Category Archives: Market Research & Intelligence

VC Funds Down; Late-Stage Funds Take Biggest Hit

Dow Jones Private Equity Analyst confirms what we all suspect: Venture-capital funds are down sharply in number and in amounts raised.

Venture capital funds raised $3.5 billion in 26 funds in the third quarter of 2009, a 51% decline from the $7.2 billion raised in the same quarter last year, according to Dow Jones Private Equity Analyst. In total, venture-capital firms raised $8.0 billion across 83 funds thus far in 2009, less than half of the $18.9 billion raised by 141 funds in the same nine-month period last year.

As investors realize that difficult economic conditions will persist for the foreseeable future, they’re taking particular care to keep their money out of late-stage venture funds, which raised $564 million through the first three quarters of 2009, a vertiginous decrease from the $3 billion raised in the same period last year.

The situation is better, but not great, for early stage funds, which raised $1.6 billion across 18 funds in the latest quarter, down from $2.9 billion raised by 17 funds in the third quarter last year.

Multi-stage firms raised $1.8 billion across seven funds, down from $2.6 billion raised by 17 funds in the same quarter last year.

Not surprisingly, big VC firms fronted by marquee names are doing relatively well. Those players include Khosla Ventures, with its focus on cleantech; Domain Associates, with its life-sciences orientation; Matrix Partners; and newcomer Andreessen Horowitz, which, of course, has celebrity entrepreneur Mark Andreessen to wave its banner.

Toward the end of August, Benchmark Capital’s Bill Gurley explained why the venture-capital industry is being downsized and reconfigured. The results of those industry dynamics are apparent in the latest numbers from Dow Jones.

Startups Fewer in Number, Less Ambitious in Scope

The economic downturn, called the Great Recession by some, is supposed to be over. Numerous economists and pundits have pronounced an incipient recovery. If it has arrived, it’s an odd sort of recovery that is barely perceptible, even invisible to many.

We know the downturn has taken an enormous toll on the information-technology industry in North America. We know that jobs have been lost, companies have gone out of business, and that venture capital has contracted. We also know, as an article in today’s Wall Street Journal notes, that fewer startup companies – in all industries, not just technology – are getting off the ground.

From the WSJ:

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts — including new businesses and units of existing businesses — fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.

This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.

The reasons behind the declining numbers of startup companies are relatively easy to identify. Funding, from venture capitalists and banks, is harder to get. Entrepreneurs, recognizing the funding squeeze, are become less tolerant of risk, choosing to pursue less-ambitious startup ideas or not to pursue them at all. Many would-be entrepreneurs have chosen to ride out the economic turbulence as employees of larger, established companies.

For the most part, businesses that are getting started are smaller than those launched in previous periods, even in past recessions. That’s directly attributable to constrained funding, which compels entrepreneurs to focus on businesses and markets that require relatively modest capital expenditures and that already exist as established niches. Unfortunately, these smaller businesses are inclined to grow less than previous generations of startups. That means they will generate fewer jobs, too.

Also troubling is that many new businesses are in areas – such as babysitting and house-cleaning services – with low income potential. Relatively fewer businesses have been launched in areas with higher income potential.

One mistake being made by the mainstream business media is that they continue to treat the downturn we’ve been experiencing as just another recession in just another business cycle. That diagnosis just isn’t correct. I think this downturn’s origins, its immediate effects, and its long-term repercussions are different from what we’ve experienced previously.

We’re witnessing a reconfiguration of the global economy, not just an attempted rebound from a typical recession. Some things, such as high-powered spending by US consumers, are not coming back to their former glory. With new regulations and an overdue wariness inhibiting financial chicanery, Americans will save more and spend less. Their homes are no longer veritable automated teller machines, their jobs are no longer secure, and their retirement savings are no longer assured.

Conversely, China, which funded US consumerism by buying US bonds, has begun to lay the groundwork for its own consumer economy, largely in a bid to lessen its reliance on manufactured exports to the USA and Europe.

These are huge tectonic shifts beneath the surface of the global economy, and they don’t seem to be fully appreciated by the business press. Looking back at the past-performance charts of previous cycles won’t give us an accurate guide to where we’re heading this time.

Recovery or Not, Macroeconomic Fundamentals Remain Tough

Tom Foremski points to encouraging “green shoots” in Silicon Valley that Om Malik also has discussed.

We’ve all had enough of this downturn, and I understand the need for hope. Without it, we’d be dispirited or a lot worse. That said, any recovery, when it does arrive, will not be V shaped, or W shaped, or shaped like any other letter of the alphabet with a steeply ascending angle.

The macroeconomic fundamentals cited in the infamous Sequoia “RIP” PowerPoint presentation haven’t gone away. American consumers, who drive nearly 70 percent of the country’s economic activity (though some dispute that percentage), remain tapped out. More of them are without jobs than was the case before this punishing recession on steroids took hold. Given that we have slowly and somewhat imperceptibly entered a “jobless recovery,” one has to wonder at just how robust any such recovery can be.

Moreover, credit remains tight, new financial regulation will materialize, and some bankers actually are going back to being prudent bankers rather than being engineers of eclectic and exotic forms of securitized debt.

For our own sake, to avoid taking a bipolar rollercoaster ride from depression to elation and back again, we might want to temper our expectations. What we are experiencing is more than a standard-issue recession. A permanent reconfiguration of the global economy is occurring, that outlines of which can be perceived, even if much of it has yet to unfold.

Like old-fashioned bankers, we’d be wise to tread a prudent course.

Valley Not the Place for America’s Young and Wealthy?

More than a few denizens of Silicon Valley think they reside in the center of American wealth creation, if not the center of the universe.

According a study from market-researcher Nielsen Claritas, though, America’s young and wealthy are voting with their well-heeled feet and congregating in the environs of Washington, D.C.

First the data-center investments went east, and now the young and wealthy appear to be making the same pilgrimage.

San Francisco held the top spot in Nielsen’s young-and-wealthy rankings back in 2000, but it has slipped to third spot, falling along with dot-com fortunes. No other county in the Bay Area cracked the top ten.

Newspaper Publishers Delusional on Paid Content

Alan Mutter provides an overview and commentary on a survey that indicates, as he puts it, “only” 51 percent of newspaper publishers in the United States believe they can charge successfully for access to their interactive content.

I would be astounded if 50 percent of American newspaper publishers somehow manage to extract direct revenue from online readers. I still think advertising, in one form or another, is their only hope, though it’s obvious to all that advertising isn’t getting the job done under the current circumstances.

I already pay enough for my broadband Internet access. I don’t relish the prospect of getting nickel-and-dimed as I traverse the web in search of news. I can tolerate web-based advertising, just as I am reconciled to print and television advertising, but it would be beyond my tolerance (financial and otherwise) to have to drop coins into virtual toll booths at every news site I visit on the web. Incidentally, I say that as a voracious reader and an individual who prefers to read and think about his news instead of passively consuming it as a television viewer.

Still, I would aggressively seek a news alternative rather than submit to an online mugging from the likes of plutocrat Rupert Murdoch.

I’m not only one who feels that way. According to the survey by industry consultants Greg Harmon and Greg Swanson, while 68% of the publishers responding to the survey said they thought readers who objected to paying for content would have a difficult time replacing the information they get from newspaper websites, 52% of polled readers said it would be either “very easy” or “somewhat easy” to do so.

Newspaper publishers were put into this conundrum by technological change, especially the rise of the Internet as a news-delivery channel. It was a disruptive change, one that wreaked havoc on their establish business models. The problem was exacerbated enormously by the severe economic downturn that struck with a vengeance last year and persists to this day.

As consumers continue to count their pennies and save at a rate unprecedented in decades, advertising is a tough sell, especially in obsolescent print media. It’s not going gangbusters online, either.

Even so, what on earth makes newspaper publishers think financially battered consumers are in any position to spend disposable income they no longer possess on a service that, while arguably important and valuable, is not essential?

Steve McCroskey, in the movie Airplane, famously said, “It looks like I picked the wrong week to quit drinking.” Newspaper publishers have picked a similarly inopportune time to ask for more money from beleaguered consumers.

Corporate Insiders Dumping Shares at Inordinate Rate

According to a piece available online at the TIME website, corporate insiders are overwhelmingly selling rather than buying shares in publicly listed companies.

Even as we’re told by economists and business-television talking heads that the worst is over and the economy is recovering, we find that many corporate insiders don’t share that sunny optimism.

From the TIME article:

The last time insider selling was as high as it is now was in the period from late 2006 to late 2007. It was right after that insider-selling surge that the stock market began its long painful decline, says Charles Biderman, CEO of TrimTabs, an independent institutional research firm.

Biderman believes that insider trades shoot higher when there’s a disconnect between broad market opinions and what business executives feel in their gut. “When [insiders think] things are going better than most people think, they buy stock,” he says. “When things are going worse than people think, they sell.”

Some of the phenomenon could be attributed to profit taking — the stock markets have been on a run since March — but the severe imbalance of sellers to buyers suggests a deeper disturbance.

Biderman has measured the ratio of insider selling to buying since 2004, and says historically the ratio is 7 to 1. (Insiders almost always sell more than they buy because they receive stock as part of their compensation.) Right now the ratio is 30, one of the highest he’s recorded. November 2007 is the last time the ratio even came close, at 24.

No industry breakdown was provided in the article, so we don’t know whether information-technology insiders are selling their shares to a greater or lesser degree than their counterparts in other industries.

Sun Loses More than Others in Server-Market Mayhem

Through the first half of this year, the server market was nothing short of a disaster.

Here’s IDC’s firsthand account of the carnage:

According to IDC’s Worldwide Quarterly Server Tracker, factory revenue in the worldwide server market declined 30.1% year over year to $9.8 billion in the second quarter of 2009 (2Q09). This is the fourth consecutive quarter of revenue decline and the lowest quarterly server revenue since IDC began tracking the server market on a quarterly basis in 1996. Server unit shipments declined 30.4% year over year in 2Q09, accelerating from the 26.5% decline experienced in 1Q09 and representing the largest ever year-over-year quarterly server unit decline as customers continued to defer server refresh activities.

It was bad news for all the vendors, but particularly ugly for Sun Microsystems. As InfoWorld reports, Sun suffered more during the quarter than any other top-five server vendor. Its worldwide server revenue fell 37.2 percent, and the slide is sure to continue as long as uncertainty remains about the ultimate disposition of Sun’s hardware business resulting from the Oracle acquisition. As noted previously on this blog, HP and IBM have been passionately seducing Sun’s increasingly anxious customers.

Sun’s company-specific problems notwithstanding, we should be under no illusions: The server market was not kind to anybody in the second quarter. Losses occurred everywhere, regardless of vendor, of class of system (x86 or non-x86), of server size, of target market, or of geographic territory. It was an all-out bloodbath.

Signs of hope? Thankfully, one or two exist.

Blade servers aren’t doing great, but they did better than other server variants. Shipments of blade servers decreased 19.8 percent year over year; revenues dropped 12.1 percent, representing the second consecutive quarter in which the numbers have gone the wrong way. Still, it was a relative bright spot.

IBM is said to have gained 3.8 points of market share in the blade segment during the quarter, but HP remains the dominant blade player, holding 52.9 percent of sales compared to IBM’s 27.2 percent and Dell’s 9.1 percent.

In the server market as a whole, IBM retained the pole position with 34.5-percent of factory revenue. HP maintained second place with 28.5-percent share for the quarter; it suffered a 30.4-percent year-over-year revenue decline. Dell and Sun held the third and fourth positions, with 12.4-percent and 10-percent shares of factory revenue, respectively. Dell’s revenue declined 26.8% and its market share increased marginally. Sun, as noted above, lost more ground than did any other major vendor.

IDC sees reason for optimism in the ancient server installed base. It suggests corporate IT departments can only hold together these museum pieces so long before they will have to replace them. That bodes well for a refresh cycle.

Then again, when that cycle materializes, it will not be like those of the past. We are unlikely to see one-to-one server replacement rates. Instead, with blades and virtualization clearly ascendant, vendor pickings will be slimmer than in past refresh cycles. Vendors with the strongest virtualization pitches, including the right mix of enabling software and services, will be well placed to take home the business.

Some wonder why Cisco is getting into this consolidating, cutthroat, Dickensian world. The move makes a certain sense, though, and not just because Cisco is seeing diminishing returns in its enterprise-networking principality.

What’s happening in the server space — blades, virtualization, cloud computing, an emphasis on data-center consolidation driven as much by long-term economic reality as by technological advances — is genuinely disruptive (a word that is abused and misused extensively).

An opportunity exists for a vendor to pull together all the data-center pieces and fuse them into an easy-to-use, cost-effective whole. That’s the business rationale behind Cisco’s Unified Computing System (UCS). But, in the end, it’s probably driven as much by fear as by greed.

Facebook Ranks Fourth Among Most-Visited Websites Globally

Facebook has become the fourth-most-visited website in world, according to an article published at TechCrunch.

Quoting the latest site-vistor data from comScore.com, TechCrunch reports that Facebook gained 24 million unique visitors in June, giving it a total of 340 million visitors worldwide.

In the popularity contest as determined by site visits, Facebook is behind sites belonging to Google, Microsoft, and Yahoo, respectively, but finds itself ahead of the likes of Wikipedia, AOL, eBay, and CBS Interactive.

You know what I think of Facebook. Not for the fist time, I am gobsmacked by popular taste.

VCs Stop Investing; Quattrone Laments Moribund IPO Market

Venture capitalists aren’t doing much venturing these days. They just don’t see how they can attain a return on their investments.

As reported on July 20 by The Associated Press, venture capitalists slashed their US investments in half during the second quarter of 2009 compared to the same quarter last year. It marked the second consecutive year-to-year quarterly decline of more than 50 percent.

Nearly $3.7 billion poured into 612 venture-capital deals in the three months ending in June, according to statistics released Tuesday by PricewaterhouseCoopers, Thomson Reuters and the National Venture Capital Association (NVCA). It represented the smallest quarterly total in 12 years. When one considers that biotechnology and cleantech investments are relatively ascendant, the IT-related investment picture is even worse.

The only positive that can be gleaned is that we see a sequential uptick in investment from the first quarter to the second quarter of 2009.

With such foreboding VC data providing a gloomy backdrop, Frank Quattrone — erstwhile technology investment-banking powerhouse and current CEO of boutique investment bank Qatalyst Partners — spoke with the New York Times about why an IPO has become an unachievable dream for the typical technology startup company, presuming said company can get enough funding to get off the ground.

Quoting NVCA data, the Times’ Claire Cain Miller reports that, from 1992 to 2000, 56 percent of venture capitalists’ successful exits from startup companies resulted from IPOs, with 44 percent resulting from acquisitions. From 2001 to 2008, only 13 percent of the exits were IPOs, with that proportion declining further in the last year. Of course, overall exits have been in chronic decline since 2000, too.

Quattrone notes that the incidence of IPOs, which generally make investors and entrepreneurs more money than do acquisitions, is declining because investment bankers have raised the qualification bar on such deals. Quattrone says some of the best companies with which he was involved in the halcyon days of the Internet had revenues ranging from $30 million to $50 million when they took the IPO plunge. Today, he said, bankers require companies to have $100 million or even $200 million in revenue before considering them as IPO candidates.

Other factors in the diminution of the IPO as exit strategy, according to Quattrone, include the already sizable number of publicly listed technology companies — most of which came of age and to market during better times — the increasing focus of large mutual funds on bigger investments, and the depleted pool of sell-side market analysts.

Quattrone failed to mention that the execrable economy might have something to do with the lack of IPOs. Even before the devastating financial crash of last autumn, the information-technology industry had not fully recovered from the bursting of the Internet bubble in 2001.

Except for spasmodic fits and starts, the industry has never seen, and probably will never see again, the effervescent euphoria experienced in the late 90s and into the year 2000, when a rising tide lifted all boats, even dinghies that were attempting to sell dog food online.

What’s happening is rather simple: VCs are scaling back investments in IT because they don’t foresee an appealing exit scenario, represented by an IPO or a big-bucks acquisition, preferably involving an all-cash transaction. IPOs are down because the market today does not remotely resemble what it was like when Quatrrone was riding high on an endless succession of gargantuan investment-banking deals.

As long as IPOs are down, VC investments will not be forthcoming. Why add to supply when there isn’t enough demand to satisfy what’s already on the market?

iSuppli Reports Moderate Sequential Growth in Handset Shipments

Now is apparently the time for market-research companies to churn out their latest mobile-handset data, with iSuppli joining the deluge in reporting its latest numbers.

It says there was sequential (from the first quarter to the second) growth of nearly 5 percent in the second quarter, the first quarter-on-quarter growth in nine months. (It is important to recognize that this data does not conflict with year-to-year declines in quarterly unit shipments reported by Strategy Analytics and IDC.)

Said iSuppli analyst Tina Teng:

“The moderate increase indicates the worldwide mobile handset market is bottoming out and now is returning to growth.”

For 2009 on the whole, however, the research firm says unit shipments will shrink 9.9 percent (relative to 2008) to 1.1 billion units. That would be the first annual decline in eight years.

Looking to the immediate future, iSuppli foresees an improving second half, with quarter-on-quarter sequential unit-shipment increases of 6 percent in the third quarter and 8.3 percent in the fourth quarter.

We’ll see, though. Nearly everybody seems cautiously optimistic at the moment, but a setback in reported consumer or business spending could occasion downward revisions by market trackers in subsequent months.

IDC and Strategy Analytics Note Handset Declines

On the heels of my post regarding sharply declining sales by the world’s five leading handset vendors in the second quarter of 2009, I note that Wireless Week ran a story on new market-research reports by Strategy Analytics and IDC, both of which suggest that second-quarter global handset shipments were indeed down, but not as prostrate as in previous quarters.

That’s what passes for good news these days.

Strategy Analytics says global handset shipments reached 273 million units in the second quarter, a decrease of 8 percent compared to shipments in the same quarter last year. For its part, IDC reported that handset vendors shipped a total of 269.6 million units worldwide, down 10.8 percent from 302.2 million units in the second quarter a year ago.

As for market share, IDC paints a picture similar to the one depicted by Mobile Entertainment. IDC estimates that Nokia held a 38.3 percent global market share in the second quarter, followed by Samsung with 19.4 percent, LG with 11.1 percent, and Motorola with 5.5 percent. Sony Ericsson accounted for 5.1 percent share, and “others” totaled 20.7 percent. Those “others” usually get a sizeable chunk.

In its market outlook, IDC sees consumer demand for high-end handsets. Apple is feasting in the high-end smartphone category, with Strategy Analytics estimating that the Cupertino, Calif.-based vendor shipped 5.2 million iPhones worldwide in the second quarter.

Handset Sales Down Sharply in Q2

The folks at Mobile Entertainment have crunched some market data and concluded that unit sales by the world’s five top handset vendors were down sharply in the second quarter of 2009.

Handset sales by Nokia, Samsung, LG, Motorola, and Sony Ericsson totaled 213.9 million units, down from 247.9 million handsets sold in the same quarter last year. That’s a year-to-year drop of 13.7 percent.

Some vendors suffered more than others, with the South Korean manufacturers taking market share from their rivals. Nokia, which remains the overall market leader, saw its shipments decline 15.4 percent on a year-to-year basis. The biggest gainer was Samsung, which saw it handset sales grow 14.4 percent relative to the corresponding quarter last year.

The company that fell off the map was Motorola, whose shipments plummeted 47.3 percent. Sony Ericsson was nearly as wretched, with unit sales dropping 43.4 percent.

With sales 103.2 million phones in the quarter, Nokia retained a clear lead over runner-up Samsung, which sold about 52.3 million handsets. LG breezed past Motorola to become the number-three vendor.