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Milestone Matters - Winter 2001 Newsletter
"We're nowhere close to realizing the consequences of the Net
for two reasons. First, we've only got about 3.5% of the world's population
on the network. Second, the Net is still in an immature state, relative
to what it will be 5 to 10 years from now..."
--Marc Andreessen, Fast Company, Feb. 2001
Editor's Corner
Dear Friends, Investors and Associates,
I am writing to you in the wake of a most tumultuous year in which the
miracle of the periodic peaceful transfer of U.S. political power was
severely tested and the capital markets retreated sharply after a nine
year bull market.
Within the venture capital markets, the year was no less extraordinary.
Individuals and, particularly institutions, invested in excess of $70
billion in the country's several hundred venture capital firms, a significant
advance over the record $50 billion of 1999 and far exceeding the annual
norm of circa $5 billion in the 1980s and the early 1990s. In the first
quarter of the year, continuing the torrid pace of 1999, venture firms
committed substantial amounts to entrepreneurs--as much as $200 million
on a daily basis. Private investors became price insensitive, which increased
entry level pricing to irrational levels. This was largely due to the
fact that IPOs were possible for even very young companies at very high
prices
Then came the ides of March, the public market rout and the continuing
sluggishness throughout the year. These conditions obtain as we enter
2001. The lions of the venture capital community have, for the most part,
become risk-averse lambs. Despite the fact that the leverage has shifted
sharply from the entrepreneurs to the investors, a mountain of money remains
on the sidelines, assessing the landscape. A good deal of time, energy
and capital is now being focused on wounded portfolios rather than on
new opportunities.
This is the silver lining that we see--a season ahead which offers liquid
funds, not preoccupied with troubled companies, an opportunity to invest
at remarkably low prices in companies which have already demonstrated
real operating progress.
With respect to our aborning fund, Milestone Venture Partners II, we
are moving ahead, and with the commitments now in hand, believe that we
will be able to orchestrate an initial closing at a minimum capitalization
of $10 million in March. Accordingly, I expect that in our next newsletter
(Spring 2001), we will be in a position to include news about MVP II's
initial investments.
With best wishes for a peaceful and prosperous new year,
Yours truly,
Edwin A. Goodman
Principal
Milestone Venture Partners
Milestone Portfolio News:
PlusFunds.com, an electronic marketplace
serving the hedge fund industry, launched its site Q3 2000. The Company
currently has $470 million of assets on the platform and is in advanced
discussions with major fund managers to bring additional assets online.
In addition, PlusFunds recently hired John Pileggi, formerly CEO of ING
Funds. Pileggi replaces current CEO Christopher Sugrue, who will remain
a co-chair of PlusFunds' board of directors. PlusFunds raised $42 million
in July 2000 with prominent institutional investors, including: LabMorgan
(J.P. Morgan's e-finance unit), Merrill Lynch, CS First Boston, and Wachovia
Capital Associates.
CarParts.com, the e-commerce leader
in the automotive after-market, is generating strong revenue growth and
is expanding its technology capabilities. Revenue currently exceeds $35
million on an annualized basis. In addition, the company's commercial
division, CarParts Technologies, has positioned itself to provide end-to-end
supply chain management solutions to manufacturers, warehouse distributors,
jobbers and installers. Recent acquisitions on the commercial side include:
AutoNet International, a provider of information technology solutions
to the automotive aftermarket; Anderson BDG, a leading provider of point-of-sale
and shop management application software for the automotive service and
repair industry; and CR Computing Solutions (CR), a leading provider of
inventory and business management systems for warehouse distributors and
jobbers in the automotive aftermarket parts industry. Carparts raised
$42 million in December 1999 from institutional investors, including:
CMGI, Brand Equity Advisors, RHO Management, St. Paul Venture Capital,
Barnard, Investor AB, and Ravenswood.
Leading Web Advertisers (www.web-advertisers.com)
continues to increase the breadth and depth of its web advertising tracking
service. The Company's system efficiently combs over 3,400 sites (growing
daily), capturing banners, buttons, pop-ups, interstitials and some rich
media. In addition, LWA is the first and only company in this space to
offer its clients the capability to view reports of advertising on the
AOL proprietary site, which accounts for over 30% of online advertising
spending. LWA has in excess of 100 clients and its annual revenue run
rate exceeds $2 million. The Company is in the final stages of negotiating
a third round of financing.
Cosential.com, a managed application
service provider for the architecture, engineering, and construction (AEC)
industry, continues to close large contracts with marquee clients. Recent
sales have been in excess of $200,000 with significant recurring revenue.
Selected clients include: Davis Brody Bond Architects, Fletcher Thompson
Architects/Engineers, Kling Lindquist, and Montroy Andersen Design Group
Inc. The Company's current annual revenue run rate exceeds $1.5 million.
Cosential completed a $1.8 million round in Fall 2000 with Milestone,
Silicon Alley Venture Partners and VentureQuest.
Prospective Transactions
Milestone Venture Partners is in advanced discussions to participate
in equity rounds for two companies. In one case, we plan to lead the round
and in the other, we will join a syndicate which is currently in formation.
Sector Trends and Developments
• Although still investing at a torrid pace, U.S. venture firms'
investment pace has slowed markedly. In the fourth quarter of 2000 these
VC firms invested a total of $19.5 billion in operating companies including
firms within their portfolios in need of additional equity. This amount
represents a decline of 31% from the third quarter and represents the
first downturn since the initial three months of 1998.
• Venture capital firms are investing an increasing percentage
of their assets in existing portfolio companies and later stage opportunities
at the expense of new investments in early stage companies. According
to VentureOne, venture firms invested 25% of their funds in initial
rounds in Q3 2000 versus 40% in Q2 2000.
• In another defensive measure, the principals at Milestone see
venture capital firms increasingly syndicating their investments i.e.
investing alongside several firms to share risk and follow-on financing
responsibilities. As a result, financings are taking longer to complete,
as multiple investment professionals must coordinate their legal and
business due diligence efforts. In many cases, companies do not have
enough cash to survive the process.
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