New Realities:

• $15M Raise @ $100M Post is gone
• Series B/C will be smaller raises
• Customer uptake will be slower
• Cuts are a MUST
• Need to become cash flow positive.

Macro & Markets

· Increasing signs of no V-shaped recovery
· Is this really the 4^th weekend of crisis meetings?
· G7/G20 meet to this weekend to save the world (again)
· Unprecedented use of the word “unprecedented”
· Desperate times, desperate measures - every Central Bank that can cuts rates
· Iceland Frozen - 300,000 inhabitants, US$14bn of GDP & US$100bn of liabilities
· Surprising saviour - Russia, with and a few problems of its own (but $580bn in reserves) rides to the rescue
· “Things Can Only Get Better” - FTSE100 moves below the level it was at when Labour came to power in May 1997
· Dow Jones weekly fall of this magnitude has not been seen since…..Germany invaded France
· US equity market now ‘on track’ to post the 5th down quarter
· Leaving out the oil shock, this is the first such occasion since 1932.
· And the final quarter performance of that streak in 1932?  Down 40% - i.e. the worst
· The only stockmarket still in positive terrain year-to-date, and it is Jordan (by 1%).
· Sony joins the 70% of Japanese companies trading below book
· The market cap of Coca-Cola is larger than the free float of the Russian Oil & Banking sectors combined
· Chinese ‘A’ shares are the best performing market since the collapse of Bear Stearns
· The Japanese Yen appreciated 37% against the Brazilian Real in 4 spectacular days
· SEC short sale ban ended midnight Wednesday – very helpful
· Did it Work? …. US Financials fell 26% in that period
· 81% of investors with at least one million dollars of assets plan to walk away from their current advisor
· That is human nature - in a bull market, even the most novice investor thinks he is brilliant. In a bear market, it’s the financial advisor who gets the blame.

· Most-asked question this week - have we reached capitulation point?
· WSJ says - ‘Now Is the Time to Think Long Term and Buy Stocks".
· Rosenberg says “No - that is not a headline in a major national newspaper we expect to see at a market bottom”.

· When you see the headline "Sell Everything and Buy Long Treasuries at 3% Yield", that will be the day to sound the all clear.

· Why Government’s will act this weekend (INJCSP Index GP W)
· And if it works? Optimists say - “It’ll be like Concorde. If you aren’t in your seat when it takes off, you’ll never catch it”

Credit

· LIBOR/OIS still in trouble territory (366bp in US, 220bp in UK, 187bp in Europe)
· Every Central Bank continues to flood the money market with liquidity.
· But….. the rising amounts of extra liquidity provided to the money market are not having a discernible effect on interest rates beyond the overnight rate

· UK still rising despite the intelligent bailout – main uncertainty is whether interbank lending is guaranteed or not (PM says yes, but no statement from Treasury)

· Leader - HSBC bravely returns to 3m/6m Interbank market offering £2bn
· Syndicated loan market also cracks (LCDX 10 Curncy) – Why?
· Lehman ‘wind-up’ – Today’s the day where an auction will determine the size of the payments buyers of CDS can claim from counterparties that sold them.

· Lehman’s $128bn of bonds were trading yesterday at an avg of 13c/$….
· ……. indicating credit swap sellers may have to pay 87c/$ (BBERG).
· No surprise to see forced sellers of financial assets…
· Heavy (and somewhat surprising) support for the US$ - The Fed’s custody holdings (Treasury’s for foreigners) soars US$44bn in a week to staggering US$2.47trillion.

· FX reserves of Asia now US$2.5tn – expect more FX intervention
· The Fed has already dramatically boosted its balance sheet from $900bn a year ago to around $1.5tn today.
· This looks very likely to reach well over $2tn by the end of the year.
· The Baltic Dry Index is now down 76% from peak
· You thought VIX hitting a 20 year high was bad (VIX Index), try European VIX (V2X)
· IMF raised their credit crunch loss forecast from $1tril to $1.4tril. ML at US$2tril.
· US$675bn of capital raising to go
· National Debt Clock in New York runs out of numbers this week as national debt passes the US$10 trillion mark.
· Lengthier version due early next year with 2 more zeros
· Unblocking the LIBOR monster the key for this weekend

Stocks

· VW gains, and then lost $66Bn of market cap in 8 hours yesterday - that is the entire market cap of Siemens
· The Fed throws yet another huge bone to AIG - agrees to provide another $37.8 billion to the insurer (on top of the US$85bn so far)

· HBOS is smaller than Bank Sabadell
· Quote of the week: CEO, Martin Blessing of Commerzbank, "I could tell you more if I knew less"….
· Real Company Quote of the Week: "The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy."

· There will be a world tomorrow
· Smart client points out the most perfect ‘inverse indicator’ for the market (VOW GR)
· Let’s hope it falls

This isn’t the first we have heard of VC’s brining their portfolion companies in to address the well known facts (outside of Silicon Valley) that times are going to be tougher into next year and maybe longer.

I was meeting yesterday with a startup that is close to burning through their Angel/A round, and going to the market for a second round of $5mm to $10mm.  They expressed concern, but only in the short term.  I don’t agree.

Some of the common themese in the recent articles:

1. Reduce your burn rate significantly
2. Trim expenses where possible - just because you have VC money, doesn’t mean you have to pay a premium to you CDN, bandwidth and phone provider, office furniture leasing company, office space, etc.
3. In a downturn, there are deals to be had and take advantage where possible.
4. Extend your timelines when possible, and if able, push for revenue earlier than later
5. If you are in a funding cycle, go big and as fast as possible.

The companies with low burn, realistic timelines, low overhead, and plans for early revenue will win in the long term.

If you are smart and lucky enough to have all of these componenets in the bag, we look forward to seeing you on the other side.

The full article is here:

http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/

"The increase is six times the $92.6 billion in additional funds deployed after the terror attacks on Sept. 11, 2001 and nearly nine times the extra money made available before the start of 2000, when policy makers guarded against the potential failure of networked computers worldwide as they handled to changeover to a calendar year requiring notation in four digits.

The Fed increased its balance sheet 7.7 percent in the wake of the implosion of the Greenwich, Connecticut-based hedge fund Long-Term Capital Management in 1998."

"Hopefully Mail Goggles will prevent many of you out there from sending messages you wish you hadn’t. Like that late night memo — I mean mission statement — to the entire firm."

Here is the story in Wired:

http://blog.wired.com/business/2008/10/googles-mail-go.html

The infamous spyware company, Gator, having rebranded at least twice and most recently losing several of their "key" employees to the toxic, ISP behavioral targeting firm, NebuAd, had shuttered it’s doors.

http://venturebeat.com/2008/10/06/controversial-ad-company-jellycloud-shuts-down-citing-industry-consolidation/

"Over the past two years my investments have had a heavy digital media focus, with many directly or indirectly related to the advertising industry. Most have a significant data component, where the business generates valuable data from which even more valuable metadata can be extracted and monetized. I have been pretty happy with the performance of my portfolio to date.

That said, these next several years do not look promising for advertising in general, notwithstanding the fact that many successful early-stage companies in the space will emerge from the rubble as profitable, formidable enterprises. I feel a need to better diversify my portfolio exposures, and I have been fortunate to see several attractive deals in different spaces that I believe will fare much better in an economic down-cycle."

My investment criteria, as general matter, can be described as the following:

• 2-3 person teams, with a CEO who is the product visionary
• A strong technology lead
• A CEO who has infectious passion and intensity, yet is humble and coachable
• A business model that I can understand in 30 seconds without visual aids
• The company has a prototype/alpha version that is currently being challenged by users and generating feedback
• An ability to generate revenues in 6-9 months
• A business that needs no more than $1-$2 million in financing to become a $25-$50 million (exit value) company, simply by executing the core business plan
• A business that has an inherent call option, that could boost its base-line exit value by at least 10x

While not every one of my investments share all of these characteristics, most do. I have done some deals, however, in order to learn about a particular sector, where I figured an exit would be at a much lower dollar value but where the knowledge would be worth it, e.g., Wallstrip, MyTrade. Given the uncertainty of ad spending, the tremendous dollars going into digital media, the increasingly competitive landscape and the jittery global financial markets, I have added a few criteria to my check-list:

• Initially sells to the enterprise for branding, credibility, awareness and early revenues
• Can get to revenues within 6 months, tops
• Is sold on the basis of ROI, e.g., helps generate revenues or reduce headcount/costs
• Integrates easily with existing platforms and/or programs
• Either leverages existing open source programs or can itself become partially or fully open source
• Has multiple revenue streams, e.g., software, maintenance, services, etc.

Mobile Broadband:

• 29% Mobile Broadband Penetration
• Mobile Broadband Lifts Media Consumption
• 2-3x times data consumption with 3G over 2.5G

Smartphones:

• In January 2005 - 45 models
• In January 2008 - 152 models
• 122% YoY Increase in Smartphone Owners
• Only 7% of consumers have Smartphones
• Active Media Users Embrace Smartphones

Mobile Web:

• 46% YoY Increase in mobile web audience
• Utility web audience grew even faster 5x to 10x - news, weather, maps, traffic, search, banking
• Smartphones still raised the bar further
• Clear emergence of consumer experience - moving past the novel and time wasting application
• Mobile has now become mainstream and relied upon - a very important part of this digital mix today.

Mobile Advertising:

• Mobile provides new advertising platforms
• SMS is the most mature
• 112MM text users last year
• 48MM Mobile gamers
• 14MM Mobile Video viewers
• Mobile Web Drawing Top Brands

Top 10 Sources of Mobile Web Advertising

• Publishing
• Personalization
• Broadcasting and Cable TV
• Automobile
• Internet Software
• Application Software
• Movies and Entertainment
• Aerospace
• Specialized Consumer Services
• Diversified Banks

The iPhone Effect:

• Clearly Apple is hitting it out of the park
• The iPhone has a significant and broad impact
• Increased the service penetration of social networking, video, music, browsing and game playing
• Small audience, but outsized impact
• Software is the new mobile battleground (cf. Symbian, Android)
• "Openness" is the new black

Things are continuing to improve - the transition from Analog to Digital is alive and well.  Everything is getting faster slammer, clearer, with greater capacity and cheaper.

Further integration of devices, accessories, content, services network and community continue to be aligned and integrated from the beginning of the solution and product launches.   Service providers and content owners are collaborating at launch.   The Amazon Kindle is a good example of this type of integration and seamless integration of content.  Devices increasingly are moving in this direction/

Distribution is evolving.  There are new methods.

New Battlegrounds:

The Living Room:

• Supreme Court ruling allowed the betamax to be sold and distributed in 1984.
• The typical services that controlled that portal - cable, OTA, and satellite.
• 75% of households with an internet connection have broadband
• Netflix box, set top boxes, TIVO are allowing the consumer to consume content when they want.
• The traditional cable operators (MSOs) are integrating DVR capability into their set top boxes.  This used to be ruled by the OEMs.
• Gaming and computers, including the Wii, Xbox 360 Media Center capabilities,
• What’s next for Television?

Battleground #2: The Palm

• What’s next for Palm and Pocket?

I’ve completed and posted mine for what it is worth:

http://adtech-sf08.sched.org/dhelmreich