A few days ago our firm held its annual meeting. We regularly meet with our investors (LPs) individually to update them on the progress of the funds where they have invested. On a quarterly basis we send them reports detailing each portfolio company’s financial performance. However, during the annual meeting we bring it all together. We review the macroeconomic environment in the geographic regions we invest and discuss its impact on the venture investment environment, review the new investments we made and the follow-on financings we completed during the previous 12 months, detail our investment strategy for the next 12 months and invite portfolio company CEOs to present their companies and meet with our LPs.
This year’s meeting was particularly important for Trident. It was the first annual meeting since closing our most recent fund; our 7th. Moreover, the last 12 months have been some of the most active in recent investment history with valuations in certain sectors rising to unprecedented levels and fierce competition among VCs for certain deals. So our LPs were particularly interested to hear our perspective on what transpired during the year and what lies ahead. We have already made eight investments under our 7th fund (8thbridge, Acclaris, Appia, Exelate, Extole, Jiwire, Jobvite, Solera) and lost a few more opportunities to competitors. We also completed 10 follow-on financings in existing portfolio companies, all up-rounds. During the meeting we stated the investment thesis for each of these new investment, discussed the competitive environment and detailed our plans for helping each new portfolio company.
We invest in early-, expansion- and late-stage North American, Indian and Chinese companies that focus on software, internet and technology-enabled services. In North America we see a slowly improving economy but with uneven regional growth. In our focus sectors several of our portfolio companies (particularly the early stage ones) continue to see their customers hesitating to invest in new initiatives, particularly when these involve early stage companies. IT budgets are still on track to grow by 5% over last year, even though we are starting to hear of decreasing confidence by CIOs despite the fact that corporate profits continue to increase. Internet advertising budgets are projected to grow by more than 10% over last year’s numbers. The business environment is much better for the more mature of our portfolio companies with several seeing 50-100% year over year growth. The Indian and Chinese economies are obviously growing faster which is reflected in the progress our relevant portfolio companies have made over the past 12 months.
We see technology and business model disruption occurring around cloud computing, social web, local services, and mobile computing. We also see transformational opportunities in sectors such as enterprise security, healthcare IT, and energy IT. We expect to see accelerating adoption of these technologies by both consumers and enterprises. This adoption will lead to the emergence of new winners. For this reason we have been aggressively investing in earlier stage companies that provide solutions using these technologies. Unfortunately other VCs see exactly the same opportunity. This has created the emergence of an extremely competitive venture investing environment. We find that in this environment we compete with the same small group of top-tier VCs. Our LPs, who attend the annual meetings of several other venture firms, indicated that they are hearing exactly the same story regarding the investment competition from these firms. They claim to be witnessing the creation of a two-tier ecosystem with the firms that have been able to raise new funds recently occupying the top tier and being able to compete for the better investment opportunities, i.e., the companies with the better management teams, the innovative business models, the breakthrough solutions, and the best market traction. So while several venture firms are not able to raise new funds and are going out of business, the remaining VCs create a fiercely competitive environment.
The competition among VCs is causing valuation prices to rise to levels not seen in several years; some say to levels last seen in 1996-1999. We are still trying to figure out whether such valuations are justified. In addition to the competition among VCs, higher valuations are aided by an increasing appetite for acquisitions by larger companies and the opening of the IPO market. While the prices paid for smaller, less mature companies working on cloud computing, social, local and mobile solutions are not particularly high, they still provide very attractive returns to their early investors. However, the multiples paid for larger companies with strong growth and significant revenues are high. We predict this acquisition and IPO environment continuing for the next 12 months.
This year we invited the CEO of Turn (www.turn.com) to talk about developments in the online advertising industry and how his company’s Demand Side Platform is becoming the standard platform for Real Time Bidding. We also invited the CEO of Teladoc (www.teladoc.com) to talk about how telehealth can be used to control health care costs. Finally, we hosted a panel on Social/Local/Mobile (SoLoMo as is often now called) with the CEOs of four of our relevant portfolio companies: Extole, 8thbridge, JiWire and Appia. SoLoMo is succeeding because:
- We are becoming increasingly connected.
- Smartphone and tablet shipments will overtake PC shipments for the first time during 2011.
- Social networking is replacing email as the communication platform and Facebook is emerging as the next internet platform. Many innovative applications will be developed on top of this platform.
- Revenues opportunities through the use of local services are increasing with a projected CAGR of 17%.
SoLoMo is:
- Enabled by cloud computing
- Monetized through online advertising
- Accelerated by the consumerization of the enterprise
- Changes shopping/commerce behavior
- Drives the creation and utilization of Big Data
Trident is well-positioned to take advantage of this opportunity because these are all areas where we have strong experience.
This was a particularly positive meeting with lively discussions and beneficial feedback. We always look forward to the interactions with our LPs, as every investor should. They provide us with the fuel that makes possible what we do on a daily basis.
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