The Age of App Platforms

Internet businesses seem to set new management paradigms than their offline counterparts. Revenues are earned by sharing them with each other and costs are apportioned between competitors in innovative ways through clever use of hardware and software solutions. An important way of doing business currently is the App Platform. The App platforms are application servers that companies such as SalesForce.com, FaceBook, Apple, Amazon.com and others make available to people who want to target their audiences not through their products and services but through their own applications. App developers have a variety of business models to monetize including sharing application download fees with app platform providers and supplying advertising revenues and traffic. If you are a start-up seeking to build a large subscriber based business, then app platforms are a MUST as a component, if you wish to see better valuations for your business. Just as with other businesses, there are certain Internet-based businesses such as retailing where revenues may become stagnant in the new American "savings" era. Innovative revenue sharing and growth models may become a necessity now.

Biotechnology Financing

I was recently at the MIT-Harvard Health Program information session where I met a few folks who are active participants in the Biomedical/Biotechnology/health care start-up industry. When I queried them about the state of the health care start-ups and the financing trends, the majority response was that getting financing for new ventures is going to be a very difficult task during the next year and a half. Folks were of the view that established start-up firms have a much better chance of getting follow-on financing than new entrants. When I asked them about what areas of health care research are emerging, most pointed to medical devices/technologies that addressed nerve-related diseases and efficient localized delivery of drugs. Prosthetic body parts is another biomedical area where a lot of development is being financed by venture capital. Overall, it was an interesting session where I got to learn about the latest advances in immunology and biomedical devices.

Value allocation in a water fall structure

The main issue is that companies calculate per share values without taking into account the waterfall structure i.e. your post-money valuation has to be allocated according to the waterfall model to arrive at a per share value for the new preferred round. You need to first arrive at a company valuation and then allocate that to different shareholder classes per the allocation rights. Right now the pre-money valuation is arrived at by assuming a per share value for the new round and multiplying that per share value for all existing shares, which is doing things in a reverse way, and is not correct as shareholder classes are not equal and each class will have a different per share value. Also, companies should always be valued at the enterprise level and then the value of each class arrived at. This method of arbitrarily assigning a per share value to the new preferred round and then arriving at the pre-money based on that is not quite correct. This is why there is a divergence between your calculated per share value and ours, which takes the waterfall structure into consideration, and correctly allocates the value. There is a difference between allocating value and just dividing up the value between all classes assuming a fully converted, pro rata basis.

Apple's iPhone business

In an investor call with W.R. Hambrecht (WRH), we learnt the following about Apple's business. WRH expects that Apple will sell about 3 to 4.5 million iPhones per quarter. People who need to create business models to get financing for their iPhone APP development can probably use that input. WRH, however, says that they haven't heard from inner circles or anybody else that iPhone apps would turn out to be a major driver of iPhone sales. The analyst firm pointed out that Apple was trading at a 13-year low P/E and it is probably a good time to buy. We tend to agree with that. Further, the Android phone from Google is not expected to compete with the iPhone even though AT&T may offer the Android phone as well. We have to point out that Apple's iPhone revenues are only about 5% of its overall revenues. Apple continues to be a Mac company with 35% to 40% revenues coming from Mac and relates software sales.

What about an equity bailout?

Why cannot our Government trust in the power of entrepreneurship? Fundamental businesses and jobs are created by hard working entrepreneurs. So, shouldnt the US $700 billion bailout package also setup an innovation equity fund or small business equity fund to infuse equity capital into deserving businesses as opposed to debt? While credit takes center stage, the US Congress seems to have simply ignored the need for lowering the risk for able minded entrepreneurs to create new companies that later turn into large corporations. Now we know that this bailout package is an aimless one with no one willing to elaborate if the outcome will be successful. We at least know that innovative entrepreneurs produce enormous IP and thousands of new jobs. Write to your House Representative/Senator and demand that they believe in the power of entrepreneurship and set aside at least$20 billion toward an equity fund.

Size Matters

If you want better multiples when valuing your firm, you need a larger sized firm. Studies have shown that smaller websites and web-based businesses sell for lower multiples (between 0.5 and 2 times revenues) whereas larger websites/web-based revenues sell for 3-10 times revenues. Yes, there are still some businesses that sell for as high as 9 or 10 times revenues. A security software firm sold for 9 times revenues in 2007. A game & entertainment software developer trades for 33 times revenues even in these depressing markets. Bottom line is that there is still value to be discovered and better values to be got by building the right mix of business. For start-up firms, it is better to look at a strategy of building larger businesses as your exit multiples would be a lot higher.

Can "sustainable" business models be valued?

At AccuServe, we are currently valuing a company that is a wholesaler of fish and related products that is operating under a sustainable development model. While "sustainable" business models are one where environmental concerns take some precedence over a purely profit-seeking businesses, it is important that these companies through a verifiable measure prove what "sustainable" really means. Sustainable business should lead to less green house gases (GHGs) footprint, at the least, and not just simply "humane" ways of doing business, which is more difficult to measure. We are establishing a valuation model where green businesses can be valued for the sustainable element they bring into the business model and not penalize them for it. Many businesses and investors are resorting to premium prices as a way for justifying such business models. But it should not have to be that way. If investors are able to access subsidized government funds to promote green businesses, then the reduction in GHGs footprint should serve as incentive enough to warrant a higher valuation. Fortunately, mechanisms exist to measure CO2 footprint in dollar terms and this additional dollar value should be added to the value of the business either through a reduction in discount rates or through a net addition to the overall enterprise value.

Xobni may be the best makeover that has happened to MS Outlook

We all know that MS Outlook is a bloatware with features that make it tough to sort, organize and search. Well..those days maybe over. A new company called Xobni ('Inbox' spelt backwards) has developed a downloadable software that allows a user to organize email data in way that enables social networking quickly, right within the Outlook framework. It also displays aggregated information in a bar chart, for instance, the days and times emails were received from a specific person or organization. The social network is instantly generated based on who your email senders associate with through CCs and BCCs. The application also provides a list of files exchanged with your conversant going all the way back in time when your conversation first started. The tool also actively crawls through emails to actively populate phone numbers, photos and other information that maybe missing in your contacts database. Overall, the tool is extremely useful for heavy email users who have had enough of the Outlook Bloatware.

Cuil - the next best thing in search engine technology?

Cuil, a company floated by former Google search executives and financed by the venerable venture firm Greylock Ventures, promises a lot. But will it catch on? The search engine is capable of searching triple the number of web pages than Google can, according to its founders. Cuil, an old Irish word for knowledge, seems like a formidable competitor. But will it be, really? The way we assess a search engine's functionality is based on areas such as:

1: reasonable aggregation/presentation of information
2: presentation of relevant and updated information
3: employ a targeted advertising model for revenue generation
4: ability to link to specific information within web pages and buried documents

How many of us ever cross page #2 of Google, MSN or Yahoo! search results? Do we really need so many result pages?

So when Cuil claims that it can search more using less hardware, we are not sure how the results will be more relevant or how a very relevant result missed out by Google may magically show up in Cuil's search engine. Or for that matter, we are not clear how Cuil will go one up against Google in all 4 of the parameters presented above. It appears to us that the goal of maximizing advertising revenues may conflict with the goal of serving up pertinent results. For the goal of pertinent results, the effective use of resources would be to screen all irrelevant pages and present only pages that are most relevant. But this would mean that advertising real estate on several million pages would be rendered valueless. Our question to Cuil is: is anybody of relevance complaining today that they dont appear in search results?

SaaS software's re-emergence

We believe that the resistance to adopting SaaS as a software solution is diminishing. In the FY 2007 Goldman Sachs technology Report, SaaS came in at #18 out of 30 investment priority areas by CIOs of large firms. In FY 2006's report, SaaS came in at #30 - dead last. In the SaaS category, the CRM/marketing & sales automation category commands the best valuation - both in IPOs and M&As. Broadly speaking, this category fetched almost twice as the average multiple for the entire SaaS category. Advancements in areas such as virtualization servers and cloud computing solutions are prompting start-up firms to design solutions for various verticals using the SaaS way. A note of caution is that many companies have still not figured out what the real costs of integration of SaaS with legacy systems are and therefore, in our opinion, valuation multiples will stay depressed for the overall SaaS category. Sensitive applications such as security software continue to be a no-no for deployment on SaaS platforms. The other risk factor is pricing. There is no set pattern of pricing in this industry and prices vary widely contributing to significant cash flow volatilities. On a review of their business plans, some small businesses are forecasting optimistic revenues per license/seat/user/subscriber and operating margins . We believe that conservative operating margins and average revenue per subscriber should be the norm in this industry . Visit www.accuserveus.com to learn more about us.

The Idea Game

Welcome to Shiva Badruswamy's Idea Blog. I have created this blog to write about trends I and my partners evaluate in the innovative technology, health care and energy-related industries. We have reviewed and valued hundreds of business plans in these industries. This gives us the ability to condense idea generation trends into broad market movements that may trigger venture capital fund flows into these ideas in the immediate future. While some of our views maybe speculative, most of them are based on a solid understanding of what the market participants are evaluating when it comes to next generation of technologies.

Disclaimer: Our information is designed to help readers understand what and how innovative ideas are generated. Our information should not be used in any form or manner as prospectus material to solicit offers for investment capital, buy or sell securities, or as an analyst's guidance in evaluating performance of public and private companies. Our permission is needed for reuse of our material. Please contact us at info@accuserveus.com for more details.