Economy and outlook for 2008: Geoff Yang, Redpoint Ventures: “There’s been a lot of money raised in the venture business, but there aren’t that many spaces that have a lot of wind in their back… as such, you have a lot of money wanting to investing in the consumer internet… that’s been pushing extremely high valuations.” Companies are worried about the economy, and want to tank up, raising big amounts of cash (especially among later stage companies). However, even if things slow down, there will still be a big backlog of cash looking for a place to park itself. “I would expect that the number of acquisitions that have been done at recent prices will go down” But, for the next 2- 3 years, there will still be a vibrant M&A market. Ross Levinsohn, Velocity Interactive Group: “We’re coming to the end of the cycle.” But that’s not because things are dying down, as Levinsohn claims to be seeing more innovation than ever before. It’s just that this innovation is accompanied by compression. He added that his firm is telling companies to preserve cash and look out for good buyout opportunities: “You’re going to see some big names have to take down rounds.” (You can probably take some guesses on who that would be). Michael Hirshland, GP at Polaris Venture Partners, declined to predict what economic effects there would be, and argued that to some extent, startups are economically immune. Later, Yang added that downmarkets are great times to invest: “I’m thrilled when it’s really dark out.”
Talent: Building the right team has been a challenge that’s frustrated several startups. Hirshland: It’s very difficult: “We have a recruiting department of four full-time people, and that’s all they do.”
Buyouts: Shawn Colo, head of M&A, Demand Media: Frequently, it’s more efficient to buy than to build from the inside. Of course, the heavily capitalized Demand Media (NYSE: DMD) has made several deals, most recently the social networking player Pluck. Jason Rapp, SVP-M&A, IAC: Clearly the severe contraction of the credit markets has limited private equity. And it’s grown harder to be public, so selling to a strategic buyer makes more sense for a lot of companies. Rapp reiterated a point that others have made to defend the health of the consumer internet in the face of a downturn: “The measurability of the internet is what the marketers are looking for, so there’s a certain mitigation there.”
Hedge funds: Yang:” We’ve had a couple of hedge funds come into our companies and offer extremely high prices… and part of the attraction is not having to mark to market.” Basically in a downturn, they won’t have to mark that asset down. Beyond that, they’re hoping to be in a good spot for an eventual IPO once the downturn turns into an upturn: “Their rationalization is kind of a little bit weird… I think it screws things up for us.” Rapp: “An out-of-the-money call on the next Google (NSDQ: GOOG). There’s an abnormal return out there.”
Metrics: Colo: “For us, it really does boil down to profit metrics (ed note: shocking).. of the number of acquisitions that we’ve made, there have been one or two that haven’t been profitable at the month of acquisition.” Rapp: At IAC (NSDQ: IACI), it’s all about asking whether a company fulfills a compelling social need, and if so, then it’s about figuring out the size of that market. Hirshland: “I’d go as far as to say the idea of metrics doesn’t really fit into seed or early stage… it’s really all art.”
YHOO-MSFT: Will a theoretical merger of Microsoft (NSDQ: MSFT) and Yahoo (NSDQ: YHOO) harm the deals market? Yang says yes: “I would rather see a healthy Microsoft and a healthy Yahoo… we do best when there’s arms races.” But: “Somebody’s gotta stop Google… it’s almost an unnatural share of market that they have.” Both Right Media and Zimbra, Yang noted, were Redpoint portfolio companies: “I’d like that to continue.” And if the deal doesn’t happen, Yahoo could be a huge buyer, predicts Yang, as it may have to make a measure, bet-the-company kind of move to stay competitive. But who, besides Facebook (and that’s not going to happen) would move the needle for Yahoo right now?