transactions led by recently public SaaS companies. Of particular interest was Bazaarvoice’s acquisition of Longboard which also underlines again the gradual merging of adtech platforms (Longboard) with enterprise SaaS platforms (Bazaarvoice).
Positive aspects of our SaaS portfolio’s performance:
Strong license revenue growth of 25-35% QoQ for the adtech platform companies, and 15-20% of the remaining SaaS companies with increasing subscription ARR. We are seeing significant upside in our adtech platform companies for 4Q12 and 1H13. Like with IT, 4Q typically is the biggest quarter for the adtech companies. It is also the quarter during which the budgets for the following year will be set. On this issue, our direct checks with advertising executives and through our portfolio companies lead us to be optimistic for 2013.
Steady renewal rates (85-90%) with strong upsells in 15-20% (similar to last quarter) of the renewing customers. In most cases the customers that are not renewing are not customers our companies want to keep, primarily because their solution is not a good fit for those customers’ needs. The high renewal rates and the significant upsell rates provide the strongest indications that the customers are realizing strong ROI from the use of these applications. The most significant risk regarding renewals is coming from our social application SaaS companies, because corporations have started to scrutinize the ROI these solutions are able to demonstrate consistently.
Growing pipelines, underlying the continued interest in SaaS applications by the segments targeted by our portfolio companies. Though with the particular macroeconomic backdrop it remains difficult to assess whether the sales cycles will start accelerating.
Negative aspects of our SaaS portfolio performance (none of these are new compared to what we reported in the past):
The macro environment and the uncertainty it results in remain a concern as corporations continue to back on their investments.
Price pressure and margins. We continue to see customer pressure for 5-10% discounts for an annual subscription and 5-7%/year for multiyear contracts. This, in conjunction with the need to invest in sales and marketing, results in continued lower gross and operating margins.
Lead generation and nurturing still uneven. Lead generation is becoming more effective due to the strong interest in SaaS solutions. However, nurturing these leads and converting them into sales qualified opportunities is still lacking, particularly for the more complex SaaS soutions, negatively impacting CAC.
We expect that our SaaS portfolio companies will have a strong end to the year. We continue to keep a vigilant eye to the trends we are observing in both our own companies and relevant SaaS companies as we try to help our portfolio outperform the market, as well as we try to determine which SaaS companies and under what terms to bring into our portfolio, during this period of moderating performance but inflated valuation expectations.
It has been awhile since I provided an update on our firm, the overall venture capital investment environment and some of the areas where we will be looking to invest during 2013. We recently met with our SaaS and Internet advisory boards so it was a good time to reiterate our firm’s investing posture, assess the performance of our SaaS and Internet portfolio companies, and discuss our more recent investment focus.
Our firm continues to grow. We recently hired a new partner, Gus Alberelli, to strengthen our late stage investment team, as well several associates to add to our sector teams. We continue to invest out of our 7th fund having just passed the half way mark and we have already started thinking about our next fund.
The last few months continued to mark the evolution of the venture industry both in terms of the firms that are actively investing and raising new capital but also in the types of investments that are being made. Since the beginning of the year we have considered a very large number of investment opportunities; maybe even larger than we typically see during a similar period. Angels, super-angels and early stage VCs have continued to be very active investing in companies raising their first capital as well as in earlier stage companies looking to raise their first truly institutional round. Just during 2Q12 alone $1.1B was invested across 282 deals, representing 15% of all dollars invested and 31% of all deals done. During 2Q12 we saw $7B invested in 898 deals, down 7% from 2Q11. We feel that during 3Q12 investment sentiment went up again and we see a similar pattern for 4Q12.
We continue to see a decrease in funding to consumer Internet companies, but a significant increase and focus on enterprise models, particularly around software, which is at a 10 year high. Starting with 2011 but also during the first 3 quarters of 2012 we saw a strong increase in investments around social for the enterprise, mobile, where we saw a YoY increase of over 50% in investments, a renewed interest in adtech and marketing technology, and accelerating investment interest in companies with big data solutions, where $1.1B has been invested to date in 60+ companies. Cloud computing has become table stakes in these opportunities.
The broad set of US venture firms continued to have trouble raising new pools of capital. We are seeing 100-120 funds being able to consistently raise new capital, invest it and have exits. This is a much smaller number of the funds that are registered with the NVCA (450) and continues to drive the separation of the “haves” from the “have-nots." During the 1H12 82 funds raised $13B, 31% increase over 1H11. The top 5 funds raised 80% of the $6B that was raised during 2Q12. We are also seeing, what I believe to be, a return to normalcy with firms that are focused on early stage investments raising smaller funds, ($100-250M), and multi-stage firms raising larger ones.
While we appear to be returning to normalcy regarding number of venture firms and size of funds, we are still in unreal territory regarding valuations. During 2012 it became apparent that VCs are willing to pay up for top line growth and for companies that have established leadership positions in spaces that are considered important. While it appears that in sectors such as social we have reached the peak of inflated expectations, we have nonetheless been extremely surprised at the valuations achieved by companies that have consistently demonstrated this growth (50-100% yoy growth) and demonstrated escape velocity in revenue ($15-20M+). Recent examples include Quirky, Klout and Zendesk.
We are on a pace for about 55-60 IPOs this year, a similar number to last year. However, while the number of IPOs was flat, the amount of money raised was up (primarily because of Facebook). SaaS IPOs did well this year with Workday and ServiceNow leading the way. Trident’s SaaS portfolio company Qualys had a very successful IPO a few weeks ago. Moreover, the SaaS companies that went public are trading well.
M&A of venture-backed companies is up slightly during 2Q12 with 110 deals, resulting $13.6B up from 98 deals worth $12.7B in 1Q12. Four of Trident’s software portfolio companies were acquired thus far this year.
We remain concerned at the lack of several (as opposed to just a few) significant exits in the Internet space. We recognize that the space is full of point solutions and that few companies will be acquired by a relatively small set of acquirers. We are also concerned that in our recent discussions with corporate development officers we heard of their desire to make acquisitions in the $30-100M range but not higher, intimating that they are not willing to pay high revenue multiples for the companies being acquired. Finally, as we consider the universe of potential acquirers in the internet area we recognize that Google and Adobe have largely completed their buildout, Akamai appears to have slowed it down (or even abandoned it), Facebook is building internally or is looking for partnerships, at least for the time being.
While adtech has not produced many exits, certain adtech sectors (DSP, SSP, mobile, video) continue to grow fast and are starting to attract public market interest. Millennial Media’s successful progress as a public company is a big contributor to this interest. We expect to see stronger IPO and M&A activity during 2013 and 2014, particularly in Demand Side Platforms, Supply Side Platforms, video and mobile. These are the adtech sectors where Trident has invested heavily and our portfolio companies Turn, Brightroll, Exelate and Appia are considered leaders in their spaces.
We have also been encouraged by the recent interest of IT vendors, e.g., IBM, Oracle, Salesforce to accelerate acquisitions of marketing technology companies (Buddy Media, Vitrue, Coremetrics). Our social marketing and commerce portfolio companies Extole, 8thbridge, ThisMoment, and Pivotlink, our marketing analytics investment, are expected to benefit from this trend.
In the big data sector during 2014 we may also see 1-2 IPOs, particularly of big data infrastructure companies, but we expect that the best of these companies to exit via acquisition.
Corporate VCs are aggressively re-entering our ecosystem either by establishing new funds and locating in our area, e.g., American Express established a standalone $100M fund, or by investing in venture funds and participating in individual financings, e.g., Walgreens.
Trident remains focused on companies that provide software, Internet and technology-enabled services centric solutions to the mid-upper enterprise and the global enterprise using B2B and B2B2C models. We differentiate ourselves through our areas of expertise that obviously include SaaS, adtech and mobile, big data and business analytics, as well as security and healthcare IT.
During 2012 we have slowed our typical investment pace because we are concerned about the overfunding of several sectors of interest, and the very high valuations being offered by investors and expected by management teams. We have been focusing on companies that have reached the expansion and growth stages. We have walked away from several opportunities where the company may be doing extremely well but where we couldn’t find a way of making money under the terms expected by their management teams. As a result, since the beginning of the year we have invested in Mocana (mobile security) and ThisMoment (social marketing and rich media content management). Presently, we are also waiting to receive feedback on four term sheets we have recently submitted. We expect that we will be able to close at least 2 of these investment opportunities before the end of the year.
Our portfolio continues to perform well with most companies achieving at least 30%+ YoY growth. Our earlier stage SaaS portfolio and most of our adtech portfolio companies have been able to grow 100% YoY.
New Areas of Investment Interest
Over the past couple of years we have had three distinct investment theses: social for the enterprise (social meets SaaS), adtech (SaaS platforms for ad-driven Internet monetization), and mobile applications for the enterprise.
We remain very excited about these sectors because of:
The continued shift of ad budgets to the online channel. We see social, mobile, and display/video as being strong growth drivers.
The accelerating adoption of programmatic buying and Real Time Bidding (RTB).
The increasing corporate desire for multi-channel marketing.
The technology opportunities afforded by the use of big data and analytics, closed loop marketing, and the increasing desire to merge offline with online programs while providing the proper attribution.
As a result, our overall investment thesis is evolving. Rather than looking at these sectors in isolation, we are looking at models that bring together Cloud, Social, Mobile and Big Data and monetize through advertising or commerce.
I wrote about the increasing power of the CMO, who is increasingly collaborating with the CIO in setting application strategy in the industries of focus. We are aware that mobile and social, while of strong interest to the CMO, remain under-monetized and that attribution, particularly involving offline channels, is of strong interest to the CMO. In addition to these areas we are spending more time with models that provide significant leverage such as freemium, try and buy. We see continued focus on these areas by ad agencies but we see them as having little ability to understand the technologies and the complexities they entail. Our portfolio companies continue to deal with campaign-based contracts rather than term-license contracts.
As we evolve our investment theses we have been focusing on four areas that we expect will continue to occupy our time for the next 18-24 months. Of course we would very much like your input and insight regarding these approaches.
Horizontal and vertical mobile applications. We believe that mobility remains a huge opportunity as mobile devices (tablets of every type and smartphones) continue to be adopted in large numbers and used on an increasing variety of tasks (search, mcommerce, collaboration). We remain, however, concerned about the platform war being waged by the large vendors. The improvement of networks is also a big factor as is the increasing use of both native and HTML5-based applications. We see mobile advertising and mcommerce (with representative companies like Aisle411, Revel Touch, Coffee Table, The Find, Square) as being completely distinct than online advertising and mobile ecommerce because they take into account the unique features of smartphones and tablets. We are seeing corporations increasing the number of trials and campaigns they are conducting using mobile devices but we are still seeing trials and not large scale deployments, even though we are impressed by the faster than expected adoption of tablets by enterprises. We view the growing number of mobile applications as good news, bad news. Good news because they provide more opportunities for interactions with brands. Bad news because application discovery is becoming a problem. Much like web site discovery had become a problem in the past and gave rise to search, we see the need for application discovery and recommendation technologies, based on user interests and usage.
Social applications for the enterprise. Over the past 2 years we have been focusing on applications that use social in inter-enterprise business processes, e.g., marketing and commerce. We are now focusing on applications that effectively utilize social in intra-enterprise business processes and value chains.
Adtech/Monetization. We remain focused on companies that can provide improved Internet monetization through new formats, and are paying particular attention to Facebook’s adtech efforts, data-driven targeting and optimization. As marketers are increasingly asking for omni-channel marketing solutions, and a clear demonstration of ROI, we see a big opportunity in cross-channel attribution solutions that can account for more than the last click.
Big data vertical and horizontal analytic applications that are being built on top of open source infrastructures like Hadoop. Thus far we have had hard time finding innovating applications that can only be done through these infrastructures and none of the commercially available proprietary ones. We are starting to see some examples like Bloomreach that can play an important role in both eCommerce, mobile and social. We are also particularly interested in social analytic solutions that can use such open source infrastructures to extract insights from social graphs that are augmented with other first- and third-party data.