Category Archives: Venture Capital

Picking the Carcasses of the Startups VCs Deserted

Startup companies continue to be left in the lurch as venture-capital firms retrench, but established technology vendors aren’t complaining. Instead, they’re benefiting from the situation, seizing the opportunity to pick off capital-starved, distressed startups at fire-sale prices.

A post at the Wall Street Journal’s Digits blog recounts how Silicon Graphics International (SGI) — a company that knows distress when it sees it — spent just $2 million to acquire Copan Systems, a vendor of data-storage hardware that had raised more than $107 million in venture capital since it was launched nearly a decade ago.

Mark Barrenchea, president and CEO of SGI, says his company’s acquisition of Copan represented “great value,” and it’s easy to see why. Still, I wonder what SGI got for its money. Copan had exhausted its operating capital, and one of its creditors had placed it in foreclosure and appointed a receiver.

Probably long before that point, most employees with survival skills and marketable talent would have bolted for the exits. They would not have waited around for last rites to be administered.

Given the circumstances, SGI was practically picking at Copan’s carcass. Then again, Copan had a technology-patent portfolio and an installed-base of customers. Even if it was operating more in word than in deed near the end of its venture-funded existence, its patents and customers gave it significant residual value.

SGI will continue to shop for deals among abandoned and forlorn startup companies. Others are doing likewise. It’s an advantageous time to be shopping for shards of value among the ruins.


Further Detail on Juniper’s Venture-Fund Strategy

Pursuant to my previous post on Juniper Networks’ $50-million Junos Innovation Fund, I’ve received additional information regarding the company’s venture-capital strategy.

First off, Juniper will not restrict its investments exclusively to companies with existing development efforts or products connected to the Junos network-operating system. Quoting an email reply from a Juniper spokesperson:

“Juniper will look at companies with favorable investment profiles that are building innovative products or services complementary to Juniper’s growth strategy (company forecast for +20% revenue CAGR over the next 3 to 5 years) and can benefit Juniper’s customers by improving the experience and economics of networking.”

That broadens Juniper’s investment possibilities, providing fund managers with a greater degree of choice and flexibility.

Not surprisingly, Juniper’s preference is to follow VCs rather than take the lead in the investments it pursues. That said, the company says it “will lead if it makes sense.”

Regarding the average stake Juniper intends to take in target companies, and whether it has floors and ceilings to which it will adhere in its investment strategy, the company says its typical initial investment will range between $1 million and $5 million, with participation in future rounds occurring on a pro-rata basis.

Thoughts on Juniper’s Venture Fund

Yesterday Juniper Networks announced a $50-million venture fund. Called the Junos Innovation Fund, it will primarily target VC-backed early and growth-stage startups offering products and technologies that run on or with Juniper’s Junos network-based operating system.

Juniper will make fund investments during the next two years, focusing on networking technologies, applications, and services that further the development and deployment of security infrastructure, advanced mobility and video solutions, virtualization, network automation, optical technology, and green networking.

Juniper has pre-existing investments in 11 companies, including (but not limited to) Blade Network Technologies Inc., Packet Design Inc., and Ankeena Networks.

I sent some questions about the fund to Juniper’s PR and IR representatives, but I have yet to receive a reply. For the record, what follows are slightly modified versions of the questions I emailed to Juniper:

1) Will the investments focus exclusively on companies with existing development efforts connected to Junos?

My assumption is that Juniper will use the funding as an inducement to get intriguing startup companies to port compelling applications from other environments to Junos.

2) Will Juniper take the lead on some investments, or will it always look for a VC to take the lead position in a new round? (I am presuming that Juniper’s target companies will already have released product and been brought to the commercialization stage by earlier investments.)

3) What is the average investment stake Juniper is willing to make in target companies? Does Juniper have floors and ceilings in mind for its investment stakes?

4) What’s the typical equity position Juniper intends to take in its portfolio companies, and will that position come with strings attached, such as prohibitions against target companies working with Juniper competitors such as Cisco?

From the announcement and the coverage, I assume Juniper’s objectives are primarily strategic, but I suppose it would like to make money on its investments, too. That said, given the strategic imperative, I think the company will take a long view with the bets it makes.

Many startup companies in telecommunications and enterprise networking have struggled to raise money during the last couple years, so Juniper’s market intervention might give it leverage.

Valley’s Commercial-Property “Bloodbath” Symptom of More Serious Malady

The sorry state of Silicon Valley’s commercial real estate is a symptom of a more serious malady.

Quoting commercial-property numbers from CB Richard Ellis Group Inc., Bloomberg reports that more than 43 million square feet (4 million square meters) of office space — the equivalent of 15 Empire State Buildings — stood vacant in Silicon Valley at the end of the third quarter, the most in almost five years. It is the biggest office-property glut to afflict the peninsula since the dot-com bust.

Bloomberg reports that about 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise “flex” (research and development) space, which can be used for offices or manufacturing, according to CB Richard Ellis.

Given the Valley’s persistently high unemployment rate — holding at about 12 percent — and the generally weak state of the broader economy, the situation is not expected to improve any time soon. With layoffs mounting at some of the Valley’s largest employers, a steady flow of jobs being transferred overseas, and a paucity of venture-backed startup companies to pick up the slack, the market dynamics don’t favor those who own and manage the area’s office buildings.

Foreclosures of commercial property are expected to double in 2010, and job growth isn’t anticipated to increase until 2012, according to some projections. Meanwhile, Valley companies that remain in business are unwilling to pay sticker-price rents, using the abundant supply of space as negotiating leverage for sharp discounts.

I suppose it’s good news for those seeking space. On the whole, though, the data suggests the Valley is in frail health. Unemployment is way up, commercial-property values are about to go way down, the traditional IT industry has tottered into slow-growth maturity and seemingly endless cost-cutting, the VC community has been decimated, and the social-networking upstarts depend (to a certain extent) on robust consumer spending that is unlikely to materialize in the near term.

The hope is that new industries can supersede information technology as the Valley’s growth engine. That could happen. Cleantech startups are drawing an increasing percentage of overall investment dollars, and the long-term prospects for that sector are bolstered by geopolitical as well as economic imperatives.

But it will take time. As the title of this blog proclaims (and has done for some time), we are witnessing twilight in the valley of the nerds.

Explaining Cisco’s Slowing Pace of Acquisitions

In terms of making acquisitions of venture-backed companies, Cisco led all other industry behemoths during the lachrymose decade known as the “oughts.”

According to a post at the Wall Street Journal’s Venture Capital Dispatch, quoting figures compiled by Dow Jones’ VentureSource, Cisco acquired 48 venture-backed companies from 2000 through 2009. Also reaching the medal podium for acquisitions were IBM, which closed 35 such transactions, and Microsoft, which consummated 30 deals.

In recent years, particularly the last two, Cisco’s acquisitive pace has slackened considerably. The networking giant made only two purchases of VC-backed startups in both 2008 and 2009. This past year, in fact, Cisco wasn’t among the foremost acquirers of VC-backed companies. Instead, Oracle finished at the head of the 2009 table, with five deals; EMC bought four companies to rank second.

You might wonder, as did I: Why is Cisco slowing down? I think several factors are at play.

For one thing, there aren’t as many compelling VC-based startup companies entering Cisco’s ecosystem as there were a few years ago. In general, VC backing for early-stage IT startups has fallen off the charts, and the same holds for startup companies in networking and many of the “market adjacencies” of most interest to Cisco. The lake has been fished, and nobody is restocking it with healthy specimens.

Related to that first point is the fact that the IT industry, including the networking segment, has matured. It’s moved into a slower-growth stage, replete with consolidation and fewer leading players. In its core markets, Cisco runs the numbers and often concludes that the right business decision involves building rather than buying. That wasn’t always the case, as amateur historians of networking’s heyday will tell you.

The slow growth, maturation, and consolidation in Cisco’s legacy markets of enterprise and carrier switching and routing have driven it toward a major diversification effort, with some of the forays into new spaces seeming more adjacent than others. Some of these new markets will bring Cisco back into acquisitive fervor, but it hasn’t happened yet, perhaps because Cisco hasn’t fully committed to some of them. (An area where I think you’ll see Cisco eventually make some interesting purchases is smart-grid technologies.)

Cisco’s acquisition juggernaut has slowed for another reason, too. If you examine the composition and distribution of Cisco’s vast cash reserves, you’ll discover — as I have discussed previously — that most of the money is located overseas. If that foreign cash were repatriated, Cisco would have to pay taxes on it. With the US government refusing to relent on that point, Cisco has chosen to leave the money overseas. As a result, that cash cannot be used for domestic acquisitions. If Cisco wishes to use those funds, rather than stock, to consummate deals, it must identify, pursue, and execute transactions in foreign markets.

Effectively, because of its cash allocation and the increasing reluctance of prospective takeover candidates to accept stock in lieu of hard cash, Cisco is geographically constrained in making deals over a certain size. Given Cisco’s tax strategies and the growing internationalization of its business, the ratio of foreign-to-domestic cash reserves isn’t likely to change markedly. Cisco will spin more cash through quarter-to-quarter operations, but most of it will land in the foreign pool.

At least in the near term, for the reasons adduced above, I don’t foresee Cisco returning to its acquisitive frenzies of the late 90s or the early to mid oughts, when it took advantage of the dot-com implosion to consolidate power through strategic acquisitions. Cisco remains a big, old dog, but it is being forced to learn some new tricks.

Apple’s Uncharacteristic Acquisitions Speak Volumes

Although Apple has nearly as much cash on hand as Cisco Systems, it is not a company known for acquisition-fueled growth. Instead, Apple has grown organically, through its own research-and-development initiatives. Apple has a flat, lean corporate structure and unique corporate culture, both of which militate against acquisitions.

Lately, though, Apple has been going against form. In December, it bought Lala, a digital-music service, for an undisclosed sum. A year earlier, it bought PA Semi, a designer of low-power microchips, for a reported $278 million.

Admittedly, that’s not a blazing pace of acquisitive activity. Still, while some companies are more casual with their acquisition strategies, Apple only pursues such deals as a last resort. When Apple buys a company, you know it’s because the folks in Cupertino felt they had absolutely no chance of building a viable alternative within a reasonable timeframe. You also know that Apple must have genuinely and strongly believed it needed to play in a particular space.

All of which brings us to today’s news, brought initially to light by AllThingsDigital. According to Kara Swisher, Apple will acquire Quattro Wireless, a mobile-advertising company, for approximately $275 million.

Launched in 2006, Quattro had received about $28 million in aggregate venture-capital investment from Highland Capital Partners and GlobeSpan Capital. Based in Waltham, Mass., Quattro was on a revenue run rate of $50 million, according to the Boston Globe. Quattro has about 150 employees, who are expected to remain in Waltham.

The Boston Globe reports that the deal closed before the end of 2009. It says Quattro is expected to notify its partners and customers of the transaction today, though there’s no word on when Apple will make a formal announcement.

In the wake of this deal, many observers will immediately point to the increasingly adversarial relationship between Apple and Google, formerly on friendlier terms, even with cross-pollination at the board level. While that’s an aspect of the story that bears notice, it’s also important to maintain a broader perspective, to resist seeing everything that happens in the industry as a cartoonish cage match between bloodthirsty foes.

Yes, Google recent announced an agreement to buy AdMob for $750 million, outbidding Apple in the process. Now Apple has responded by acquiring Quattro, an AdMob competitor.

However, Apple didn’t bid for AdMob or acquire Quattro because of a vendetta with Google. Apple doesn’t do acquisitions on a whim, and it doesn’t pursue them just to keep a property away from a competitor. Apple pursued both deals for reasons of its own, reasons having far more to do with its own strategic plan than with a preoccupation with Google.

Still, both companies see the same opportunities in mobile advertising. Each company has its own strengths it can leverage. For Google, the predominant player in search advertising, mobile advertising is the next frontier. It developed its Android mobile operating system as a platform for that push. For Apple, mobile advertising is an untapped source of potentially rich revenue in mobile communications and entertainment, realms in which it has established market leadership with its iPhones, iPods, iTunes, and AppStore.

While Apple and Google have intersected in competition, they’ve taken very different paths, with very different motivations and rationales, in reaching this juncture.

As 90s Recede from View, VC Returns Turn Negative

We know that venture capital isn’t the business it was a decade ago. Statistics, contained in a story published in the San Jose Mercury News this past weekend, drive that point home.

As the dot-com boom of the late 90s recedes into the mists of time, we can see that the venture-capital industry has been sickly for the past decade. Quoting from the Mercury News piece:

Venture capital is a long-term investment — one reason why the 10-year return is most often cited in comparing the sector to stocks, real estate and other familiar benchmarks. As recently as June 20, the industry’s 10-year return was as high as 14.3 percent — but that was far below the 34 percent of just one year earlier.

Now the dazzling 83 percent return to investors during the last three months of 1999 — the industry’s best quarter ever — has rolled off the industry’s 10-year performance record. The next report, Ganesan predicted, will put the ten-year return well south of -5 percent.

The longterm inclusion of data from the dot-com boom, many say, served to camouflage what former venture partner Georges van Hoegarden characterizes as the “sub-prime” performance of the sector in recent years.

Just to be clear, with the late-90s surge now excluded from the frame of reference, the decade-spanning return on investment for the VC industry is now -(as in minus) 5 percent. Limited partners will take a long, hard look at that forlorn number and question whether they want to bet their money at the same table. In many cases, they’ll decide to go elsewhere.

Yes, the mainstay venture-capital firms — Sequoia Capital, Accel Partners, and Norwest Venture Partners among them — are managing to buck the trend. They’ll continue to produce results and find favor from limited partners. A lot of other venture-capital firms will go the way of the dinosaur, though, with the herd being thinned to an unprecedented degree.

Another trend is at work, too. The IPOs and acquisition-related exits of the future will come increasingly from non-IT sectors. Clean-tech companies figure to be at the forefront of the action. When the best that IT has to offer is a social-networking service as ethically conflicted and vapid as Facebook, you know the halcyon days are long gone.

The world is changing, and venture capital will have to change with it.