Burnham's Beat

RSS vs. E-Mail: It’s No Contest, E-Mail Wins … For Now

As I mentioned in a prior post, there’s a study out that shows only 11% of blog readers use RSS and 2/3rds of them don’t even know what RSS is.  For Bloggers trying to build a subscription base of readers that’s not good news.  It means that on average only 1 out of every 9 visitors to a blog is going to be able to subscribe to a blog via RSS.  Unless you have another option to regularly reach such readers, they are going to be left out in the cold.

As it happens, there is another option and that option is none other than good old reliable e-mail.  While e-mail may not be as sexy as RSS, you can bet that close to 100% of blog readers will have an e-mail account and know what it’s used for.  Indeed, given the almost ubiquitous reach of e-mail and its “push” nature, one might argue that if you are really interested in reaching your users, you should probably make e-mail the preferred means of subscribing to your blog.   That may sound like heresy to some in the blogging community, but I’d be willing to wager that the read rates for blog posts sent via e-mail are probably much higher than those that are simply made available via RSS, not to mention that fact that e-mail subscriptions apparently reach the 90%+ of Internet users that don’t use RSS.

Up until recently, it seems as though one site, Bloglet, had a monopoly on enabling blogs to offer e-mail subscriptions to their posts.  By many accounts, Bloglet is a somewhat unreliable service and with little or no customer service.  But it was the only game in town, so basically everyone used it.  Recently a few new RSS to e-mail services have emerged including Feedblitz and RSSFWD.  I myself have switched to Feedblitz and, like several others who posted recently, have been very happy with the switch.

All that said, over the long term RSS will triumph as e-mail subscriptions to blogs do not scale well and RSS will become much more ubiquitous and user friendly (thanks largely to MSFT’s decision to embed RSS into Vista), however in the short term I think it’s hard to argue that e-mail isn’t a far more accessible and practical way of allowing the vast majority of readers to subscribe to a blog.

When to Catch A Falling Knife

If you ask any public investor “When should you catch a falling knife?” their answer will invariably be “Never”.   That’s because public investors have learned over time that stocks in a free fall often continue falling all the way to zero, so you are better off selling now and buying back later.  Unfortunately, things are often not so clear cut in the world of Venture Capital.  The very nature of start-ups is that they are bound to have fits and starts and make major changes in product strategy, target markets, or business models, all in an effort to find the right combination of factors that will ultimately lead to success.

What this means is that VCs, more often than they might like, are bound to be confronted with the following situation: a once promising start-up that they funded unexpectedly falls on hard times and the VC must either invest more money in the start-up in an attempt to “rescue” it or find an honorable way to wind it down (which usually means a quick sale or a quiet shut down).

I myself have faced this situation several times and have also watched others suffer through it.  Despite the fact that I started out my investment career on Wall Street, where the saying “sell your losers and buy your winners” is often recited as Gospel, I can tell you that simply walking away from a VC investment is harder than you might imagine.  Some of this difficultly has to do with the fact that Venture Capital is, by its nature, an optimist’s endeavor, some of it has to do with the strong emotional bonds that many VCs build with their companies, and some of it has to do with the natural unwillingness to admit that you are wrong.

That’s not to say there aren’t times that a company clearly isn’t going to make it, but more often than not VCs face very tough decisions that are better served by careful thought than a black and white aphorism.  My own experiences with this situation have led me to develop several maxims for evaluating an investment in a falling knife.  They are:

1. There must be significant changes in a company to warrant a new investment.  As the old saying goes, the definition of insanity is doing the same thing over and over again and expecting something different to happen.  To expect a failed business to turn around just because you give it more money is similarly insane.  The key to successfully catching the knife, is to recognize what aspects of the business are failing and to take immediate decisive action to change those aspects.  A significant corollary to this maxim is that firing the founders, or whoever else happens to be in charge, is not guaranteed to fix the problem by itself and sometimes may actually create new problems.  While it’s tempting to blame the founders for all flaws, the board must accept ultimate responsibility for the business going south.  Once the board takes responsibility, it’s easier to consider a much wider range of potential problems and solutions.
2. There must be few if any legacy financial issues weighing the company down.   Even if you believe that the company has developed a great turn around plan, this will all be for naught if there are too many legacy financial issues to deal with.  Long term office space leases are a classic legacy financial issue.  For example, in 2000/2001 many start-ups found themselves saddled with wildly expensive long term leases for far more space than they needed.  While some landlords would cut deals to restructure, most would not, and this doomed many companies to  failure because the leases made them impossible to fund.  As a general rule, the bigger a company’s operating expense base and the longer it has been in business, the greater the number of legacy financial issues that you will have to deal with.
3. There must be a strong foundation from which to rebuild on.  If the business is starting over completely with a new market, product, and team, it probably makes more sense just to shut the existing business down and create a new startup.  To justify the time and expense of a restructuring there must be some core assets of the business, ones that you couldn’t easily replicate with a “green field” startup, that provide a strong foundation for rebuilding the business. 
4. The investment analysis must only focus on the future.  The easiest way to throw good money after bad is to justify the new money going in largely on the basis of trying to save the old money.  All financial analysis of an incremental investment should focus on the incremental returns.
5. The partner on a deal must get a second opinion.  Unlike in the public markets where the best money managers have an unemotional, highly objective, and detached relationship with their investment portfolio, being a good VC almost requires a high level of emotional investment, something which is bound to cloud one’s judgment from time to time.   This makes it imperative for VCs to seek the objective opinion of their fellow partners when evaluating follow-on investments in broken deals for these partners can add a much needed reality check given their “fresh eyes” and relatively light emotional involvement.
6. You must restructure the capital structure of the business with an ultimate emphasis on simplicity.  When constructing a “rescue” financing, you often face two choices:  A) Close an incremental round of financing on top of the existing capital structure or B) Restructure and recapitalize the company as part of the financing.  Option A is often the most expeditious because it requires less work, less consents, and does not upset the existing order.  Option B can take much longer but ultimately creates a more manageable capital structure.  In keeping with my post on how complex preferred structures often create more problems than they solve, I firmly believe that rescue financings should strive to ultimately reduce the complexity of the capital structure (even if that takes several step over time).

Now I don’t profess to be the world expert in successfully catching the knife (and I kind of hope I never am).  I’ve had some successes doing it, and I’ve also had some failures.  I do think however that these maxims can serve as a good foundation for evaluating whether or not to put more money  in a “broken” deal, as I know from experience that they can save you a lot of pain and suffering if you carefully follow them prior to putting more money to work.

P.S.  If anyone else has any maxims of their own they’d like to add, by all means add a comment.

RSS: Geeks Only Please

Jeff just linked to a new Neilson study that reveals only 11% of blog readers use RSS and that a whooping 66% of blog readers don't even know what RSS is.  These figures should be a bit sobering for VCs and the rest of Silicon Valley because not only do 100% of VCs seem to know what RSS is but it seems like 66% of them have already invested in an RSS/Blog related start-up.  Some guys are even apparently trying to raise an RSS themed VC fund.

Fact is, if you wander just a little bit outside of Geek-centric world of tech-related and VC-related blogs what you quickly discover is that RSS feeds are few and far between.  Take political blogs for example.  A couple of weeks ago I noticed that one of the political blogs I enjoy, which also happens to be in the top half of the Top 500 feeds, didn't appear to have an RSS feed.  I contacted the author and asked him if he had an RSS feed and he asked me "What's an RSS feed?".  I explained and told him that since he was apparently using Moveable Type that he should just be able to check a configuration box to generate a feed.  Five minutes later, a small link to his feed (Moveable Type's strange default "Syndicate this Site (XML)") appeared way at the bottom of his blog.  After that we exchanged a couple e-mails in which I encouraged him to consider moving the link up to the top so that he could capture subscribers and to also consider inserting ads into his feeds to generate some more money.   I checked back today and he still just has the single link way at the bottom of his site.

Now remember, this guy is a professional blogger doing numerous posts a day and trying to earn a living off of his blog (and judging by his ranking on the Top 500, doing a better job of that than most), but RSS wasn't even on his radar and even after having the supposed benefits described to him, he hasn't been motivated enough to do much more than the bare minimum.   Thing is, his lack of action is totally rational.  Given that I was apparently the only reader of his highly ranked blog to have ever asked him for an RSS feed I assume he therefore suspects, quite rightly, that spending a lot of time and energy to optimize his RSS feed would be a complete waste of time at this point.

I don't think such behavior indicates that RSS is doomed or that it is a passing fad (in fact it may just indicate that we are in the early stages of something huge and there's still plenty of time left to make RSS related investments), but I do think it indicates that RSS still has a long way to go to mainstream adoption.

Perhaps most importantly, I think it underscores that VCs have to be careful not overestimate near term adoption rates.  Just because something is "hot" within the incestuous and self-centered world of Silicon Valley doesn't mean that it is hot elsewhere or even destined to be hot elsewhere.

Preferred To Death

Most people assume that the biggest source of financial tension within a venture backed start-up is the financial tension between entrepreneurs and VCs that is created as a result of the preferred stock agreements that VCs routinely insist on. While this situation can indeed be a major source of tension, a far more common and often far more destructive source of financial tension is the tension that develops between the VC investors themselves.

Generally speaking: the more VC investors in a company, the greater the inherent level of inter-investor financial tension. For companies that have raised multiple rounds of preferred financing (and had a few ups and downs along the way) this tension often erupts into highly distracting and even debilitating conflict, forcing entrepreneurs to either play the role of peacemaker or to choose sides and wage war against one investor faction or the other.

Having been involved in a few of these fights myself and having observed more than a few from afar, I think there are some structural ways to significantly lower the level of inter-investor tension and thus the probabilities of conflict, but first let’s explore the typical sources of conflict.

When You Need It The Least, You Get It The Most
The most common cause of inter-investor conflict is poor investment performance. If a start-up is failing to execute on its business plan, investors generally get nervous and one can almost feel an “every man for himself” attitude start to overtake the group. Some investors might want to change management, some might want to change strategies, some might want to “stay the course” and still others might just want to sell and get the hell out. While investors no doubt often have principled disagreements over what’s best for the company in such situations, more often than not, a particular investor’s preferred path is heavily influenced by their specific financial position relative to the other investors.

For example, take a company that has raised a substantial amount of money by issuing four separate series of preferred stock. Typically the last series of investors will be first in line to recover capital in the event of a sale. This means if a company starts to go south, the last series of investors will typically push hardest for an immediate sale while the first series of investors, who realize that they will likely realize little if any proceeds in a distressed sale, are much more likely to advocate “staying the course” or some kind of restructuring.

These situations can get even more complicated when one takes into account not just the financial incentives of each investor, but their individual fund dynamics. Some investors may not be willing to do a “down round” of financing because they are in middle of raising money, while others may not have enough money left over in their funds to make a new investment even if they wanted to. These fund dynamics can add a layer of complexity and confusion to inter-investor conflict that is incredibly frustrating.

The irony for entrepreneurs is that this is worst possible time for them to have their investors engaged in a debilitating and distracting cat fight. After all, this is the time that the entrepreneur clearly needs as much help as possible, but to his eyes it often appears that the VCs are too busy fighting each other over who gets the first class suite on the Titanic to bother helping the company.

When One Person’s Home Run Is Another’s Base Hit
A similar, though somewhat less common, situation can occur when a start-up is doing very well. In this situation, investors may disagree about the best path to maximize the return on their investment. The typical catalyst for such a conflict is a buy-out offer from another company. Once again, each investor’s preferred path is highly influenced by their relative financial position. In a reverse of the downside scenario, in this scenario it is the early investors who are typically pushing hardest for a sale, while it is the later investors who are most vested in “staying the course”. This difference is due to the fact that the early investors often stand to make a much greater investment return than the latest investors.

For example, if the early investors bought stock at a post money valuation of $2/share and the latest investors paid $8/share, a sale at $10/share would net the early investors a 400% return, but the later investors would net only a 25% return. In such a situation, the later investors may well want to “let it ride” but many early investors will be screaming to cash out.

These “upside” conflicts are usually easier to work out, however sometimes they can be just as nasty as a downside conflict with investors threatening to file lawsuits and all other sorts of crazy things in an attempt to get their way. In these situations usually the management team is aligned with the early stage investors (as their options are in the money) although it’s not uncommon to see the management team split as well between the founders, who have very low cost stock and therefore stand to make good money and professional managers who joined later on, and thus have options that are only marginally in the money.

The Nuclear Option
Much of the underlying tension in both scenarios comes from either overt or implied threats by one investor class or another to exercise the VC equivalent of the Nuclear Option. Each class of preferred shares has so-called protective provisions. These provisions essentially give each class of preferred stock veto-power over a set of company decisions. One common protective provision is that a majority of investors in a particular class of preferred stock, say the Series A investors, must vote to approve any merger or sale for it to be valid or must vote to approve any new round of financing. In this way, any class of preferred investors can essentially veto a sale or new round of funding. In the case of the new round of funding, vetoing it can effectively kill off the company if it is in distress, while in the case of selling the company, vetoing it (or simply not voting for it) can kill the deal outright.

Investors insist on such “blocks”, as they are often called, to avoid situations in which they invest in a company at a $100M valuation only to have the other investors, who invested at a $20M valuation, sell for $80M. This obviously wouldn’t be fair, so it’s not like blocks are an inherently unreasonable term.

However, in addition to “blocks”, most investors get preferences, or the right to get their investment (and sometimes multiples of their investment) back before the other investors. Theoretically preferences encourage investors to invest at higher valuations than they might otherwise.

The problem isn’t that blocks or preferences or preferred stock are inherently bad, but that each new issue of preferred stock builds up a separate layer of blocks, preferences and other terms. After just a few rounds of preferred stock, companies are often saddled with so many different terms and provisions across the various issues of preferred stock that getting simple board consents can be harder than ratifying the SALT II treaty.  Major decisions, such as selling the company or raising a down round or hiring new management, are almost pre-ordained to set off World War III.

Can’t We All Just Get Along?
Having been through what seems like World War III, IV, and V and few times, I have developed a 5 step method to preferred investor harmony:

1. Never have more than three classes of      preferred stock outstanding. Roughly speaking, the amount of investor tension and the chance of      “going nuclear” is a log function of the number of preferred stock series      outstanding. Having any more than      three series outstanding is just begging for investor Armageddon. If you find yourself on a board debating      the merits of Series G stock, you should immediately stop what you are      doing and proceed directly to recap the entire company.

2. No Class Blocks For Sales: Allowing an individual class of      preferred stock to block a sale of the company is simply a recipe for      trouble. You are better off giving      a class a higher preference than giving them a block. By all means don’t give them both as      there’s no real justification for both. If you must give a sale block to a preferred stock, at least make      it conditional in that they can’t object to sale above a certain share      price.

3. Keep      It The Same Stupid: To the      extent humanly possible, the terms on each class of preferred stock should      be the same as the others. That      means the same protective provisions, the same conversion terms, group      votes on as much as possible, etc. The more everyone is in the same boat the easier it is to make      harmonious decisions.

4. Drag Along’s Are Your Friend: Drag-along provisions, provisions that      require investors to support certain actions whether they like it or not      as long as enough of the other investors vote for them, are a company’s      best friend as they preclude all sorts of childish and destructive      behavior on the part of a rouge investor. They are somewhat draconian, but you will come to love them when      you have to line up consents for a new financing or a sale.

5. Manage Expectations: When recruiting additional series of      preferred stock it’s important to let them know what the expectations and      intentions of the existing investors are. If the existing investors have resolved that they will hit the      first M&A bid above $50M, by all means tell new investors that. On the flip side, if a late stage investor      plans to not even consider selling before they make a 100% return they      should let the company know that before they put their money in.

Inter-Investor Agreements?
While these suggestions are all ways to keep the peace within an investor syndicate using existing preferred stock purchase documents such as the Stock Purchase Agreement, the Investor Rights Agreement, and the Articles of Incorporation, fact is these documents are really written to address issues between the investors and the company, not issues between investors.

The more experiences I have with such situations, the more convinced I have become that it might make sense to have a separate “inter-investor agreement”, similar to an inter-creditor agreement often found in debt financings. Some of the things the inter-investor agreement might spell out in more detail include: A) What milestones investors will use to determine progress or lack of progress B) What actions they agree to take if such milestone are met or not met C) What happens in the event one investor’s fund runs out of money or needs to sell their stock D) Expectations and processes for resolving disputes short of all out investor war.

Such a document might not be necessary if the 5 step method is followed, but either way, I think VCs need to explicitly address the issue of inter-investor financial tension head on as it is bound to become an issue sooner or later in most venture funded start-ups.

SOA Under The Radar: Recap

Last night I served on a panel of VCs at IBD's "Under the Radar: SOA Death Match".  The event featured 4 companies with products that were either directly or indirectly focused on enabling Service Oriented Architectures (SOA).  Each company presented for 6 minutes, then the panel of VCs asked 6 minutes of questions.  At the end of the event, the VC panel picked a "best in show" and the audience picked their own "people's choice".

Perhaps what I found most interesting about the conference was that you could actually get 75 people into a room on a Tuesday evening to discuss Service Oriented Architectures.   Sure this is Silicon Valley and there are lots of tech geeks that are always up to discuss the latest and greatest technology trends, but I remember in 2001/2002 when the mere mention of XML, SOAP, etc. brought puzzled stares from many in Silicon Valley.   I think it just shows that the whole concept of XML and SOA has reached mainstream acceptance, at least within technology circles, and really is destined to become an important and long term part the technology fabric.

In case you are interested, here's an overview of the 4 companies that presented:

Appistry:  Appistry was a bit of mis-match for the conference in that they are more of a application virtualization play than an SOA play.  I actually like the application virtualization space quite a bit, although many of the big players have already made acquisitions in the space so the amount of opportunity remaining for start-ups is limited.   That said, Appistry seemed to have a very solid product and several good reference customers.  They were a bit of a sentimental favorite for me given that the CEO was a former Wash U grad and they are located in Wash U's hometown of St. Louis (not exactly the tech start-up capital), but they clearly were at a disadvantage in the competition because SOA wasn't really their sweet spot.  I suspect they knew this and were really just looking to get some valley exposure for their business/fund-raising efforts, so they should have gotten an award for entrepreneurial pluck.

Blue Titan:  Blue Titan's main product is a web services management platform that enables companies to provision, secure and manage lots of different web services.  Their main competitors are Amber Point and SOA Software (which was supposed to present at this conference but canceled at the last moment).   Blue's Titan's founder and CTO presented and he was probably the most engaging presenter of the evening.  Conceptually I like the web services management space a lot.  I actually funded a company in early 2001 to go after this space (Maaya), but I was *way* too early and I was lucky just to get my money back.  These days it looks as though the space is finally getting some traction, but the sales process is complicated by the fundamental architecture issues that come along with embracing SOA which means it's a technical sale that requires multiple sign-offs.  In one of the more humorous outcomes of the evening, Blue Titan actually won the "people's choice" award but finished last in the VC panel's voting.  I think we VCs were concerned with the difficult sales cycle that Blue Titan faces while the audience was more focused on the visionary nature of the product.  Blue Titan's CTO took the difference in stride and said that the vote just proved his belief that potential customers appreciated his business much better than potential VC investors.

Ipedo:   Ipedo is focused on Enterprise Information Integration (EII) which I like to call data abstraction.  They aren't really focused on SOA per se, but their technology is arguably critical to the enablement of SOAs.  Ipedo competes primarily with other start-ups, most notably Composite Software and MetaMatrix.   I like this space a lot and actually came very close to investing in the first round of Composite Software (which I still believe is the best company in the space) but wasn't able to get my partners over the goal line.  I believe Ipedo started out as more of an XML-database play, but they quickly (and correctly) realized that a more generalized EII platform had more long term promise.  One of the most interesting things the CEO mentioned in his presentation was that Ipedo had an office in Shanghai, that their Chinese operations were profitable on a stand-alone basis, and that they were seeing strong demand for their EII solutions in China.  Given that EII solutions are just now being adopted by many US corporations I would not have suspected that there was demand in China, but I think it just goes to show how quickly the software market is developing over there.  As it turns out, Ipedo ended up winning the VC panel award.  I think this had to do with the fact that Ipedo seemed to be addressing a more pragmatic and immediate business need (data integration) than SOAs, so in some senses it really isn't fair as that's really comparing apples and oranges.

Reactivity:  Reactivity is a Message Aware Networking company that sells a "software appliance" focused primarily on securing XML messages as they transit a company's network.   I funded one of their direct competitors, Datapower, so I am very familiar with the space.  XML appliances aren't theoretically required to build an SOA, but they provide a much more secure, reliable and manageable foundation for SOAs.  Reactivity has traditionally been focused almost exclusively on the security side of equation (many refer to their product as an XML firewall).  To their credit this has really turned out to be the near term sweet spot of the market, however I think Reactivity's early focus has allowed some of their competitors to pigeon hole them as only security focused which may hurt Reactivity as customers begin to look for broader XML message platforms.   The big news in this space has been Cisco's recent announcement of its AON initiative which I think will likely force other big networking and software players to seriously consider buying some of the start-ups in the space.  I asked the CEO about Cisco and he gave a very honest, straightforward and mature response about  Cisco's efforts which was very refreshing to hear from a start-up CEO.  Ultimately I think both Datapower and Reactivity will do well, as the space is growing quickly and strategically important to a number of companies.

Virtual Stock Portfolio Update: July

In July my virtual stock portfolio was up only 1.1% compared to the NASDAQ's blistering 6.2% gain thanks to fact that I got clobbered on a couple of short positions.  On average my stocks were off almost 6% thanks to two smaller short positions, Convera and Wave Systems, that had inexplicably huge months.  Both stocks have cult followings and the cults appear to have won this month.  My longs all did well this month though, so I was able to avoid a net loss.  I guess that's what is supposed to happen in a long/short portfolio but it is still not fun to under perform.

Overall, my portfolio is up 21.6% YTD vs. 0.4% for the NASDAQ, so I am still nicely ahead of the market, but I am overdue for a bit of portfolio re-engineering so I am going to make a few changes this month.  First I am going to cover two of my poor performing shorts, Salesforce.com and Convera, because they both look like the momentum guys have gotten a hold of them.  Second, I am going to reduce my exposure to one of my longs, Neteller, and add a new long that is related to Neteller, FireOne, but trades at a significantly lower multiple.  I am also adding Kana as a short, as I see it following a path similar to what Broadvision did (i.e. going private at a big discount to its current price).  With these changes, I am somewhat net long on a cost basis, so I will try to look for a decent short this month to get the portfolio back into balance by September.

Long Picks

Company: SPSS Ticker: SPSS
Sub-sector: Business Intelligence
Investment Thesis: SPSS is a player in the business intelligence space with a particular emphasis on predictive analytics, something that is particularly hot right now. The stock has been battered by a restructuring that the company went through last year as well as an accounting restatement. My thesis is that the new product set is strong and the accounting trouble is overblown.
Performance: Since 4/30/04: +38.1%  Jul vs. Jun: +2.2%
Comments: The stock has been somewhat quiet recently but has been slowly trading upward so I will keep my exposure for the time being as the BI space remains hot and the multiple laggards in the space (such as SPSS and MSTR) are slowly closing the gap the the premium plays (BOBJ and COGN).

Company: Stellent Ticker: STEL
Sub-sector: Content Management
Investment Thesis: Stellent is a relatively sleepy, but well established, content management company that is attractively priced.  I like the content management space as a consolidation play.
Performance: Since 6/30/04: -1.1%  Jul vs. Jun: +12.7%
Comments: Strong month that made up a lot of lost ground, but this stock has been somewhat of a disappointment as it appears to range trade with no real direction.  Probably worth swapping out with something more attractive at some point in the near future.

Company: Neteller Plc. Ticker: NLR.L
Sub-sector: Financial Services
Investment Thesis: Every portfolio needs a flier and this sure counts as one. Neteller is Europe/Canada’s answer to PayPal and it has been making a killing by servicing markets, particularly on-line gambling, that PayPal has been pressured into exiting by the US Justice Department.  I know, I know, this is not a software stock, but I still follow on-line financial services quite closely and I feel compelled to point out this stock because it is such an attractive buy.
Performance: Since 6/30/04: +409%  Jul vs. Jun: +27.2%
Comments: The energizer bunny of stocks, it keeps going and going and going up.  Still only trading at a mid-20s PE despite the huge run-up.  It has gone up so much that it represented a disproportionate portion of my portfolio, so this month I trimmed my position back to be much more in line with the other positions.  I also added another stock, FireOne, that is basically in the exact same business, but trades at 14X earnings, so I still am overweight in terms of portfolio exposure to Internet payment processing for gambling companies.

Company: Sportingbet Plc. Ticker: SBT.L
Sub-sector: Internet Gambling
Investment Thesis: Sportingbet is the largest on-line gambling operator in the world. At 23-25X 2005 EPS this stock is still attractive relative to its growth rate (25-30%) and especially attractive relative to other Internet commerce plays. I don’t like the big options overhang in this stock or the poor margins (due to sports betting business) but this is a chance to own a major player in an important on-line commerce player at an attractive valuation.
Performance: Since 11/30/04: +120.5%,  Jul vs. Jun: +11.3% 
Comments: This has been a pretty easy play on Internet gambling and I don't see any reason to get out yet despite the good gains to date, although the stock may suffer as more Internet gambling companies get listed in the UK (for example Party Poker's (PRTY.L) recent listing).

Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy.  This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  From what I hear, businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +42.2%,  Jul vs. Jun: +45.5%
Comments: MSTR had a huge month in July thanks to a strong earnings report combined with a big repurchase announcement.   The repurchase should give the stock a bit of a floor in the next few months, so I will hold on to it, but I think all the easy money is now off the table as it is trading much closer to the other plays in the space now.

Company: FireOne Group Ticker: FPA.L
Sub-sector: Financial Services
Investment Thesis: FireOne operates an Internet payment service very similar to Neteller.  It is used primarily by on-line gamblers to transfer money around.  I added FireOne to the portfolio because I wanted to maintain overweight exposure to the these kind of Internet payments plays without putting all my eggs in one basket (Neteller).  It helps that FirePay trades at 14X earnings compared to Neteller's 24X, but FireOne is admittedly not as big or well run as Neteller.  I seriously considered adding, Optimal (OPMR), the parent of FireOne and an 80% owner, instead of FireOne, but the relative valuations suggested it was better just to go with pure exposure to FireOne.
Performance: Since 7/31/05: NA,  Jul vs. Jun: NA
Comments: Hopefully FireOne will be able to close at least part of the considerable multiple gap between itself and Neteller.  Given the lagged nature of its results vs. Optimal it may be possible to make very good guesses at its performance well in advance of a public announcement, so I should be able to get a bit of a "head's up" on any particularly good or bad news.

Short Picks
Company: Autonomy Ticker: AUTN
Sub-sector: Content Management
Investment Thesis: Autonomy is a UK-based purveyor of advanced enterprise search software a space I know well from some of my VC investments. The enterprise search space is crowded and getting even more competitive with the entry of folks like Google. Autonomy’s secret sauce, its categorization software, is increasingly being duplicated by it competitors. Autonomy continues to trade at a premium to the market. This premium appears to be largely an artifact of the fact that autonomy is a bit of a cult stock in its home country of the United Kingdom.
Performance: Since 1/26/04: +17.2%  Jul vs. Jun: -7.3%
Comments: Ever since AUTN delisted from the NASDAQ and relisted with the LSE, it has been a much quieter stock and has traded up a bit as well.  I think a lot of this has to do with the much lower reporting requirements of the LSE, but it's hard to tell.

Company: Salesforce.com Ticker: CRM
Sub-sector: Vertical Applications
Investment Thesis: Salesforce.com is a, mostly, hosted sales force management application. It's a good product, most of my start-up companies use it, but it is expensive the longer you use it and the larger your company gets. CRM is 2nd most highly valued stock in the software space despite the fact that it is facing increased competition from the big boys of enterprise software and that it’s very hard to rapidly grow subscription-based revenues. Any misstep and this stock will down 25% in a heartbeat.
Performance: Since 1/26/04: -81.0% Mar vs. Feb: -15.0%
Comments: I got killed on this short and can't take it any more so I am covering this month.  The company continues to have a crazy valuation (9X EV/Sales), but the management team is doing a good job telling the growth story and is also keeping revenues growing faster than I thought they would.  As the poster-child of software as a service the stock gets a lot of trend money as well.  I am not going to fight the trend anymore.

Company: Wave Systems Ticker: WAVX
Sub-sector: Security
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance: Since 10/1/04: -28.6%  Jul vs. Jun -50.0%
Comments: In July Wave was running out of cash and probably has two months cash left at most right now, yet the stock was up 50%.  This means one of two things either A) they are in talks to sell the business at a premium or B) someone is manipulating the stock.  Given the history of the stock, I think that B is much more likely as the stock has mysteriously run up in advance of two prior PIPES (giving the buyers the opportunity to short their positions in advance), however it will take a month or two to know for sure.  I am still hanging on to this short despite last month's blood bath because its clear that the company is approaching the end of its rope.

Company: Convera Ticker: CNVR
Sub-sector: Content Management
Investment Thesis: I ran into Convera when I was on the board of Stratify.  I was unimpressed with Convera’s business then and I am unimpressed with it now.  They have a decent market niche in the government sector but have never been able to really expand out from there and face increasing competition from the likes of Google, Verity, and Microsoft.  The stock is up strongly in the past few months thanks to the company’s announcement that they are going to enter into the web search market. This hype has disguised very poor license sales of the core product and a continued high burn rate (averaging about $4M-5M a quarter). Eventually the chickens will come home to roost here...
Performance: Since 11/30/04: -79.6%  Jul vs. Jun: -85.6%
Comments: The stock went on a huge run this month thanks to a PIPE from Legg Mason and lots of speculative interest in Convera's upcoming Internet search initiative which won't even start selling until Q4.  I  clearly underestimated how much people were willing to pay for hope and given that they won't get any real sense of how the new product is doing until Q4 now, it makes sense to cover and cut my near term losses.  I will be back to short this in Q4 though as the company is trading at 15X EV/Sales which is just silly given that there's no proven demand for their new product and it's not like the existing Internet search guys are going to roll-over.

Company: Manugistics Ticker: MANU
Sub-sector: Supply Chain
Investment Thesis: Manugistics is in a tough spot strategically and financially. Strategically it's facing increased competition from the big ERP players who are successfully bundling more and more supply chain functions into their core offerings.  Financially, Manugistics has a crushing debt load and a negative tangible book of $55M.  It's going to be very hard to pull this company out of the tailspin.  The debt holders may ultimately convert to equity and save the day, but things will have to get a bit worse on the equity front before they are willing to talk turkey.
Performance: Since 2/28/05: +4.0 Jul vs. Jun: -8.4
Comments: Still range trading a bit.  I still think that the equity is going to get pimped by the debt at some point before the end of the year, so it's worth waiting around for that day of reckoning.

Company: Kana Software Ticker: KANA
Sub-sector: CRM
Investment Thesis: Kana has been in a long decline ever since the bubble burst.  Once a CRM darling, it is now generating only about $2M in license sales/quarter and $10M in total revenues.  It continues to lose millions a quarter despite having only ~$10M in cash.  In addition, the CEO recently left in the wake of getting censored for expense account abuses and the company hasn't filed a 10K or 10Q because they have new auditors that are taking much longer than expected.  The new CEO is going to have to undertake a major restructuring to get this place profitable.  This company may ultimately experience the same fate as Broadvision in that it goes private at a big discount.
Performance: Since 7/31/05: NA Jul vs. Jun: NA
Comments: They need to file a 10K by the end of the end of the month.  I can't imagine that the 10K will have lots of good news in it.