1. TM
*nextwave Ideas for private equity investors and entrepreneurs in the technology industry
Inside
Web 2.0: The Internet subset formerly
known as the Web
Successfully shaping the future: MoneyTree™
FutureCentricSM companies 2005
ISSUE 4: 2005
Q4 and Full-year
*connectedthinking
2. TM
*nextwave
Special topics
01
Web 2.0:
The Internet subset formerly known as the Web
ISSUE 4: 2005
07
MoneyTreeTM Report
Full-year and Q4 results
23
Successfully shaping the future:
MoneyTreeTM FutureCentricSM companies 2005
Quarterly features
20
Regulatory buzz:
Issues regarding cheap stock and IPOs for private companies
24
Industry currents:
Fast-growth CEOs take brighter outlook, but proceed with caution
26
Voice of the VC
3. Message to the reader
A new year, a new beginning. So once again nextwave™ is looking to the
future—at the evolution of technology and the companies and entrepreneurs
driving that change.
Our lead article, “Web 2.0: The Internet subset formerly known as the Web,”
explores the next wave of Web-related development driven by the rapid
consumer adoption of broadband and high-speed wireless connectivity. Our
second article, “Successfully shaping the future: MoneyTree™ FutureCentricSM
companies 2005,” showcases a few of the entrepreneurial companies who
are building ideas and products that are shaping our future.
Also included in this issue are the fourth-quarter and full-year results of the
PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM
Report; data provided by Thomson Financial. Venture capitalists matched
2004 by investing $21.7 billion in 2,939 deals in 2005. See pages 7 through 18
for full details.
Finally, look for our regular features throughout the issue—Industry currents,
Regulatory buzz, and Voice of the VC—providing brief updates, useful advice,
and expert opinions on both the VC and technology industries.
You have a vision. PricewaterhouseCoopers helps bring that vision to reality. We
hope you enjoy the Q4 2005 issue of nextwave™ and appreciate your comments
about our current issue or ideas for what you’d like to see covered in future
issues. Remember to visit us on the Web at www.pwcnextwave.com.
Tracy T. Lefteroff
Global Managing Partner
Private Equity and Venture Capital
tracy.t.lefteroff@us.pwc.com
4.
5. Web 2.0:
The Internet subset formerly
known as the Web
There are many reasons to change “We are clearly in a new wave of media types—including text, audio,
a name—from technology updates Web-related development that is and video—as well as broad Web
and business model breakthroughs being driven by the rapid consumer adoption by both consumers and
to participation in the Federal adoption of broadband and high- enterprises.”
Witness Protection Program. In speed wireless connectivity,” observes
the case of the Web, the tweak Brad Feld, a managing director at “For us as auditors, Web 2.0 could
to Web 2.0—first suggested Mobius Venture Capital. “Google present lots of exciting opportunities
by O’Reilly Media Inc. VP Dale did a brilliant job of teaching a huge and, hopefully, I think some of these
Dougherty—is meant to suggest number of people that an acceptable companies may have a better chance
user interface to the Web was simply of going public than companies in
that enough factors have changed
a box on the screen that you typed other technology sectors,” notes
since the late ‘90s to warrant
text into and hit the search button; Danny Wallace, partner in charge of
another look at what the Web this resulted in a resurgence of online PricewaterhouseCoopers’ Assurance
means to commerce, applications/ advertising and ecommerce that is Venture-backed Start-up Practice in
services, and online communities. helping the premises of many pre- San Jose. “However, on the whole,
Has the process of how we gain bubble entrepreneurs and investors the VCs we speak with—regardless of
access to the Web, interact with finally become realized. As optimism sector—expect far fewer companies to
it, and deliver services evolved returns to technology entrepreneurs go public. Let’s say their expectation
enough to support more profitable, and investors, we’ve seen an incredible four or five years ago was that three
sustainable businesses? new wave of innovation across all or four out of ten companies in their
www.pwcnextwave.com 1
6. portfolios might be going public, December 2004 co-founded Odeo— tasking 19-year-old cousin interact
now it might be one. And, they factor a creative way to record and share with the Web. “You can assemble
that into their investment strategies.” audio at no cost to the user—with subcomponents to make applications
his neighbor, Noah Glass. This time, much more quickly than you used to
Such IPO estimates don’t seem to the team chose to take VC and other be able to do and that’s why you see
dampen the spirit of developers, funding, which they describe with things like Google releasing a map API
some of whom look to be acquired by a flair in the OdeoBlog as follows: and soon you have people mapping
Internet companies such as Google “Leading the deal was Charles River friends, mapping packages, mapping
and Yahoo!. Benchmark Capital Ventures, featuring George Zachary. In restaurants, mapping stores… It’s
General Partner Bill Gurley says addition to Charles River’s involvement, relatively quick to snap together
that this seems to be the case with we included another small firm, Amicus different data sources to create
interesting technology/features and Ventures, and a substantial group of composite applications on the Web.”
tool-based companies with exits under individuals (both in number and weight)
$150 million. “If you’re not sure that in the funding round: Mitch Kapor, Joe Scott Rafer, who grew up in a tech
what you’re building has the essence Kraus, Tim O’Reilly, Ron Conway, Josh products household near Boston,
of a full, standalone business, there is a Kopelman, Don Hutchinson, Dave Pell, is aiming at the under-25 crowd of
huge incentive to bootstrap or take very Mike Maples, Francesco Caio, Barbara cell phone users as the new CEO
little money,” says Gurley. “Then, you Poggiali, Emanuele Angelidis, James of Wireless Ink. “There are all sorts
own 60-70 percent of something, sell it Hong, and Ed Zschau.” of things we take for granted on the
for $20 million, and that’s real cash.” Web in terms of just being able to find
Web 2.0 as environment people with the same interests we
Principal for New Business have,” says Rafer. “And, because of
Development at Google, Chris Sacca, Hallmarks of the participatory, the way mobile phone carriers have
encourages entrepreneurs to think connected Web 2.0 environment behaved there is no central index for
big: “Don’t assume we have thought include: the rapid rise of blogging— people in my area, or ways to find
about ‘X’ already. One of the most posting to or writing in Web logs— fans of the same bands and similar
entertaining things for me to do is read since 2004 when people discovered information. We’re simply going to
the blogs and see how much credit that blog software wrote the HTML string a bunch of existing mobile chat
folks give us for our alleged next moves software for them; categorizing sites, à system users together with a rational
in a particular area,” wrote Sacca in la del.icio.us and Flickr, collaboratively interface so that anywhere on the
his blog. “They presume we have a using keywords referred to as “tags”; planet you can find people in your
big honking master plan document the mainstreaming of RSS (Really city currently on their phones chatting
somewhere and have the next few Simple Syndication), which started as in this moment about a topic, or in a
years set forth step-by-step. Truth is, a way to aggregate news feeds, spread particular forum, or at this concert.”
we are constantly learning. We tend to to use in job postings, commerce, and
launch early and launch often. However, enterprise applications and will be part David Sifry, founder and CEO of
this doesn’t mean we have it all figured of Microsoft’s upcoming new releases; Technorati, a search engine unique for
out. You have a killer idea for us? Are and more engaging client functionality its focus on people and time—instead
we missing the big picture? Can you through the browser using AJAX, of pages—considers one of the key
help us? Fire away. For instance, you which uses existing technology like changes of Web 2.0 over Web 1.0 to
guys who have been thinking about JavaScript and XML. be evidenced by the change in the
VoIP for years and years, what would metaphor for how we think about the
you do if you were Google, and how “Web 2.0 is really a user application- Web, from a library, where a reference
can you work with us to get that done?” driven revolution,” notes 27-year-old librarian can help you find the sources
MBA Charles Hudson, a product you need, to an ongoing conversation.
Some “serial entrepreneurs” take both manager at Iron Port Systems, San “Google understood an additional
routes. For example, Evan Williams Bruno, California, who marvels at the dimension of the data,” explains Sifrey.
sold Blogger to Google in 2003 and in difference in the way he and his multi- “They understood it was not just about
2 Issue 4: 2005
7. “You cannot go into the same water twice.”
Plato
understanding key words to figure out or another event, instantly. “Instead
relevance, but [they could produce of a 24-hour news cycle, the world is
better search results by] counting measured in megahertz,” says Sifry.
hyperlinks to those pages. Google is
so good because it doesn’t rely on Technorati is so good because you can
algorithms alone to feature what’s search for a topic or name and find out
relevant; it uses people to understand what’s been said about it in as little as
context and gray areas as well.” a few seconds ago, by whom, and how
many other people link to this site—
Sifry’s story seems to be another which can offer a sense of authority
characteristic of Web 2.0: creating a for the source. The company’s model
product because it satisfies a personal is to generate revenue in three ways:
need for interacting with the Web. Sifry, 1. advertising, 2. fees for sponsored
an avid blogger who had headed up links, and 3. syndication relationships,
three previous start-ups, wanted to such as those with The Washington
know who was talking about him and Post, Newsweek, International Herald
built Technorati over Thanksgiving in Tribune, and other big media.
2002. He didn’t intend it as a business,
but he explains: “It turns out there are Dean Petracca, Global Managing
a whole lot of other people out there Partner of Software and
who basically felt the same way. It Internet Industry Services at
just turned out to be wildly popular.” PricewaterhouseCoopers, views the
Consider the impact when on-air difference between Web 1.0 and Web
news organizations can view the buzz 2.0 as a before-and-after period in
about the story they’re broadcasting, terms of technology, its adoption, and
www.pwcnextwave.com 3
8. “Web 2.0 is really a user application-driven revolution.”
Charles Hudson, Iron Port Systems
how the two affect business practices, product, which provides mass feed
particularly when it comes to greater importing, management, and analysis
cooperation among companies. to help publishers with multiple
feeds better understand and engage
“I see increased recognition that its audience. USA Today.com uses
not only does Web 2.0 encompass FeedFoundry to manage and measure
technology, content, and connectivity, RSS subscription growth for over 100
but also that companies specialize in of its magazine and columnist feeds.
delivering value in each of those areas,
and in many cases, acknowledgement In any environment, healthy
that no one company necessarily has collaborative relationships hinge on a
all the talent it needs,” says Petracca. mutually beneficial business model.
“For example, valuable content that For example, Revver is a monetization
could be delivered over the Web engine for video shorts being backed
more often might be provided by one by Skype’s main investors—Draper,
company and managed or maintained Bessemer, and DFJ. “Revver’s mission
by another.” in life is to help the publishers or
owners or creators of video shorts
For example, Chicago-based privately make money through advertising,” says
held Feedburner enables commercial Andreas Stavropoulous, managing
publishers, podcasters (downloadable director, Draper Fisher Jurvetson. “So,
audio file makers inspired by the they publish their video on Revver, set
iPod), and bloggers to reach millions a tag with it, and no matter where it
of subscribers in more than 190 appears as long as someone clicks
countries using Rich Site Summary on an ad delivered somewhere when
(RSS) technology. it plays you get a big piece [of the
revenue]. Figuring out the business
“When we started FeedBurner in 2003, model—which is making money based
we saw the Web evolving from a tool either on advertising, subscriptions,
for simple browsing to more intention- or transactions—in the Web 2.0
based searching to now allowing distributed or syndicated world is
consumers to subscribe to any content no small task,” he adds. “It’s much
and read, listen to, or watch it wherever harder to do when you’re talking about
they want, when they are ready to do a world of syndication, where your
so,” says Chicago-based FeedBurner content at point A gets consumed
CEO, Dick Costolo. “It was clear to us at point B, which may or may not
that every network-aware device would be connected, may be intermittently
soon provide a mechanism to consume connected, and measured differently.”
all manner of content and that the
standard of distribution would be RSS. “There are many companies that
We had a simple plan to be the people are taking a longer term view
who help publishers navigate the and trying to build a sustainable
complexities of measuring subscriber standalone business,” observes
reach, maximizing subscription growth, PricewaterhouseCoopers’ Wallace.
and making money from content in “It’s hard to do that on your own
syndication, and that has remained and often it results in partnering up
our goal.” On January 24, Feedburner with another company, particularly a
announced its new FeedFoundry local company if you are considering
4 Issue 4: 2005
9. venturing into emerging international hard technology. That has changed. By September 2005, Salesforce.com
markets. This is true for large and small Now, every VC firm on Sand Hill had invested $50 million to rebuild its
companies alike. Consider Yahoo! for Road is rushing to hire someone to architecture, hardware, and two data
example and their recent deal with run their Internet consumer practice. centers—and created an on-demand
Alibaba in China, reportedly valued Because if you look over the past five operating system and platform
at $4 billion. At the other end of the years, whether it’s Google or Skype called AppExchange from which
spectrum you have a company like or Shopping.com, all these deals are Salesforce.com subscribers could
Mforma, a venture-backed company Internet deals. They had much bigger choose to test-drive and use business
that provides mobile entertainment exits than other deals. I think the top applications from independent
content to leading wireless five exits of the past seven years are vendors, including Adobe PDF,
operators globally. They invested all consumer Internet: Google, eBay, Business Objects’ Crystal Reports,
in and partnered with two content Yahoo!, Expedia, Amazon. Now they’re and Skype for free Voice Over
development companies in China all back. What does that mean? From a Internet Provider (VoIP) conference
to capitalize on that market’s huge supply/demand perspective it’s horrible calls. The company also created a
potential. Something they could simply for investors. You went from having sandbox application for developers
not have accomplished alone. In China, four or five guys to a multiple order and customers to share and explore
there are 100 million Internet users and of magnitude—now all of a sudden applications.
360 million mobile users, giving them there have been five comparison
the highest mobile phone to Internet shopping deals funded after the first “For the vendors, getting greater
user ratio and twice as many phone three have all been sold—which is a revenues over time offers a more
users as in the US.” bizarre thing. predictable model in terms of
forecasting what those revenues might
Remember the consumer “So, I find it more of a time to be be,” says Petracca. “It also gives
market? cautious rather than opportunistic,” companies a better way to reach the
concludes Gurley. “Not because of the small business marketplace because
Not everyone will tell you how they opportunity side, which is improving, of the user’s lower entry cost.”
really feel about Internet investing quite but it’s not improving at the rate at
the way Gurley can: “Stocks are doing which the supply side of venture capital “If you go back as far as ’97-’98
well, there have been some Internet has grown.” people started talking about software
IPOs and M&A exits and companies as a service and for various reasons,
are making profits—nice profits,” Beyond the browser including the bust, that theory didn’t
Gurley intones. Here’s the other shoe. live up to expectations as much as
The ‘I told you so’: Online platforms are very Web 2.0 it should have,” says Bill Gurley,
and at the heart of supporting the general partner, Benchmark Capital.
“I think the venture industry broadly application service provider (ASP) “Fast forward to today and look at the
ran away from consumer Internet business model. Consider bubble- success of Salesforce.com and others
when the bubble burst, because when survivor Salesforce.com, which was like Websense and Websidestory—
the bubble burst consumer Internet designed from scratch to run over the that clearly is a business model that
went first—it ended up being that Internet. Back in 2000 nextwave spoke Wall Street loves. The multiples are
telecom equipment was three times with Salesforce.com’s co-founder, incredibly high.”
the whole consumer Internet—but chairman, and CEO, Marc Benioff,
consumer Internet always had a taint and included his announcement that Like Microsoft and IBM have done with
to it. Dot-com became a euphemism his pure-play sales-force automation independent software vendors, the
for bad business. And so many VCs software company planned “to offer Salesforce platform model incorporates
ran away—I think there were four or a complete customer relationship selected application service vendors
five of us that kept after consumer management environment, including more tightly into its application and
Internet. They were going back to sales-force automation, customer infrastructure ecosystem in an on-
our core, which was what they call support, and marketing services.” demand (or SaaS) framework.
www.pwcnextwave.com 5
10. “Reaching customers was the disruptive
force that drove the first Internet boom.”
Tim O’Brien, Microsoft
Microsoft plans to hold a Web for two years now,” says Costolo. and other devices; it’s about how to
developer and designer conference “We are absolutely of the belief that make that information most relevant to
in March called MIX ’06 (www.mix06. publishers have to syndicate their users. We have a clear path forward as
com) to outline the company’s current content, distribute it, and attach Microsoft embraces RSS.”
and future investments in Web platform monetization mechanisms to it that
technologies. O’Reilly Media Inc. assume it will be consumed far away Can you be too thin or too rich?
President and CEO, Tim O’Reilly, who from the originating site or source. It’s
published the 16-page piece, “What is just the beginning of innovations that In the Web 2.0 environment, you’ll
Web 2.0: Design Patterns and Business will offer publishers and subscribers be hearing a lot about the notion that
Models for the Next Generation of the option of becoming untethered given the rich interactivity and all the
Software,” on his company’s Web site from proprietary systems.” bandwidth out there all you need is a
in September, will have a dialogue with browser and a “thin client,” a server
Bill Gates at MIX ’06. J.B. Holston, CEO of Newsgator.com, without any real software on it.
an early RSS technology adopter and
“Microsoft had made a number rapid innovator, says he really hopes “That’s not true,” says O’Brien. “It’s not
of investments in Web tools and Microsoft’s upcoming IE 7 and Vista an either/or world. Reaching customers
technologies long before Web 2.0 releases do speed up RSS adoption was the disruptive force that drove the
started making these headlines,” exponentially. “MS has been a great first Internet boom,” he explains. “Now,
says Tim O’Brien, group manager of ‘partner’ to us, in a ton of ways; one of user experience on the client becomes
Platform Strategy for Microsoft. “We which has been to share their roadmap the unique differentiator. Internet reach
announced enhanced tools for Web openly. We build everything we do on has become a commodity,” he asserts,
development and tools for graphic Microsoft technologies and, as a result, noting the proliferation of desk bars,
design at our Professional Developers’ they’ve been very open with us as we tool bars, task bars, sidebars, and
Conference this past September. Our build our company because it’s good other client-side pieces of technology.
investments on the services side, even for them to have companies using their “Skype is a Win32 application that
the more recent ones announced in technology do well,” says Holston, who runs on the client. The Google toolbar
November—Windows Live and Office is no stranger to navigating corporate is an application that runs on the
Live—are platform plays.” When networks. Holston started Yahoo! client. Most of what Google and
Internet Explorer 7 and Windows Vista Europe, the joint venture between Yahoo! announced at the Computer
roll-out this year, O’Brien says: “The Yahoo! and Ziff Davis, which he was Electronics Show was all client-side
RSS capabilities in [these products] running in Europe at the time. “If you’re technologies that run on the PC. I think
are going to make what is a Web 2.0 a start-up, the big thing you have to it’s interesting that Salesforce would
technology still in quasi-early stage do when you are potentially competing have a Microsoft Outlook edition of
of adoption available to hundreds of in Microsoft space is to just innovate their product,” he remarks, alluding to
millions of people… If you’re a VC faster than they do… The best position Salesforce.com’s long-time campaign
looking at an early-stage company who you can be in is if you’ve got a close for The End of Software.
is saying, ‘I pull traffic into my site; I sell relationship with them so you can
ads; and I’ve got this really cool RSS know where they’re going, but you The emphasis on client experience
capability’… If people stop visiting that still have to cycle your products much is apparent as Microsoft expands its
site because they can just subscribe to more quickly than they can. That’s our outreach from independent, high-level
what they need, they’ve got a business competitive advantage. We’re always software developers to include front-
model issue to think through.” going to be a higher end, richer way to end graphics designers and illustrators
present the most relevant text, audio, while fine-tuning its new Expression
Keeping just the right distance ahead and video to users,” he explains. Interactive Designer and Expression
of democratization is how forward- Graphic Designer development
looking companies, like FeedBurner, “It’s not just a question of how to tools for Web and Windows design.
must think. “FeedBurner has been aggregate, serve up, and synchronize Microsoft’s Mix ’06 conference in
innovating on ad insertion into feeds feeds over mobile phones, computers, March will address optimizing the
continues on page 19
6 Issue 4: 2005
11. This special report, covering 2004 to 2005, provides
detailed results of Q4 2005, summary findings for
full-year 2005, and an additional year of trends. More
detailed results, including an electronic version of this
report, can be found on the MoneyTree™ Web site at
www.pwcmoneytree.com.
Directory
Tracy T. Lefteroff Kirk Walden
tracy.t.lefteroff@us.pwc.com kirk.walden@us.pwc.com
Total equity investments into venture-backed companies
Investments in the fourth quarter of 2005 totaled $5.1 marked the first increase in venture capital investing
billion in 709 deals, down slightly from $5.4 billion in Q3 after three years of consecutive declines. Funding for
2005, but well within the range of investment levels seen later stage companies rose markedly in 2005 to $9.7
over the past 14 quarters. billion, while the number of companies getting venture
capital for the first time increased to 901, continuing
In 2005, venture capitalists matched 2004 by investing a steady year-over-year rise. Both measures were
$21.7 billion in 2,939 deals. Full-year 2004’s $21.6 billion four-year highs.
2000 2001 2002 2003 2004 2005
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
30
29 28.078
28
27 26.312
26 27.910
25
24
23
22 22.400
21
20
19
$ in billions
18
17
16
15
14
13 11.313
12 12.970
11
10
9 8.056
8
7 8.365 5.999 6.148 6.164
4.932 5.543 5.676 5.084
6 6.699 4.435
5
4 5.105 4.988 5.445
4.565 4.342 4.768 4.706
3
2
1
0
2,085 2,083 1,912 1,729 1,274 1,218 997 967 819 840 685 713 684 723 699 759 680 826 662 798 704 784 742 709
total # of deals
*connectedthinking
