Although he's not concerned yet about
current market conditions, venture-capital partner Geoff Yang
says his
plan in a prolonged bear period would be to focus less on
momentum-type deals -- startups in a later stage that can
quickly go
public. Instead, he'll stick to his knitting -- first-round
venture deals.
Through his Institutional Venture Partners of Menlo Park,
Calif., Yang
planted seed money for companies including Excite (XCIT: news,
msgs)
and MPath (MPTH: news, msgs). IVP invested $2.5 million in a
series of
investments in Excite. If IVP were to have held onto all of its
stake, it
would be worth some $775 million, said Yang. Another winner for
IVP is
recently public Ask Jeeves (ASKJ: news, msgs), which Yang's
company
backed with $6 million. And the company invested $3.5 million
in
privately-held TiVo, which recently filed to go public.
Yang, who took a moment to chat with CBS
MarketWatch at the Deutsche Banc Alex. Brown
1999 CEO Roundtable, gave a thumbs down to
niche deals but found value in content players,
companies well positioned for strong e-commerce
players as well. "These are where the opportunities
lie," said Yang. His theory: people will have an
affinity towards certain sites that offer deep rich
content and community and be more inclined to
make purchases on those sites. He said one such
success story is EToys (ETYS: news, msgs) with its
Baby Center division. But he said online discount
stores such as Buy.com may have trouble.
It seems everyone wants to be a VC.
Given that we're seeing this market downturn
has this made some of these folks reconsider?
Yang: It's true. Everyone and their mother seems
to want to be a venture capitalist these days. But
the reality is that you have all the existing venture
firmst that have been around for years and years.
There's the emergence of a whole new set of money flowing into
the
venture business from operating businesses. Then you have
corporations
and angels. All these executives from technology companies. The
category
is really getting flooded. Just the other day a collection of
pro-athletes are
forming a fund to form a venture business. The Internet and
'new
economy' is really changing the the economy at its core. So,
while there's
been a significant correction, you can still create a company
that's a billion
dollars in two to three years. That's still staggering relative
to historical
standards.
What about all these venture funds starting, such as
Lycos' (LCOS: news, msgs) plans to start a fund with $70
million.
With so much money out there chasing maybe very few really hot
deals -- is that enough to get into the great deals.
Yang: While competition has gone up across the board. It's
probably
more so in the later stage. But in our stage, in the start-up
and the seed,
we do a lot with vision and the creation of their management
team. That's
still a pretty rare skill. So, we've decided that we'll go for
the value-added
side rather than compete on just money. Money is just a
commodity.
With the market down, how does this change the way you
approach venture investing?
Yang: It hasn't affected the way we do business yet today.
It takes
some time to trickle from the public markets to the private
markets,
particularly for the early-stages that we're playing. If this
market continues
to decline it will affect our stage of investing. We've been
primarily
investing in early stage but over the last six months we've
been doing some
later stage investments of what we call momentum type of
Internet deals,
companies that are doing well and will go public in a short
period of time.
If the market correction continues, we'll do less of those.
We'll do the
seed or first round. With all these IPOs and very well funded
companies,
we're trying to avoid little niches. When the sixth pet deal
comes along
you can figure out -- oh, the market is getting niched to
death. But when
you look at it for the first time, it's not the easiest thing
to do.
Is this a blip or is this correction we're seeing going
to
continue and if so, how does this impact not even IPOs but
company's ability to go back for secondaries and will we then
see
an acceleration of mergers and acquisitions?
Yang: It's hard to predict the market. It's gone down and seems
to come
back. But if this market were to continue down and the new
issue market
were to close you'll see a lot of m&a transactions. A lot of
companies that
have gone public, probably won't be public over the long term
and
shouldn't be public in the long term and using the financing
advance. You'll
see an increase number of M&A transactions in both the public
and
private. Some of the ones that have raised a big war chest will
start
acquiring companies in the private market that would have
normally been
able to raise money in the public market. What you're seeing
now is a land
grab and companies are spending a lot on marketing to rise
above the
noise. To rise above the noise, you have to raise $50 or $60
million. If
you can't do it in the public market, you start wondering --
well, how am I
going to do that. So, I think that suggests a lot of
acquisitions will begin to
occur. If the market were to continue down, there will be a
flight to
earnings. Right now, the markets been saying
This must be good for you given the amount of Net
companies interested in going public. If there's a breather,
it's
definitely a good thing. The worst thing that could happen is
one of these
for a long period of time. But I'm not really concerned about
this market
-- not yet. I'm concerned because I look at the screen and it
affects my
psyche. But don't see any reasons to believe that the
fundamental model is
broken. In other words the Internet will stop to be part of our
lives or the
economy is slowing down or we've got a collapse in the
financial system
or a worldwide crisis. So, if there's market highs and lows,
that's okay
and it's healthy.
There's so many deals out there and no time to take a
chance on duds. What types of returns are you looking for now?
Does a company have to have the potential to be a $1.5 billion
at
the open before you'd even consider investing in them?
Yang: When I got in the venture business about 15 years ago,
the return
was ten times your money in five years, 58.3% compounded annual
return, that was predicated on a market cap of $100 million.
Today, I'm
talking about a billion market cap in two to three years. So,
right now, I
look at this as a wonderful period of time. So, in this type of
environment,
my only scarce resource is time and people. Money is not a
scarce
resource, it's a commodity. I got to be very focused and
discipline. So, I
roll that all the way back and say I can't really be interested
in something
that can't be worth $500 or $1 billion, just as a baseline.
There's bunc of
great businesses that could be worth $200 million, but I'm not
interested
because of the opportunity costs. That's the significant change
in the
venture business.
What's a company out there that's misunderstood in a
good or bad way, meaning what's a company that's undervalued or
a company that's overhyped?
Yang: I don't think there are any companies that are really
misunderstood
because it's all a function of spectrum. Some people really
understand a
company and some will poo poo its performance. I think
Priceline
(PCLN: news, msgs) may be. It's not just about airlines but
over time it
could be about all sorts of things and I'd put it in my core
holdings.
What are your core holdings?
Yang: You got to have Yahoo (YHOO: news, msgs), America Online
(AOL: news, msgs), EBay (EBAY: news, msgs) and Priceline (PCLN:
news, msgs) and increasingly these content guys such as
SportsLine USA.
(SPLN: news, msgs) and Broadband Sports based in Los Angeles.
Broadband Sports is a content and contextual commerce site
dedicated to
sports. We've invested $16 million in them.
Source: CBS Market Watch
Sundar Pichai