Monthly Archives: June 2011

Going public when you are not a US start-up – part 2/4: Envivio

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Envivio follows my recent post on another start-up with European roots, Transmode. Envivio has similarities and differences. Both have roots in the Telecom industry, Transmode with Ericsson and Envivio with France Telecom. Both were founded in 2000, 11 years before the IPO or filing.

Both had complex financing rounds, including “down rounds”. You can see that in the Transmode case, the price per share went from $5.5 in the B round to $1 in the C round. These down rounds are usually terrible for founding teams. And indeed, there is not much info about Transmode founders.

Envivio had raised $41M until 2008 and the price per share increased steadily to $2 per share. Difficult to give precise dates for the rounds, but the investors were a combination of corporate investors (France Telecom, Intel, Bertelsman, Philips), and financial (Global Accelerator, Crédit Lyonnais – now Crédit Agricole). Then the G round in 2008 was a down round at $1.25 and the H round, less than 2 years later, even lower at $0.34. With such events, it is not surprising to discover that the investors own 87% of the company before the IPO. Obviously, this would have been very dilutive to the founder, Julien Signes, without the possibility of granting new (stock option) shares that you discover in the right column.

There is another interesting difference with Transmode: Envivio is filing to go public in the USA, it is indeed an American start-up, and not much shows its French roots (the R&D is based in Rennes, Britanny though). Even if Julien Signes studied and worked in France initially, he worked also for France Telecom in San Francisco and I would be curious to know if this had an impact in his entrepreneurial path. I asked him and am waiting for an answer, but it is possible that Envivio is not allowed to communicate in the pre-IPO period.

It is one my thesis that Europeans who had a US experience have digested better the start-up dynamics (whether they moved to the USA and became entrepreneurs there – De Geus, Bechtolsheim, Brin – or they became entrepreneurs in Europe but had lived in the USA – Liautaud, Borel, Haren). This does not prevent European high-tech start-ups to exist and succeed, but I have to admit, the numbers are not exactly the same.

Again, because the company is not public yet, I had to guess what the price per share might be at IPO. I have put a small price, using multiples of market cap. to revenues of 7x. I will make an update when I know more…

Next: Alibaba

NB: an explanation from the filing on the issuance of incentive shares: “In September 2008, we sold 1,532,372 shares of Series G1 convertible preferred stock and 13,359,323 shares of Series G2 convertible preferred stock for $1.25 per share and received total consideration of an aggregate of $15.9 million. Also in September 2008, we converted the outstanding principal balance of our outstanding convertible promissory notes in the amount of approximately $8.9 million plus accrued interest in the amount of approximately $0.2 million into 467,628 shares of Series G1 convertible preferred stock and 6,829,154 shares of Series G2 convertible preferred stock simultaneously with our Series G financing. In June 2010, we sold 895,502 shares of Series H1 convertible preferred stock, 18,487,298 shares of Series H2 convertible preferred stock, 7,775,801 shares of incentive Series 1 common stock and 87,170,915 shares of incentive Series 2 common stock for $0.3351 per unit and received total consideration of approximately $6.5 million. In connection with this Series H financing, all outstanding shares of Series B, C, D, E and F convertible preferred stock converted into shares of common stock. Also in June 2010, we converted the outstanding principal balance of our outstanding convertible promissory notes in the amount of $1.0 million plus accrued interest in the amount of approximately $4,800 into 2,998,571 shares of Series H2 convertible preferred stock simultaneously with our Series H financing. The number of Incentive Shares to be issued was based on the series of the outstanding convertible preferred stock held by each Series H participant as follows: at a rate of 107.430618 shares of common for each share of the Series B, 77.588779 shares of common for each share of Series C, 1.492092 shares of common for each share of Series D, 1.865115 shares of common for each share of Series E, and 3.073709 shares of common for each share of Series F. As a result, the Company issued 94,946,716 Incentive Shares with the shares of Series H convertible preferred stock issued during the Series H financing.”

Going public when you are not a US start-up – part 1/4: Transmode

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I was studying recent IPO filings and discovered (more by accident than on purpose), that some of these companies were not US-based. I wanted first to know more about Chinese success stories, Baidu and Alibaba, and at the same time heard of Envivio’s filing and Transmode IPO. Envivio has roots in France (just as Sequans which I also studied a few weeks ago) and Transmode is based in Sweden.

I remember visiting Transmode during my days with Index. Transmode was and is a start-up in the Telecom sector, providing solutions for fiber-based local networks. The company just went public on the Stockholm stock exchange, 11 years after its IPO. The prospectus was in Swedish so that the data should be handled with care! An interesting element of information, if we agree high-tech is a global business.

The cap. table that you just discovered shows the history of the company has probably not been simple. Transmode has raised $45M since 2002 but this is the “new” Transmode, which is the outcome of the merger of Lumentis, another Swedish start-up with the old Transmode. At the time of merger the combined entities had raised $61M. There is money available in Europe, no doubt. They were 7 founders in each firm, but none appears in the Transmode IPO filing.

Investors owned 76% of the start-up before the IPO, 56% after the sale of 25% of the company to the public. With about 700M Swedish Kronas in revenues (about $100M), the company is valued 2x its annual revenues. Nice but not great. Still a sign that high-tech is viewed more favorably than during the last decade.

Next: Envivio.

The IPO fever goes on: Groupon files to go public!

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The latest IPO filing is 3 year-old Groupon. After raising more than $1B from its (famous) investors, the start-up hopes to sell $750M worth of shares at its IPO. I quickly build the capitalization table which follows (hoping there are not too many mistakes). I will update it when the IPO nears including the shares sold by existing stockholders, if any.

Worth noticing is the crazy valuation some “savvy” investors such as KP, Greylock or Battery paid for their shares. The other winners, besides the Groupon founders, should be the German start-up CityDeal launched by the Sawmer brothers (from the European Founders Fund).

I assumed a price per share of $19M but this is just to accomodate the $750M the company wants to raise with a consistent number of shares. I made no assumption on existing vs. new shares. Some analysts claim Groupon value would be more in the $20B range (i.e. a price per share of $60.)

Final comment for today: Groupon declined to be acquired by Google for about $6B last December. We’ll see soon if they were right to do so…

When Google wasn’t (yet) Google…

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A friend of mine just gave me a bunch of old Upside and Red Herring magazines. For those who are too young, these were the references in high-tech and entrepreneurship in the late 90’s and early 00’s! I plan to go through them and when something will attract me, I might mention it here. So here is the first example:

In May 2000, search engines were still nice internet tools that did not make that much money. Google was a hot start-up with two brilliant Stanford PhD students, and no real CEO. SO here is what Upside was saying:

Searching for profits. By John F. Ince, Upside Magazine, May 2000.

The pioneers had to expand to make money. Will the next wave fare any better?

During meetings, they bounce on huge rubber exercise balls. “It helps us to think better,» explains one employee. Between meetings, they blow off steam in the air hockey room, rollerblade; and ride bikes at the bay-front park, or go downstairs for a massage. At lunch and dinner, they dine on gourmet meals prepared by Charles le Chef, previously employed by members of the Grateful Dead and diverse upscale restaurants. Classical music from a baby grand piano will soon waft through the lobby. Welcome to Googleplex, home of a hot, new search engine that two Stanford Ph.D. candidates are riding like a cresting wave on an ocean off avorable publicity into a Never Never Land, where money is as plentiful as 3D-foot waves at Maverick’s, and nobody seems too concerned about wipeouts or ever having to turn a profit.

In November 1999, Fortune wrote, “Google seems to exhibit inscrutable magic.” But the biggest mystery is that the company seems to give such short shrift to the more mundane aspects of developing corporate strategy, penetrating new markets, and creating revenue. Nor does anyone in Googleplex have a clear timetable for when Google will turn search technology into profit. “Our number one priority,” says co-founder Larry Page, “is improving our technology and the user experience. We are insanely focused on that.”

In terms of pure technology, Google is getting the best reviews. According to a competitive survey conducted by NPD Online Research, Google came out at the top of the list in overall user satisfaction and loyalty. The survey included the top 13 search and portal sites and was commissioned by 13 major Internet companies, including America Online, Ask Jeeves, HotBot, LookSmart, Lycos, Excite, Go Network, GoTo.com, Netscape, WebCrawler, and Yahoo. What makes Google’s technology so cool? “It is a sophisticated next-generation search engine that uses complex mathematical algorithms to determine the importance and relevancy of Web pages,” says CEO Larry Page. Whereas most search engines use a keyword or metasearch technology, Google emphasizes making sure that the most important result comes up first. To do this, Google takes advantage of the expertise of millions of the “highly qualified editors,” out there who are creating, formatting and linking their Web sites. Google is hypertext-based and takes a gestalt view of information, analyzing all the content on each Web page. It considers such factors as fonts, subdivisions, and the positioning of all the terms on the page. It also factors in what’s happening in the site’s neighborhood. It looks at links and comes up with results that more often than not are superior to other searches in the critical category of relevancy. Google also provides searchers with an excerpt from the Web page with search terms highlighted in boldface type.

“I was very impressed, especially with their commitment to technological excellence,” says John Doerr of Kleiner, Perkins, Caulfield, and Byers. Kleiner eventually invested and : Doerr took a position on Google’s board, as did Sequoia Capital’s Moritz.”People thought we were crazy, both investing and both going on the board of yet another search engine,” says Doerr. “But their search numbers kept going through the roof, and still do.” In a little over two years since the release of its beta site, Google’s capability has gone from 50,000 searches a day to more than 10 million. Half of those searches emanate from Google’s Web site, google.com, and half from co-branded Web sites that contract with Google to provide search.

“Google is a shining example of superior technology actually drawing traffic on the Internet rather than marketing,” says Danny Sullivan of Search Engine Watch. Can Page and Sergei Brinn, Google’s other 20-something founder, translate their technology into a profitable business even though they have no business experience? Will they eventually hand over the reins to a seasoned veteran, as Yahoo’s founders did with Tim Koogle? “We have had discussions,” says Brinn, “and when the right candidate appears we will hire that person.” Moritz isn’t sure the process will be so smooth. “When will we know when we have found the right candidate?” he asks. “We won’t. Jerry [Yang] and David [Filo] weren’t sure that Tim Koogle was the right guy at Yahoo. They asked, ‘How do we know that TK is the one for the job?’ We didn’t. You only find that out after.” Will Moritz and Doerr force the issue? “We are investors, not managers,” says Moritz. “We can argue our position, proffer advice, make suggestions, twist arms gently, but we can’t force them to do anything. This is their company.”

Is Google positioning itself for acquisition, like Direct Hit, or does it intend to go it alone? “We are constantly talking with the other portals and search engines about possible partnerships,” says Brinn cryptically. “It is a very small community,” he adds. According to IDC’s Parr, “If you’ve got the money to [remain independent], it’s a reasonable strategy,” He continues, “Build word of mouth, build a team, get product ready.” Google’s strategy is to make money via co-branded WebSearch, SiteSearch, and advertising. WebSearch offers commercial Web sites such as Netscape’s Netcentral portal and The Washington Post search capability for the Internet at large. Google has licensed its SiteSearch technology to other Web sites, such as Linux vendor, Redhat.com, enabling users to search for information contained only on RedHat’s site. But these contracts only provide compensation in the vicinity of S5 to $10 per thousand searches- not much of a revenue source. Google expects its new banner advertising program, highly targeted to specific users, to account for 60 percent of its revenues within two years. “When your customers are doing search, you know a lot about them,” says Page. “That knowledge base can be monetized in higher advertising rates.”

There are many lessons, but for me the most striking is that VCs do not seem to dictate what the founders will do. Of course, Google was and is an excpetion in many dimensions, but it shows that entrepreneurs are the real center of Silicon Valley. The second striking point is the fact that technology was Google’s main asset. There was a bet that their technology leadership would convert at some point into a profitable business.