newsletter - third quarter 2005

Ventures West News

In September, Ventures West announced that Ted Anderson has been named President of Ventures West.  In this role, Ted will be responsible for the overall leadership and management of the firm, and will spearhead the formation of new funds. Ted has been a partner with Ventures West since 1996 and is based in the Toronto office. 

Ted succeeds Robin Louis, who has served as Ventures West’s President since 1999.  Robin will remain with Ventures West as Chairman of the firm and will focus his efforts on managing current portfolio investments and evaluating new investment opportunities in the IT sector. 

New Companies Funded

In the third quarter of 2005 Ventures West participated in seven financings, both new and follow on, investing a total of $14.78 million. The new portfolio companies are Alder Biopharmaceuticals Inc. and Fresco Microchip.

Alder Biopharmaceuticals’ proprietary technologies accelerate the discovery and development of antibody therapeutics that will address significant unmet medical needs. The company’s therapeutic focus is centered in autoimmune and inflammatory diseases with extensions into certain forms of cancer. www.alderbio.com

Fresco Microchip is a fabless semiconductor company whose focus is developing leading-edge silicon tuner and demodulator products for television and consumer electronics applications.  Its technology enables universal TV reception in existing and emerging markets.  www.frescomicrochip.com.

Articles and Opinions

Web 2.0 - The Next Generation

by Paul Kedrosky, Venture Fellow
(with Riaz Lalani, Research Associate)

“You’ll never guess what happened to me last week. I wrote about it on MySpace. Have a look.”

“I had an amazing vacation. Check out my pictures on Flickr.”

If you haven’t heard people talking like this before, it won’t be long before you do.  The online world is changing, and new services like MySpace and Flickr are prime examples.  Often grouped under the “Web 2.0” label, such companies are growing quickly, even faster than first-generation web applications like eBay and Google. While MySpace and Flickr have been acquired by Rupert Murdoch’s Fox Interactive and Yahoo, respectively, such transactions represent only an early wave of consolidation in the new Web. In order to see what is happening, it is important to understand what “Web 2.0” really is. 

The First Wave

We can call the current generation of online technology Web 1.0.  It came out of the late 1990s, a time when the web was dominated by content from large publishers made available to the consumer through company sites or portals like Yahoo.  While it was possible for individuals to “publish” their own content, it was difficult to do, and the resulting content was hard to find, so there was little incentive to update it regularly.   In the absence of edge content, it was an online world where information flowed in broadcast fashion, from the center out to consumers.

There were exceptions, including Amazon.com, the online book retailer.  Up against heavy competition from other online bookstores and offline booksellers, Amazon succeeded because it better understood the things that made online business different.  It used those things to beat up on both its offline and online competitors. Most importantly, in a foreshadowing of Web 2.0, Amazon harnessed people’s behavior by looking at their buying patterns and encouraging them to contribute product reviews and wish lists, all in a successful effort to let it “instrument” their customers’ actions. Ebay, the online auction company, did something similar, by creating a market in which information about transactions was at least as important as creating a market for the transactions themselves. In other words, information created by customers was vital.

Perhaps the best example of this Web 2.0 idea of harnessing people’s online activities to create a service is Google. Google was the brainchild of two Stanford students who demonstrated that it was possible to create much better search results by using what other people linked to. If a high-profile and respectable site linked to another site, then, all else being equal, that site was likely high-quality too. The resulting PageRank system powered what quickly became the world’s most popular search engine, which led to a new market for search-driven keywords and related advertising.

Moving Forward

In a competitive market, people notice what works and what doesn’t. They noticed Amazon’s success with reviews, Google’s success at extracting information from people’s self-serving linking behavior, and so on. Having noticed the rise of edge content and participation-driven services, Web 2.0 came into being, a new data-centric and edge-driven way of thinking about Internet services. As publisher Tim O’Reilly is fond of saying, “Data is the new Intel Inside”.

Both MySpace and Flickr show how Web 2.0 companies understand the new way of doing things, and how value accrues to companies that get it right. MySpace gives people a web-based place that they can call home, where they can show off their interests, share music, or connect themselves with an extended network of friends.  By the time MySpace was purchased by Fox earlier this year for $58-million – a scant two years after being created – the site had 22.5 million users. Similarly, Flickr allowed people to create an online place where they could share photos. While it was far from the first service  to allow you to store photos online, Flickr turned things inside out, making it the default that your photos would be shared, and creating a labeling system, called “tags”, to make it easier to navigate through the resulting forest of photos. The company grew quickly, and less than a year after   launching its photo service the Vancouver-based startup was acquired by Yahoo in early 2005 for an undisclosed amount.  

The rapid and lucrative success of Flickr and MySpace did not go unnoticed. There has since been a wave of Web 2.0 startups, some of which that were naked clones of the first Web 2.0 successes, but others -- in areas like podcasting, blogging, social bookmarking, decentralized content and remixing -- that were genuinely new and interesting.

This rapid speciation of Web 2.0 companies is only partly about the technology. It is also about how much less expensive it is to build such firms, with many of the underlying software tools available for free as open source products. As a result, Web 2.0 companies can be built on relatively little money, often not even needing venture capital dollars until well after some success has been demonstrated. But that has not stopped VCs from sniffing eagerly though the pile of emerging startups, with marquee U.S. firms all having made recent Web 2.0 investments.

Critics are already nervous about all the excitement, and there is even chatter about a ‘Bubble 2.0’ right alongside Web 2.0.  After all, as happened in the late 1990s, many companies are getting funded despite having no clear sense of how they will make money, and being more like features than actual products that people will pay for.  While no one wants to miss out on the “next Google”, it is fair to worry that many of these new companies will never be large enough to pay their way through advertising (the current preferred Web 2.0 way of generating income), and thus provide venture capital returns.  Similarly, too many Web 2.0 companies are created with an eye toward being acquired, not toward building sustainable businesses. Because there are far more firms looking to be acquired than there are likely acquirers for such firms – Google and Yahoo chief among them – it makes the odds of any one company being acquired for an attractive price very low indeed.

While Web 2.0 arrived below most venture capitalists’ radars, it is now hard to ignore. And importantly, a more mature venture industry is already looking at the phenomenon in a nuanced way, one that thinks coherently and critically about Web 2.0 companies based on what they do, as opposed to lumping them together in a homogenous dot-com-style mass. You can see some of that new maturity and conservatism in the reduced amount of venture capital being raised by such startups, with late-1990s-style $30-50 million rounds nowhere to be seen. Even more sensibly, many entrepreneurs are bootstrapping their companies in the beginning, and only then raising “normal” venture rounds of $3-8 million.  So, whether or not a next Google emerges from the pack of Web 2.0 startups now sprinting from the starting line, there is at least a fighting chance that such companies can make money, both for themselves and for their investors.

IPOs, Financings and Acquisitions

September 2005 - Databeacon, a developer of business analytics and reporting software, was acquired by Cognos Inc.  No financial details were disclosed.  For more information about Databeacon, visit www.databeacon.com.

September 2005 - Fortiva, a provider of email archiving solutions for compliance, legal discovery, and email storage management, completed its Series A funding, raising a total of $8 Million. Investors include Ventures West, Mclean Watson Capital and Cargill Ventures.  For more information, visit www.fortiva.com.

August 2005 - OncoGenex Technologies Inc., a clinical-stage biotechnology company developing targeted therapeutics for the treatment of cancer, announced the completion of a $12.8 million (U.S.) oversubscribed series B2 round of private equity financing. Existing investors participating in the round included Ventures West, H.I.G. Ventures, GrowthWorks Capital, and Business Development Bank of Canada. New investors include WHI Morula Fund, LLC and BC Advantage Funds. To read the full press release, click here.

September 2005 - Triversity, the leading North American provider of point-of-sale (POS) software solutions, was acquired by SAP AG (NYSE: SAP).  SAP is the global market leader for retail enterprise applications, with more than 2,700 customers in the retail industry worldwide. The acquisition is expected to be completed in October. Financial terms of the transaction were not disclosed.  To read the press release, click here.