A few days before the holidays our partnership met with our Internet Advisory Board, a group of 10 senior internet executives. This Board advises us on our internet investment strategy, helps us vet related investment opportunities, and assists our internet portfolio companies on business development, strategy and technology areas. The group meets once or twice a year. However, this was our first meeting in 15 months because our recent successful fundraising effort for Fund 7 kept us on the road for about a year. As a result, and also because of the rapid rate of change in the internet and mobile sectors, the meeting was long and full of lively conversation. During the meeting with discussed:
- Market conditions. 2011 is expected to be another year of strong growth for companies with desktop and mobile online advertising and ecommerce offerings. Social and local will be the new growth areas. Ecommerce sales are expected to grow around 10% Y/Y. The search market will grow approximately 15% in the US and maybe 20% internationally. The display market is expected to grow 10% in the US.
- Online advertising. The investment opportunities in search and display advertising technologies and models, including mobile, remain strong even though billions have already been invested. Our Board agreed that we remain in the early innings of online advertising and there still exists significant opportunity for innovation and increasing automation. Video consumption will be a big driver for the continued growth of display advertising. While privately held DSPs have so far dominated an opportunity in its early stages. Recognizing the trends in online ad buying we have already invested in Turn, a DSP, and Sojern, an ad network that leverages traveler data. Recognizing the importance of data in improving the targeting effectiveness of display advertising solutions, and capitalizing on our expertise in big data management and analytics, we recently invested in eXelate, an online data marketplace and data management platform (DMP).
- Consumer privacy. The adoption of the recent FTC recommendations on giving consumers more control over tracking information has the potential of negatively impacting the growth of companies with online advertising solutions. These recommendations are still viewed as moderate and rely on self-regulation. Our advisors believe that when implemented they will represent a positive step for consumers without destroying the online advertising industry.
- The explosion of the social web. The rapid growth of the social web among consumers and businesses points to an internet platform shift. Facebook is emerging as the new platform of choice. It is being used by over 500M consumers and businesses that are spending more time with Facebook than on any other site. Over 70% of Facebook’s users live outside the US. We discussed a recent DDB study of 1,642 international Facebook users, according to which the average user is 31 years old and follows nine brands. This is the reason CMOs are quickly embracing the social web. As a result of this adoption they are becoming more quantitative in their decision-making though it is not yet clear which metrics are most effective in assessing advertising effectiveness in the social web. Three-quarters have already pressed "like" to signal they are a fan of a brand. In return, they expect special treatment and are willing to advocate for the brand if necessary. In addition to the thousands of apps that are running on the Facebook platform, Facebook Connect is becoming a major API that will enable the user base’s monetization. Our advisors also pointed to the need for social and mobile to come together seamlessly. Investment appetite in social web companies will continue during 2011. Several such companies were funded in the last 4 months of 2010. In 2009 we invested in Extole, a company we incubated in our office. Extole has developed a SaaS social marketing platform and is experiencing rapid growth. The company has received investments from Redpoint and Norwest. Exelate’s is also working around the social web as its data is being used in social targeting. We will continue to look for investment opportunities in this sector and are ready to start incubating another team that is working in this area.
- The acceleration of local. 2010 showed the potential of online local advertising. Companies are beginning to crack the code on how to offer local merchants options that combine the effectiveness and accountability of online marketing with the simplicity of traditional offline channels like yellow pages. We expect group buying and local review sites, as well as companies combining mobile with local to benefit from this shift.
- Internet usage and penetration rates. The internet penetration rates in emerging markets remain low. However, amid increasing middle class populations in these markets, internet usage and media consumption is expected to grow briskly. In these markets mobile will continue providing the primary internet gateway with smartphones starting to represent a great computing and internet-access device option. For example, only 81 million Indians (7% of the population) use the desktop internet, but six times as many (507 million) have mobile phones. In China PC vs. mobile penetration rates are 20% vs. 57% respectively, whereas in Brazil the corresponding numbers are 32% and 86%. In the short term, the high cost of smartphones, such as the iphone, and of associated data plans will inhibit smartphone adoption broadly in these countries. For the time being the high costs provide opportunities to companies like SMS Gupshup whose services emulate in feature phones functionality typically found in smartphones. SMS Gupshup has 40M users and its base is growing over 2% monthly. We will be looking for more investments in this area leveraging our experience in India and China.
- Mobile. In the US and Europe we expect that the continued improvements in smartphone functionality, including geosocial, will sustain their drive strong adoption rates during 2011. This holiday season demonstrated convincingly that US consumers are able to effectively use their smartphones during shopping for price comparison in brick and mortar stores, as well as to buy online. During 2011 more US consumers will start using smartphones as a payment option. We are leveraging our payments experience as we look for investments in this area.
- Information overload. The data volumes that result from the email messages, tweets, SMS, IM, and the messages exchanged within social networks is overwhelming users. It is becoming impossible or impractical to keep up, manage this data and make sense of it. Calling on our firm’s big data expertise, our board members pointed to investment opportunities in new approaches for organizing, managing, and consuming such information; a new type of inbox if you will.
The session re-affirmed the basic elements of our internet investment strategy and provided us with several ideas on how to refine it.
Wishing everybody a happy and prosperous New Year.