Trident Capital Blog

CES 2012 Report

The Consumer Electronics Show (CES) this year attracted 153k attendees (10% increase over last year), with 34K attendees being international.  This was another event that showcased the continuing evolution of consumer electronic devices rather than anything revolutionary.  Mobility and internet connectivity dominated the exhibits.  My focus continues to be on the implications of these themes on our SaaS, adtech, mobility and big data strategies.  Google’s influence was felt strongly this year both because of Motorola’s presence but also because of the incorporation of Android in many mobile devices and TVs, and so was Apple’s based on the number of iOS peripheral devices that were demonstrated. In other words, the two companies continue to be the front runners in ecosystems.

Themes of Interest

1. Mobility.  Manufacturers tried to differentiate their mobile offerings in two ways: a) by introducing new form factors (Samsung offers several smartphones with 4.3” screens, a 5” tablet, called the Galaxy Note, and 7” and 10” tablets also under the Galaxy brand) that also carry different price points, b) by making small modifications to the Android operating system which most of these devices run, and c) by incorporating technologies from their other divisions (TV technology, camera technology, etc.) into these mobile devices, such as Sony’s Xperia. Most of these devices run various versions of Android. Because of the OS customizations performed by the mobile device manufacturers, the demonstrated devices were running different versions of the Android OS with uncertain plans for migration to V4 (the latest version).  The introduction of Amazon’s Fire at $199 before the holidays demonstrated that there is tremendous demand for devices at that price point.  Most of the tablets introduced at CES will be priced between $199-250. Nokia’s Loomia 900 Windows phone was also introduced to positive reviews. We’ll have see whether it provides the push that Microsoft needs in this area.  The smartphone screens are getting larger because, according to the phone manufacturer representatives I spoke to, most consumers run  entertainment-based applications (60% of the mobile traffic is now video). This year also saw the introduction of “ultrabooks,” extremely light (3-3.5 lbs) running Windows.  These products have many of the attributes of tables, i.e., long battery life, instant on, solid state memory, better graphics, but with the power of a PC. Along with Windows 8, they may provide another opportunity for Microsoft to rejuvenate its ecosystem.
   
   
   
   
2. Smart TVs.  More gesture-based and voice-based interfaces (Microsoft’s Kinect influence) and more connected TVs (built mostly on a Google platform) running as many applications as we typically see on mobile devices or use the cloud to have content streamed to them.  Tablets and smartphones are now connectable to these Smart TVs to enhance interactivity with the device and consumer interactions through the social web.  At the end of 2011 there were 82 million connected TVs in homes worldwide and by 2016 it is projected that number will increase to 892 million.  Content consumption through applications or through streaming over the internet can change consumer viewing patterns.  Consumers will no longer be subject to the formats, choices and content pricing imposed by cable and satellite TV operators.  Instead such operators may be relegated to simple internet providers rather than content providers.
   
3. Health monitors.  The number of such devices introduced in this year’s show rivaled the number of new TVs.  Zeo, Fitbit, BodyMedia, Tanita, iHealthLabs, Striiv, Motorola and Qualcomm were some of the companies that introduced new such devices to measure heart functions, weight, glucose levels, calorie count, sleep patterns, activity levels, etc. and several of them include gamification concepts in order to better motivate the wearer. Unfortunately, each creates its own data silo with the data it captures.
   

Investment Implications

1. The choices among the available mobility form factors (smartphones, mini-tablets, tablets and maybe even ultrabooks) are so many that consumers and enterprise users will have a hard time selecting the right device for their needs.  The OS variations among the Android-based mobile devices will start presenting problems to application developers who typically decide whether to try to optimize an application for a particular device and form-factor.  During CES Google announced that it wants Android developers to focus on application consistency and is now requiring they make the stock Google experience available to developers on their phones in order to carry a link to the Android Market.  As a result, application developers may start using HTML5 more aggressively in order to address application consistency and portability.  Of course, HTML5 is still quite immature, with slow execution particularly around graphics and a memory hog.  Microsoft may be in a good position here because of their early commitment to HTML5.  Finally, the use of gesture- and voice-based interfaces will also make application development more complex.
2. The OS variability among the mobile devices will also challenge corporate IT infrastructures in companies that allow their employees to bring their own devices. These companies will need to adopt or develop solutions that provide easy ways for “fitting” enterprise applications to the available devices and offer strong device management capabilities.
3. The increasing use of mobile devices, including ultrabooks, will further accelerate cloud adoption by the enterprises for the provision of content and services, e.g., storage, training, etc.
4. Based on Android’s adoption as the platform for both next-generation mobile devices and next-generation interactive TV sets, online and in-app advertising will remain the major means for monetizing the content and applications.  Advertising solutions that have already been deployed on desktops and Android-based mobile devices are expected to transfer easily to the new TVs.  Some content will continue to be monetized through subscriptions (see Hulu’s progress during 2011).
5. The health sensors being deployed are creating large quantities of data that must be captured, securely moved to and stored in the cloud, managed and hopefully analyzed.  We will see a strong consumer need for personal dashboard and BI solutions that automatically integrate, analyze and appropriately present the information extracted from the data collected by each device.  In other words there will be strong need to break down the data silos now being created by these devices.  Once such integration and analysis of the data is achieved, consumers would want to start linking this data with their electronic medical records and perform additional correlations and analyses.

Related articles

• That's A Wrap! CES 2012, Smart and Connected (blogher.com)
• The Winners And Losers Of CES 2012 (techcrunch.com)

Areas of Investment Interest for 2012

Happy New Year!  After a nice break, as I head back to the office I thought I’d provide you with my views regarding the overall environment we expect to face in 2012, as well as the areas we will be looking to invest within a two of our focus sectors: adtech/Internet and SaaS.  Data (big and small) as well as business analytics are common themes across both of these sectors so I break them out.

During 2012 we expect the economic volatility to continue and to have a significant impact on the financial performance of companies (private and public).  We anticipate that IPOs at a pace similar to that of 2011 (NVCA reported that during 2011 52 VC-backed companies raised $9.9B through IPOs), but also post-IPO price volatility to be exhibit comparable characteristics to that of the 2011 IPOs.  We also expect large traditional IT and Internet vendors to continue acquiring high growth, innovative companies, with SaaS, adtech, mobile and analytics to be their favorite sectors.  According to NVCA, 429 VC-backed companies were acquired in 2011.  As I wrote here, during 2012 more large software vendors will look to acquire private adtech companies, as adtech solutions start to be viewed as important components of enterprise marketing platforms.

Continued IPOs and acquisitions will contribute to the continued improvement of venture returns.  However, despite this improvement fewer venture firms will be able to raise new funds during 2012 as LPs, perceiving venture returns as lackluster, continue to decrease their allocations to the venture asset class.  As a result, the venture industry will continue to shrink evolving into two segments: the top 100 venture firms, among which the competition for investing in the best companies intensifies, and everybody else.  The top 100 will continue raising new funds, as was evident during 2011.  Because of these trends venture business will go back to basics.  The Venture investors will work side by side with strong entrepreneurs and management teams to build scalable and enduring companies.  I don’t expect Trident to increase its investment pace during 2012 (at Trident Capital we invest in 8-10 new companies every year) and, like other VCs, may even decrease it.  During 2012 we need to see more companies that are achieving scale.  We will focus our investment attention on companies that are showing strong signs of such scaling ability. 

Seed stage companies will have hard time fundraising during 2012.  Too many seed stage companies have been created and funded in the last 18 months, over 10K by some estimates.  In 2012 several of these will be looking for their first institutional venture investment, and will not get it.  Many such seed-stage companies will go out of business during 2012.  Moreover, the fund and flip investment model that had been recently re-adopted by entrepreneurs, and angel investors will come to an end. 

Adtech/Internet: During 2011 too many early stage undifferentiated adtech were created, continuing a trend that started in 2010.  I hope this trend doesn’t continue in 2012.  We don’t need another DSP, or DMP.  I expect that consolidation of the most promising of these early stage companies will start.  Late 4Q11 we saw several later stage companies going on the road to raise capital to use for “tuck in” acquisitions during 2012.  Advertisers are becoming more customer-centric and are moving away from silo adtech solutions.  I’m very interested in companies that provide cross-channel marketing and optimization solutions with strong attribution models, i.e., solutions that use technology to address some hard problems.  Social is moving from a fan acquisition to the need for demonstrable ROI and ongoing fan engagement.  Solutions that can provide such ROI and measure the effectiveness of social engagement are also of great interest.  Social advertising showed good performance during 2011.  As a result, I anticipate that during 2012 we will see the continued growth of the Facebook ad ecosystem and maybe even the emergence of a Twitter ad ecosystem.  Therefore, companies that work in these ecosystems are of interest.  During the 2H11 and particularly during the holiday season, the power of mobile solutions was soundly demonstrated.  We expect this trend to continue during 2012 with mobile social solutions attracting strong interest than other types of social solutions. 

SaaS:  Enterprises continued to adopt SaaS solutions at a rapid pace during 2011.  This trend has not escaped the large IT vendors which made big acquisitions (Oracle acquired Rightnow, SAP acquired Success Factors, and IBM acquired Demandtec).  Adoption of SaaS applications (horizontal and vertical) and of cloud computing solutions of any type (public, private, and hybrid) will continue to accelerate during 2012.  With that, demand for cloud security and data privacy solutions will also continue to increase. Corporations continue to become more social and are refining their notions of how to better engage consumers in a social conversation and value exchange.  While I have already invested in 8thbridge and Extole, social marketing and commerce solutions continue to be of investment interest for 2012.  The PaaS offerings and the applications built on such platforms are also becoming more interesting and will get closer attention by VCs. Finally, the adoption of tablets by the enterprise remains strong and has surpassed even the most optimistic 2011 predictions.  There is a need for new, tablet-native apps that solve important enterprise problems, including analytic applications that make BI truly mobile.

Data:  Big data was everywhere in 2011 and particularly in software and adtech.  We are tracking about 100 private companies of all stages that are “involved” in big data software and services.  For 2012, the world doesn't need additional Hadoop distributions.  But, we sorely need more analytic applications, including applications that are built on one of the existing big data frameworks, that can effectively address high-value business problems, particularly in retailing (online and offline), online advertising, healthcare, pharma, and manufacturing.  We also need applications that enable the rapid and interactive exploration of big data sets, including through the use of visualization.  Finally, we will continue to look at investment opportunities in analytics services companies in order to address one of the major problems with business analytics that corporations are facing. 

Related articles

• Mahendra Ramsinghani: 2011 A Year Of Recovery For Venture Capital, But Still A Ways To Go (huffingtonpost.com)
• VC Outlook: Emergence Capital's Ritter On The Industry's Swinging Pendulum (blogs.wsj.com)

The Value of Advisory Boards to Trident Capital's Investments

Last summer I had written about how our firm is organized around four core investment areas (Adtech/Internet, SaaS/cloud, security, and healthcare IT).  Each of these areas has a dedicated investment team that is able to invest on both early and late stage opportunities, as well as its own advisory board.  An investment team meets with its advisory board every 8-10 months.  Our investors frequently ask us how we derive value from each advisory board.  These boards

1. Provide insights about the sector-specific market conditions and trends that can impact a) our firm’s approach to relevant new investment theses, new investments under consideration, and potential exit opportunities for existing portfolio companies; b) how existing portfolio companies may approach specific initiatives, e.g., entering a new geography, or raising new capital.
2. Offer their perspective on new business models, e.g., daily deals, so that we can determine if an investment around such a model is warranted.
3. Help existing portfolio companies with introductions to potential customers and partners, as well as offer them business advice.
4. Participate in the due diligence process for new investment opportunities.

In fast-moving markets, such as adtech, where significant capital inflows by venture and private equity firms continue, and new companies are created regularly even though every subsector is crowded (see below the most recent version of LUMA’s crowded landscape for the display advertising ecosystem of adtech), receiving advice on which subsectors to avoid or where to invest, even if the subsector appears overcrowded, increases our opportunity to provide better returns to our investors.

A few weeks ago we convened our adtech/Internet advisory board, a group of 15 industry executives.  During the lively discussion that ensued among the participants, we came away with the following conclusions:

1. Market: The display advertising market is doing better than it is officially reported while the search advertising market is not doing as well as reported. Within display advertising, social advertising, particularly around Facebook, and non-premium display are doing extremely well, with DSPs (such as our own portfolio company Turn) increasing their market share over ad networks.  Power is shifting to demand aggregators.
2. Budgets: While 2012 online advertising budgets in the US remain more tentative than in years past, for yet another year online advertising will continue to be a US-centric market because of European macroeconomic conditions and approach to data privacy, and still immature Internet infrastructure in the rest of the world.
3. Advertisers: Advertisers are starting to care about engagement, rather than just a funnel.  There will be strong demand to create a brand’s social graph and quantify the value of a fan (big issue for 2012).  Brands are starting to care again about how and where they show up, so ad safety will be a big issue.  Media is becoming part of the brand message.  Performance marketers and brand advertisers are separating. 
4. Data: Managing and analyzing data assets will continue to be a growth opportunity for 2012.  Our advisors expect to see increasing adoption of big data management and analytics approaches as ad buying is shifting away from site/network or even audience buys and is now directed to identifying the right people to target.  Advertisers will continue to combine online with offline and social data in order to better understand who to target.  In fact, managing data assets is a big opportunity.
5. Mobile: All 2012 metrics point to the continued increasing importance of PostPC (here and here) devices (both for advertising but also for commerce) along with the growth of social, but attribution is important.
6. Exits: Large corporations, even those outside the traditional Internet ecosystem and particularly certain IT vendors such as IBM, realizing the importance of advertising for the monetization of online content and services, will follow Adobe’s example and become increasingly interested in private adtech companies.  They will thus provide exit opportunities to high-growth private adtech companies even if the IPO window remains only slightly open.

Next up is our SaaS advisory board that will be meeting in February.

Related articles

• Facebook is beating Google in 'the battle for eyeballs', or display advertising (nextlevelofnews.com)
• Marketers Use Online Video to Complement, Not Cannibalize, TV Ads - eMarketer (huguesrey.wordpress.com)