Milestone Group Quarterly: October 2004
Articles
Investment Viewpoint:
Stewart Alsop, General Partner, NEA
Milestone: Stewart, you’re quite well known partly because of your extensive writing about the tech sector (Fortune, InfoWorld, Inc. ). How did this segue into a venture career?
Alsop: I tell two stories about that. First is that it really helps to have a brother who has made a lot of money for a venture capitalist. NEA financed my brother’s company in 1984 and made quite a lot of money off of it. The company is called Progress Software. When I decided I wanted to look at venture capital it was natural I talked to NEA. Second, I have spent 20 years analyzing and watching how technology businesses progress and forecasting the success and failure of businesses. I have a pretty good track record figuring out which companies succeed and which ones fail and that is a core competence for being a venture investor along with all the other skills in finance and operations.
Milestone: Most people envision you having a shipping container of tech gear in your home. Describe what someone might find the most interesting, ludicrous or over the top about the gear you personally have.
Alsop: Actually I have an antique computing collection, antique in this case being considerably younger, but antique in every other way. I go back to look and remember what the justification was for this stuff. There was the original Go device; the pad is the actual device and the pen is the pointer. The prototype device was unbelievable. They built this prototype device that got everybody excited about pen computing and IBM decided to license it. They built a machine that was not the prototype and it failed. If you go back and look at that machine it is a hunk of hardware now, I haven’t charged it in years and have no way to turn it on. I remember what the whole point was and if you go back and look at stuff like that and you see products today you can see the genesis from that today. There is nothing that I would keep in my antique collection that would be the bum stuff. I think all of it had served its purpose.
Milestone: Have you ever done a pie chart showing what you wrote about and liked, or perhaps showing investment returns on what you wrote about?
Alsop: No I wouldn’t do that. One thing I discovered in becoming a VC, is that when you write an article about something, your whole investment takes about two weeks to come to maturity. When you are a venture capitalist it takes four to six years, so as a writer you never really take seriously the outcome of what the company is but as a venture capitalist you do.
Milestone: What are your thoughts about personal portable video gear being released? What’s happening?
Alsop: I think everybody else is watching closely and responding to Apple to some degree. Steve Jobs has been very clear about how Apple feels about portable video players and I have an inclination to agree with them. Listening to music and watching video are two different experiences. You design different products for different experiences. Just because the iPod did well doesn’t mean you could try to create a vPod (‘video pod’). I suspect Jobs is right because the way you watch movies is different. A lot of people watch movies on their laptops, for instance. You go on airplanes and see half the people who are using laptops are actually using them to watch movies. I just think it is a different experience. I am not sure there is a space for a portable video player.
Milestone: You once claimed CDMA would eventually beat GSM because of their superior technology and that China was out embracing CDMA. What is your take on things now?
Alsop: Well, the Chinese market was embracing CDMA at the time and then they changed their minds and embraced GSM. There are two carriers, completely incompatible in China. They have actually re-embraced CDMA because they have this new standard called TDSM/CDMA, which is a derivation of the CDMA technology. CDMA has dominated Korea. CDMA is the largest market share in the US, ironically. So all of the things that I said were true but I am also genetically a troublemaker. People were so focused on the dominance of GSM and overlooking the fact that the technology keeps changing from generation to generation. Because you dominate one generation doesn’t mean you dominate the next generation.
Milestone: Speaking of China, what is your take on the market there in terms of overall opportunity for tech companies expanding there and secondarily, what about the venture side, is it an interesting market to invest?
Alsop: Yes and yes would be the short answer. We have invested heavily in China so we are somewhat biased. We have four companies that we have already invested in and a pipeline of another three or four we are already working on. China has always been a very risky place to invest money because the Chinese are great entrepreneurs and great merchants. They understand business but they are also communists, at least in the current incarnation, so there are little things like government ownership in a private company. Of course this is something that doesn’t happen in other markets and is very hard for many to understand. We think it is very promising but very risky.
Milestone: NEA has been a bit of an anomaly over the past three years. Other venture firms have contracted and curtailed investment activity and research shows NEA is a clear leader in terms of deals invested in. What do you folks see as the other venture firms aren’t seeing?
Alsop: We can’t quite figure that out. Normally it’s a pretty simple business, you buy low and sell high. In venture capital you have to buy very low and sell very high, that’s the compensation for the risk you take in investing in early stage companies. We don’t understand why everybody retired at the time when prices went the lowest. The venture capital business should have retired back in the bubble when prices were very high. Yet discovered to our shame and suffering that prices do go down and we lost a lot of money, all of us in the venture capitalist business did. So we felt that the right time to invest was at the bottom of the market, not the top.
Milestone: What are you seeing in the open source space and what is your take on things?
Alsop: Somebody asked a question in one of our partners meetings recently, which company has made money, actually profit, from selling an application on an open source platform. We all scratched our heads, what about RedHat? That’s not an application, it’s a service. We couldn’t come up with an application company. So far the open source has been the anti-Microsoft play; for companies to have a way to not be locked into Microsoft and operating systems but it has not been a platform for successfully selling applications so it is still kind of an open question, ironically. What the real value of open source is – I love it as a regulator of Microsoft but I am not sure what the business opportunity is.
Milestone: Let’s talk about the anti-spam space. We estimate there are about 75 funded anti-spam companies globally and new money is still pouring in; note MX Logic, Cloudmark and ProofPoint all raised new rounds in the past month. How does this play out in the next 12 months?
Alsop: It is a commonly held perception that this space is now over funded. We thought it was over funded when we financed MailFrontier three years ago. We were very concerned that we were late to the business. Now three years later a bunch of other companies have been funded. We believe the space is going to contract very rapidly. We believe that the leadership has already been established in the business and that companies have chosen their spots. We don’t see any opportunity for new companies. We think the consolidation will not just be between spam companies but more broadly between security technologies.
Milestone: What are your predictions overall for the enterprise software space for the next 24 months?
Alsop: I believe and I believe NEA believes that enterprise software and infrastructure is the evergreen part of venture investing. Telecom’s business can come and go because it tends to go in cycles. Health care can come and go because it depends on regulations and public policy, and other things can come or go based on whether they are hot or not. Enterprise always needs technology to create competitive advantage. There are always opportunities. Sometimes enterprises are more into buying and others are not so into buying, so the rest have to get through the buying cycles for enterprises but they always have a need to be competitive and technology enables them.
Stewart joined NEA in June 1996 as a venture partner and became a general partner in 1998. Stewart focuses on information technology investments. Present board memberships include Boingo Wireless, MailFrontier, NextHop Technologies, Scalix Corporation, Sorrent, Xfire and Zinio Systems. Prior board memberships include eRoom (sold to Documentum) and TiVo (NASDAQ: TIVO). Prior to NEA, Stewart was Editor in Chief of InfoWorld, a weekly magazine for information-technology professionals. Stewart previously founded Industry Publishing Company, which published a fortnightly newsletter for computer industry insiders and produced the Agenda and Demo conferences for executives of companies in the computer industry. Before 1985, Stewart served in several editorial positions at business and trade magazines, including Inc. magazine. Stewart received a Bachelor of Arts in English from Occidental College.
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