Milestone Group Quarterly: April 2008
Articles
Investment Viewpoint:
Mary Coleman, Partner, Walden International
Milestone: Tell us about Walden International.
Coleman: We are an international venture capital firm. Our deals in the United States and Asia are stage agnostic, typically early-stage technology based (non-health care) companies. In addition to the Silicon Valley, we maintain eight offices throughout the Asian continent, with a heavy investment emphasis in India and China. Our technology areas of focus include software, electronics, semi-conductors, consumer electronics, and clean tech.
In the United States we've tended to be more series A, series B investors, while overseas we are more opportunistic and look at later stage pre-IPO, mezzanine-level deals.
We are probably one of the oldest investors in China; having been there for more than 12 years. And, we have quite a few people on the ground as investment professionals in China. It's analogous to the United States and the Internet revolution of ten or so years ago. We see really excellent opportunities there. It helps that they have a population of a billion people and are experiencing a tremendous explosion in terms of the Internet.
Milestone: And India?
Coleman: India has been much more of an IT services play, Wipro and the like. We have several successful systems integration investments there, including MindTree which went public a year ago. We have another private company that is doing extremely well called Sierra Atlantic, which has a large campus Hyderabad in India. Walden has an office in India and we continue to be very active in looking at consumer Internet kinds of deals, mobile deals, and so forth. We think that India is really going to be the next China from a VC opportunity perspective.
Milestone: What's the focus of your specific portfolio of companies?
Coleman: My focus is on software and IT services, and that can be broadly defined as everything from enterprise applications, to security, to consumer Internet, social media, mobile, wireless, IT services. You could also say that I have an interest in open source as a category.
Milestone: Earlier this year and late 2007, there was some buzz around 2008 being a big year for open source company acquisitions, has that happened?
Coleman: Well, I would say yes. I think one of the biggest software acquisitions in the industry occurred when Sun Microsystems acquired MySQL, an open source database company for a billion dollars.
Also, if you look at other recent acquisitions, some of the most profitable (deals from an investor perspective) have been around open source companies. Certainly last year we saw Zimbra sold to Yahoo for $350 million and XenSource, which is a virtualization software company, that competed with the VMware was sold to Citrix for about $500 million. And then, over the last two years, we saw Jboss--which was one of the leading app server companies--sold to Red Hat for approximately $370 million. So yes, these open source deals have been some of the largest returns in the industry.
Milestone: And, what's fueling that as far as those big companies coming in and snapping up those other open source companies?
Coleman: I believe that they see this as a viable business model. These companies have established leadership positions in their individual categories, and have gained enormous momentum in terms of numbers of users, technology, and pretty good revenue momentum as well.
Milestone: Are there any other trends that are affecting open source company growth, and does the current economy have any effect on that?
Coleman: Well, there is a sense, given the flowing of the economy and a potential recession here, that IT organizations will tighten their belts and not purchase as much enterprise software. I think that affects all software companies equally. I think that if IT organizations really do clamp down on spendng, it can be a boon to open source companies. Typically they are lower priced than the more proprietary alternatives. All of the trends I'm seeing are up ticks in terms of boosting open source business models.
Milestone: The Microsoft and the Yahoo deal (or non-deal as it may be) is often spoken of as the end of packaged software and the beginning of the subscription-based era. What's your view on that?
Coleman: Well, my view is it that we need to see if a deal like that can actually happen. Is the Justice Department going to allow it to go through? I would say, secondly that I think it's more of an acknowledgement from Microsoft that they have not been successful in competing with Google, especially in terms of the search portal they operate with MSN.
That said, I think we are already seeing changes in the way software is delivered. I think, we are going to continue to see classic enterprise software--mission critical applications like SAP and Oracle-- continue to be delivered the way that they are. There has been a growing acceptance towards SaaS-based business models, particularly towards small and medium sized companies. I think we will see increasing acceptance in terms of appliance based software delivery models. To some degree we are going to see software that's more consumer oriented, but may still be used by the enterprise and delivered on an advertising based model. That's the nature of what Microsoft, Yahoo, and Google have been up to.
Milestone: What does the small startup have to think about and start doing today to adjust their business strategies to maybe five years down the road in world where Google is the new Microsoft, should that come to pass?
Coleman: Well, I think any startup, particularly a software company, has to identify the significant need or pain in the marketplace. There may also need to be some form of disruptive change in the market in terms of new technologies, or the ageing of existing dominant applications which gives them a vehicle to break in. And then, I think they are going to have to look at the software delivery mechanism customers want and/or need in solving that kind of pain. And then, finally there has to be a revenue model that's going to be competitive and acceptable by the customers in that marketplace.
Milestone: Thinking in terms of headlines down the road, what do you imagine the story would be in the software IT business, you know in all of its dimensions in the next 5 years or so, how would you crystal ball that?
Coleman: I think we are going to increasing see a shift and acceptance by organizations in terms of having software delivered as a service. Secondly, I think we are going to see a shift towards more software companies using cloud-based architectures as infrastructures in terms of delivering those services. And I think to some extent, the software and the services may actually evolve to being complete business processes that are actually outsourced to the software company, similar to what ADP does today with payroll processing.
Milestone: Do you think of any companies today that either in your portfolio or out there that are positioned to do that sort of thing?
Coleman: We have several companies in our portfolio that fit the SaaS business model. One of them is SugarCRM, which is an open source company that delivers a free consumer version of its licensed enterprise version software. That technology is delivered in a variety of ways depending upon the customer's needs, it can be delivered as software that's shipped out and run behind the company's firewall, or it can be delivered as a software as a service, or as an appliance. They are seeing a significant uptick in traction and revenue growth with this business model.
Another example of a portfolio company using a SaaS based model is Genius.com. Genius provides technologies that allow sales and marketing professionals to track the interactions of their customers and prospects on their individual Web sites without the customer's IT group having to make any modifications. This technology gives the customer better insight into the behavior of their customers at a low cost monthly subscription.
Milestone: What's your view on Web 2.0 and social media?
Coleman: Well, I think Web 2.0 is a more broadly applied label than just social media. A Web-based application that uses Ajax for a better user interface and have aspects of typical Internet functionality built into them is Web 2.0. Google Maps brought into an application is case in point. Also, the notion that consumer contributed content, like contributed ratings, are also examples of Web 2.0 functionality.
I think that Web 2.0 is, in some part, taking software techniques which have been used successfully by consumer-based Internet companies (and social networks) and applying them into enterprise applications.
Social media is a completely different topic. FaceBook and MySpace have been incredibly successful in terms of building large communities. So, we continue to look at startups and other investment opportunities where firms have built new social media sites. But, I think you have got to be really careful. It takes a lot, not necessarily in dollars, to build out this kind of site and drive meaningful traffic to it. Many social networking companies operate on revenue models that are ad-based and a lot will fail because they won't gain a really strong critical mass of users in an increasingly competitive environment. If they can't attract advertisers and generate the CPM that they need it's not much of a business.
Milestone: If you had ten million to put in as a limited partner in another fund, which deal and who would it be?
Coleman: Well, we will look at other small, regional funds or seed-stage funds, and sometimes we will put a little bit of our capital into those funds more as a feeder fund. That gives us better visibility to a broader set of deals in different markets. We then have more of a competitive edge in terms of being the first series A, or series B investor into the seed stage deals. That is typically how we would participate with other funds.
Milestone: Is there a company that you personally, and not necessarily the company or the firm, passed on that made you think, I wish I had that one to do over?
Coleman: Well, not one that I passed on, but I was extremely interested in – Xen Source. It's a virtualization play and I knew the former CTO. Unfortunately because of our conflicting calendar schedules, it took us about two weeks to get a meeting set up. By that time the company had six term sheets on the table. Sometimes these very hot deals move quite quickly, and timing doesn't always work on your side.
Mary Coleman is Managing Director at Walden International. She focuses on investments in software, Internet and IT services. She has led investments in the following companies: SugarCRM (open source CRM), Savvion (Business Process Management), Genius.com (web analytics for sales reps), Funambol (open source wireless email), Apptera (voice-based mobile as platform), Agiliance (IT Governance, Compliance and Security), Levanta (Linux data center management appliance), Xangati (Rapid Problem Identification solution for IT), and ParAccel (columnar data warehouse).
She also serves on the boards of Sierra Atlantic (systems integrator) and AirTight Networks (WIFI security appliance). Previously she served on the boards of Infravio (acquired by WebMethods) and Techspan (acquired by Headstrong).
Prior to joining WI, she worked as a Managing Director at Internet Capital Group and served as the CEO of Rightworks (sold to 12 Technologies), Baan (BAAN) and Aurum Software (ARUM).
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