A GOOD Exit: Good for VCs, Bad For Microsoft
Mobile E-mail middleware provider Good Technology was sold to Motorola yesterday. I have written about the mobile e-mail middleware market in the past and the vast sums of VC money that it has consumed. Good consumed the most of anybody, almost $250M and had a long roster of some of Silicon Valley's finest as investors.
As good as Good was at raising money it was apparently even better at spending it. I got a call in May from a retail broker, of all people, pitching me on the virtues of Good's Series E or F or Z (I can't remember) and this was less than 3 months after they had announced raising another $20M. Not only was I dumbstruck that a retail broker was pitching Good's stock as though it were the stock de jour, but I was equally stunned that they were out looking for money only 3 months after raising $20M and only 15 months after they had closed another $65M. I'm no math major, but if you raised $85M in 15 months and are already looking for more, you are probably burning $4-5M/month. I guess I'll never know exactly what they were burning a month because I declined to go the San Francisco Airport Marriott and hear their pitch with whomever else this broker had rounded up off the street.
Not that it matters either as the Silicon Valley rumor mill (at least the part I am plugged into) puts the exit value at around $500M, give or take some escrow and indemnities here or there, which means that Good's investors actually made out, well ... good, real good. Of course that could be totally wrong, but it's now being reported by respectable news organizations so it sounds like it is a good number.
A 2X To Be Proud Of
A 2X on $250 in PIC might not seem like much, but from my perspective it is absolutely heroic given that there's
a very real chance that Good would have been out of business in a few years if
not a few quarters. No they wouldn't be out of business because
they had run out of money (they were apparently too good at fundraising to do that), they
would be out of business because Microsoft has started literally giving away
the same functionality, the only catch, and it's admittedly a big one, is that
you have to have a phone with Microsoft Windows Mobile on it.
Its' Hard To Compete With Free And Easy
I just so happen to have such a phone (the Treo 700wx) and was amused to find when I first powered it up that Good Technology's software was prominently displayed on the phone and offered as a solution for accessing my Exchange server. So I faced an excruciating dilemma: I could either A) Pay Good a $30 a software license and then pay my hosting company a monthly service fee of $20/month or $240/year (per phone mind you) or I could B) Get the same exact "push e-mail" functionality as Good offers absolutely free by taking 1 minute to enter my exchange log-in details into my phone. No software to install, no bills to pay. Needless to say this was not a hard decision.
However if one did not know that this functionality was released by Microsoft in Q1 06 for free and yet desperately wanted "push e-mail" functionality, there's a good chance you would dutifully sign up with Good and pay them there $240/year. It's not like Sprint, Good or my hosting provider went out of their way to mention this, after all they are all getting a piece of the action and thus don't have a big incentive to point out that I am wasting $270 on them.
I should point out, that since that time (a couple months ago) my hosting provider has actually had a change of heart (most likely prompted by a heart to heart with some lawyers and some very angry phone calls from customers who found out they were duped into wasting $270) and has now posted on their site a comparison of the three push e-mail solutions they offer which you can view here. For those too lazy to click through, the link is to a page that shows the three push e-mail solutions offered by my hosting provider: Blackberry @ $50 up front and $10/month, Good @ $30 up front and $20/month and Microsoft @ FREE. Now I am not a market researcher but my guess is that once you explain to people that each service is roughly equivalent, that about 100% of the people who have a Window's Mobile phone will pick Microsoft and a decent chunk of people who own other phones will go out and buy a Windows mobile phone while the rest will resolve to buy such a phone next time they upgrade.
Which brings me back to why Good's exit is so damn good. To get $500M for a company 6 months AFTER the death warrant for its main product line has been very publicly signed, sealed, and delivered from Redmond, WA is absolutely awe inspiring.
Hello Moto ... Hello
While the exit left me with tremendous respect for the VCs, it also left me wondering what in the world the folks in Schaumberg, IL were smoking. At first I thought they just were either desperate, drunk, or filled with wild-eye RIMM envy. Then I figured it was all three, but then I thought a bit more about it and realized that Motorola's purchase really didn't have anything to do with RIMM (despite the fact that every news account under the sun characterized the deal as primarily motivated by a desire to compete with RIMM). No, what this deal was about was freeing Motorola from Microsoft's potential stranglehold on the OS software for their smart phones
all, Motorola already knows full well that Microsoft offers the same
functionality as RIMM and GOOD for free. One can imagine that their
Microsoft reps trumpeted this fact to them to no end while they were putting
the Q together and gleefully told Motorola of their grand plan to destroy both
companies through their time tested strategy of giving everything away for
free. In fact, there's a decent (and highly ironic chance) that Microsoft
was so convincing that they literally scared Motorola into paying a huge
premium for what they knew was dying asset as this was the only way to insure
that they would be have the flexibility to compete with RIMM and Nokia (which
bought Intellisynch last year) without having to throw itself at the mercy of
the merciless Microsoft.
In Linux We Trust
Thus by buying Good, Motorola now has the freedom to develop and ship Linux-based smart phones (such as Ming) that can still play ball with push e-mail (using a familiar "brand" no less) without having to pay a significant tax to Redmond on each phone. I am not sure what that's worth but I suspect there's a spreadsheet somewhere inside Motorola's headquarters that multiplies that tax by the number of smart phones they expect to ship over the next 5 years and that this spreadsheet was the main one used to justify the deal or at least the main one that Ed Zander, someone who knows a lot about competing with Microsoft, used to justify the sky high price to himself. Of course, I could be wrong and the folks in Schaumberg could just be filled with blind RIMM envy or drunk or whatever, but I think they deserve the benefit of the doubt.
Whew! That was a Close One
As for the VCs involved, I suspect there are a lot of happy and relieved looks around the Good boardroom these days for no one could see the oncoming train better than they could. It may not be "Google Style" money, but it's more than respectable and considering the circumstances, downright impressive.
Nokia Buys Intellisync: Another Elephant Joins the Mobile E-Mail Party
The news out of Finland today is that Nokia, the world's largest manufactuer of mobile phones, has purchased San Jose based Intellisync. Om posted on the acquisition and goaded me to make my own post, so I thought I would just try to answer the Top 5 questions about this deal:
- Who in the world is Intellisync?
Intellisync used to be called Pumatech and it was one of the pioneers of "syncing" or software that synchronizes data between desktops and handhelds. Over the years Intellisync has made a number of acquisitions including Synchrologic, Starfish, Loudfire and Spontaneous. Lately they have been spending a lot of energy on the wireless e-mail space and recently released a very cool unified messaging client for mobile devices.
- Why would Nokia buy Intellisync?
Software, relationships and patents.
- Software: Intellisync actually has some pretty decent software that has been widely deployed (they claim to have 500,000 people using their wireless e-mail solution). Like most hardware companies, Nokia doesn't really understand desktop/enterprise software so by acquiring Intellisync they get significant software expertise to complement their hardware expertise.
- Relationships: Intellisync has good relationships with a number of the major wireless carriers around the world and is experienced in certifying software to run on their networks. Nokia obviously has great relationships with most carriers as well, but Intellisync will give them more credibility with carriers on the software front and an enhanced ability to customize software for each carrier which is something that carriers increasingly are looking for.
- Patents: Intellisync has been accumulating a large portfolio of synchronization-related patents for some time and has not been shy about trying to enforce their claims. While Nokia has already settled with NTP, the addition of the Intellisync patent portfolio give Nokia a lot more protection from any potential patent suits and also gives them the option of making life very difficult for some of their competitors if they choose to.
- Is this a sudden marriage or have they been dating awhile?
Nokia has had a relationship with Intellisync for awhile. It seems to have started, somewhat indirectly, with Intellisync's early support of the Symbian operating system, and recently had intensified to the point where Intellisync was designing software for specific Nokia phones.
- Is this good news or bad news for the other Wireless E-Mail Software Providers?
Bad news. As some may know, I recently did a post on the huge amount of money that has flowed into some few private companies that are also focused on wireless e-mail middleware. That level of investment looks even more suspect now in the face of Nokia's acquisition of Intellisync. Not only does this likely eliminate Nokia as a potential customer/buyer (and with it 25%-30% of the handset market) but it also creates a very well funded and well connected competitor at the carrier level (assuming Nokia will continue to sell Intellisync's software for other handsets as well). It's also bad news in that Nokia undoubtedly "took a look around the neighborhood" before buying Intellisync which suggests that they didn't see anything else they liked. The one silver lining here may be that Nokia's move might force the hand of other handset manufactures, such as Motorola or Samsung, but given that Nokia paid only $430M to take out Intellisync it's hard to see a lot of M&A upside for the private companies as two of them have already raised more than $200M.
- Does this mean that Nokia is not going to buy RIMM?
Yes. Personally I don't think Nokia was ever going to buy RIMM, but this acquisition should put those rumors to rest once and for all. With Intellisync, Nokia no longer needs RIMM's middleware software and all it would be acquiring is handset maker, and a relatively expensive one at that. Besides, with RIMM trading at 26.5X EPS vs. Nokia's 17.5X any deal would be highly dilutive to start with.
$500M Folly: Wireless E-Mail Software Investing Peaks Just as Microsoft Brings Out The Big Guns
Over a year ago I wrote a post about the staggering amount of money that had been invested in the wireless e-mail middleware space. At the time, about $250M had been invested in just the top three companies (Good Technology, Visto Software, and Seven Networks). Well today the Wall Street Journal has an article in which they reveal that Visto Software has raised yet another $70M (subscription required), taking their total paid-in-capital to an astounding $230M (and this doesn’t even count the $35M+ in PIC invested in companies that Visto has acquired). Visto’s round comes just 8 months after Good Technology closed yet another round of $65M taking its own paid-in-capital to $211M. Not be left out, Seven Networks is rumored to be close to closing yet another round of capital which could take its paid-in capital to north of $75M.
For those of you keeping score at home, that’s now a grand total of over $516M invested in just three software companies all of whom are focused on the same niche of providing middleware software that enables mobile devices to use e-mail. What’s more, the amount of capital invested in the space has increased by over 100% in little over a year. Good lord.
Now $500M wouldn’t be a big deal if these companies were pursuing a long term market worth billions of dollars but there’s a decent chance that this market won’t even exist in 5 years. That’s because wireless e-mail middleware has now gotten the full attention of a little company up in Redmond Washington called Microsoft. Microsoft just happens to be the largest provider of enterprise e-mail software in the world. As it turns out, much of the value-added provided by these wireless e-mail middleware companies has been simply to make Microsoft’s Exchange servers accessible from a mobile device.
At first Microsoft seemed content to let startups such as Research-In-Motion, Good, Visto, and Seven pursue this opportunity but as mobile devices and applications became more important to it’s long term strategy Microsoft started to pay more attention to the space. Typically, Microsoft’s first efforts at their own wireless middleware software were pretty pathetic, but they kept at it and in October they released a major upgrade to their software which not only brings much of their functionality up to par with industry standards (at least for Windows Mobile phones), but it basically eliminates the need for any kind of middleware (other than a local client) to access Exchange Servers. What’s more, in another tried and true tactic, Microsoft is offering all of this new functionality for the very competitive price of … free. Finally, in the coup de grace, Microsoft included all of this new functionality as part of last month’s major Service Pack release for Exchange 2003, virtually assuring that almost every major Exchange installation in the world will have the new mobile functionality within 9 months because the Service Pack also includes lots of bug fixes that they normally have to install. It’s such a heavy handed and devious strategy for dominating this space that one just has to laugh.
Consider the situation the average IT guy faces right now: You can go with Microsoft’s embedded “Direct Push” technology that you have already paid for as part of your Exchange license and that you have already installed because you have to install the Service Pack anyway, or you can pay a lot of extra license fees to an independent wireless middleware company whose separate software you must install and manage on your own. This decision is not even close. Carriers face much the same decision: lay out a bunch of extra money to support a middleware platform or just work with Micrsoft to license their client software. Not a hard one either.
What does this mean for wireless e-mail middleware companies? It means they are in for a world of hurt. Yes, these companies will still have a window of opportunity to create software for non-Windows Mobile phones and non-Exchange environments, but that window is closing rapidly as Microsoft moves quickly to license it’s client side software to the other major mobile OS players such as Symbian and Palm, both of which Microsoft already had deals with for their prior-generation clients.
In the grand scheme of things, the elimination of the wireless e-mail middleware market should not be surprising as it was always clear that the need for the space would greatly decrease once wireless carriers provided fast generic HTTP connections and the mobile OS market consolidated around a few platforms. However, what is surprising is that VCs would drop another $250M into a space that clearly is in the process of being, at the very least, severely marginalized by the largest, most profitable, and most aggressive software company in the world.
Such profligate spending in the face of impending doom perhaps confirms the theme of Wall Street Journal article which basically says that VCs are throwing tons of money at late stage companies because they have lots of money and it’s burning a hole in their pocket. Of course, the VCs may also be betting that Microsoft’s aggressive moves will put pressure on others to make acquisitions, but if that’s the case than they are counting on some pretty rich deals given that, at least in two cases, the deals need to be over $200M+ just to get everyone’s money back.
Personally, I think that the wireless e-mail middleware companies face a huge uphill battle just to get their paid-in-capital back and that they will likely add to the trail of tears that has been blazed by other software companies that have raised more than $100M. For me, by definition, any software company that needs $200M+ to build a sustainable business is a bad venture investment. That people would continue to throw money at these deals despite what is clearly a dramatically changed (for the worse) competitive environment makes me worry a lot about the venture market in general.
I suspect that most of this is being justified by the fact that Research-In-Motion still has a $12BN valuation and that the VC investors are simply multiplying their own users bases by RIMM’s market cap/subscriber and thinking “hey we’re worth $XBN if you comp us against RIMM”, but this of course neglects to consider the fact that RIMM is in the same boat as the private companies when it comes to Microsoft, but that only RIMM has a handset business it can fall back on.
My prediction: RIMM will see its value cut by 30-50% in the next 12 months as investors realize that the Exchange 2003 SP2 is basically the Death Knell for RIMM’s own middleware business. This in turn will lead to a dramatic souring on the prospects for the private wireless middleware companies (no doubt right in the midst of their IPO process) which will end up closing the markets to them and forcing them to sell, for less than paid in capital, to some large public company scavengers such as IBM, Oracle, and Motorola.
Of course I could be wrong, so feel free leave a comment if you have a different take!
A Microcosm of VC Madness: $250M for Wireless E-Mail
Last week, Good Technology announced that they had raised another $45.8M bringing their total paid-in-capital to a whopping $146M. This announcement came just about a month after one of Good’s main competitors, Visto, announced that they had also closed a new round taking their total funding to a staggering $160M. If you add in competitor Seven Networks’ $55M in funding that means that over a quarter of billion dollars has been invested in just 3 software firms, each pursuing largely the same market.
In the grand scheme of things $250M is not a lot of money, but when it comes to software start-ups $250M invested in one market sub-sector is a lot of coin. The general rule of thumb used to be that it should take about $10-$15M to aggressively “force feed” an enterprise software start-up, i.e. start it and grow it to break even faster than internal cash flow would allow. That rule got tossed out the window in the late 1990’s when a number of software start-ups raised huge amounts of money, but even then you’d be hard pressed to name many software companies that raised more than $100M before going public.
Now if Good et. al. were working on some kind of massive world-changing software platform I suppose I could see investing $250M in the sector, but as far as I can tell Good and the others appear to simply be building middleware that enables corporate employees to access their e-mail (and other applications) via hand-held devices. A worthy pursuit no doubt, but not an earth shattering opportunity for software value creation on par with PC operating systems, App Servers or RDBMSs.
As a case study, this massive over-investment in wireless e-mail provides some telling lessons on what’s really going on Venture Capital these days including:
1. Money is flooding to supposedly “hot” sectors. Popular perception is that VC’s have become more disciplined in the wake of the excesses of the late 90’s and as a result it is generally harder to get VC money and that even when companies get funding, VCs are insisting on reasonable valuations and capital efficient business plans. I would say that on average this perception is true, however in certain technology areas VCs appear to be throwing many of these hard learned rules out the window. With so much dry power out there and so many VC firms, if a sector is anointed as “hot” by the media, by a “star” VC or what have you, then all of a sudden it seems as though every VC and their grandmother are throwing money at the sector faster than you can say “Term Sheet” (See my post on Social Networking as a good example of this.). This behavior tends to not only drive up valuations, but it also results in more competitors and more money raised per competitor as each firm tries to “force feed” itself to faster growth than their fellow start-ups. The end result is too many VCs investing too much money in too many companies. In the case of wireless e-mail, over 50 venture firms have provided the cool $250M+ thrown at just the top 3 competitors. I’ll wager that a good portion of that money has been wasted force feeding the different start-ups in an effort to grow them faster than their competitors.
2. “Hot” companies can still entrance their VCs into supporting crazy burn rates. These days most VCs seem to feel that burning over a $1M/month is a sign of extreme fiscal recklessness. How then is it possible that Good Technology appears to have burned an average of around $2M/month since its founding in early 2000? My guess is that it is because Good is perceived of as a “hot” company and “hot” companies often don’t have to play by the rules of good start-up management. The theory is that the “hot” company can afford to have a high burn rate because there are lots of folks willing to put more money in (at high valuations) and the ultimate pay-off will more than justify the added investment. Unfortunately for this theory as more competitors and more money are being thrown at the same markets, the probability of one firm enjoying an outsized pay-off relative to the others is declining rapidly. The sheer number of these firms combined with the huge amount of paid-in-capital and high burn rates makes them all particularly vulnerable to getting “shopped” by potential acquirers. If there is just one start-up in a sector and 3 potential buyers, then the start-up has a bit of leverage. If there are 10 start-ups and 3 potential buyers, the buyers have all the leverage and they know that the VCs will be desperate just to recover their invested capital, let alone make a profit.
3. VC returns are in an inevitable decline. Too many VCs investing too much money in too many companies results in one sure thing: lower overall venture capital returns. That VC returns should be lower going forward should not surprise any student of financial markets because, as they would know, almost all returns in alternative asset classes have declined as these markets have matured. In the case of the venture market, in addition to overall returns declining over time, I suspect that the distribution of those returns will become more binary over time. When there were relatively few firms and relatively little competition for deals, VC funds could easily build a well diversified portfolio and have their “pick of the litter” in terms of start-up ideas. With so much competition and a much more mature financing market, it will be difficult for an individual fund to build a similar portfolio. This situation should theoretically lead to much more of a “hit” or “miss” environment for individual funds.
$250M invested in wireless e-mail speaks volumes about some of the challenges facing the venture capital industry today. It says that while many VC’s are talking the fiscally responsible talk, in “hot” sectors it appears as though not everyone is walking the talk. It also says that industry returns are inevitably headed downward thanks to increased competition and greater funding levels.
The key to investing such a climate is likely to be figuring out ways to avoid investing at the tail end of “hot” sectors and to prevent companies that suddenly become “hot” from blowing a ton of money in an effort to “keep up with the Joneses”. There is one piece of good news though: for $250M I am pretty sure we will all be able to follow future industry developments by reading about them on our wireless e-mail devices.