Milestone Matters Newsletter
Fall, 2005

"There is still room for new internet leaders to be created. Of the five biggest internet companies 10 years from now, I can imagine that two or three of the existing leaders will stay on, but that two will be companies that haven’t been born yet. The internet is an incredibly dynamic environment. You have to respond really fast." Meg Whitman, CEO eBay Inc., quoted in Financial Times, August 5, 2005.

Dear Friends, Investors and Associates:

Belatedly, a very important and increasingly heated debate has received some coverage in both the FT and the Wall Street Journal. The story concerns an obscure but vitally important organization called ICANN (The Internet Corporation for Assigned Names and Numbers). ICANN is a not-for-profit corporation (501c3), which is managed independently but ultimately operates under the control of the U.S. federal government through the U.S. Department of Commerce. With offices in Marina del Rey, California, it exercises the power to assign domain names (Internet addresses such as www.milestonevp.com) and is responsible for the smooth operation of the Internet and for dealing with a number of challenges such as, spam, cyber crime and privacy. Since its founding in 1998, ICANN has performed well, albeit not flawlessly. One can remember, just a few years ago, the characterization of the WWW prefix as the World Wide Wait system - a problem substantially resolved at this writing.

However, in this technological and commercial sphere, arguments are emerging that reflect geopolitical dynamics. Countries as diverse as the UK, Brazil, China, Cuba and France are voicing concern about U.S. hegemony and control of this hugely valuable global resource. Recently, at a Geneva conference on the Internet's future, David Herndon speaking for the EU delegation, stated, “We want ICANN to operate under international law and to be responsible to all governments . . ..” [sic] This begs the questions of whether there is developed international law to cover the global upstart that is the web and how any operating Internet management group could be responsible to “all governments” even should it desire to do so.

Placing the shoe on the other foot, I recognize that had France developed the Internet and subsequently managed its operations, U.S. citizens might be uncomfortable with French governance of this powerful cyberspace tool. But the path toward effective and more democratic governance remains elusive. Some countries have suggested that this responsibility should pass to the U.N. - the same folks who administered the Iraq Oil-for-Food program. Developing countries complain that it is taking too long and proving too costly for them to connect to the Internet - another process administered by ICANN. The Chinese have noted that some of the material on the Internet is “culturally insensitive.” Presumably this insensitivity includes various websites that call for democratic reform which have, to date, been successfully embargoed by the Chinese government.

Predictably, on the other hand, the U.S. approach, is to abide by the status quo, lest the Internet become more bureaucratic and politicized and less flexible and innovative. As the Internet becomes ever more pervasive (the billionth person logged on in August 2005) and critical to world commerce and the general dissemination of information, this debate is likely to intensify. The next formal occasion for discussion will be in November 2005 in Tunis, Tunisia where the U.N. World Summit on the Information Society (WSIS) is being held.

The tone of the debate has been genteel until recently because the U.S. has governed well and with a light touch. However, in August of this year, the U.S. government intervened with ICANN resulting in the tabling of an initiative to add a new domain suffix – “.xxx” as distinct from the familiar .com, .net and .org. The .xxx designation would have identified Internet websites featuring pornography. This has energized the forces arrayed against the U.S. who have denounced this intervention and cited it as further proof of the U.S. irresponsibly exerting unilateral control. International law as it may apply to pornography was not mentioned.
So we are now faced with the deeply rich irony of the U.S. (aka “the Great Satan”) intervening to curb porno peddlers and thereby inciting opposition from many countries - including religious Islamic nations - for an unacceptable unilateral assertion of power. But all these essentially political maneuvers aimed at exercising influence over the web obscure a real and tragic possibility. National governments do have leverage. They can censor the Internet within their borders, as does China, or they can set up rival cooperative internets among groups of like-minded nations as has been suggested.

In my view, this would signal the end of this wondrous global resource and the advent of balkanization of the Internet into rival cyberspace camps. The Internet’s universal utility would be compromised, the Flat World envisioned by Tom Friedman would buckle and the chasm would expand between the rich and technology-forward and the poor and technology-backward.

Let us hope that after the political posturing in Tunis subsides, a workable compromise can be found.

With best wishes for the coming Holiday season,

Edwin A. Goodman
General Partner

MVP II invested in Decidia, Inc. (www.decidia.com) in mid-September 2005. Decidia, the fund’s tenth investment, is a NYC-based company that provides search and decision tools to retailers which they use to help their customers make better on-line buying decisions.

For example, Decidia’s Guidester tool enables a consumer to rapidly narrow down product choices while navigating an e-tailer’s web site, thereby increasing conversion rates for the merchant. Decidia does not charge for the provision of the Guidester tool. In this business model – known as “pay-per click” – Decidia allows manufacturers to sponsor their products at the point of sale and the merchant receives a share of these advertising revenues. Try out Guidester at www.bhphotovideo.com.

Milestone invested $500,000 alongside DFJ Gotham Venture Fund and Wheatley Venture Partners in this $3 million financing. Richard Dumler has assumed a seat on Decidia’s Board of Directors.

Source:  Bureau of Labor Statistics, Census Bureau
 

In some respects the Web 2.0 conference that was held in San Francisco recently seemed like a Web 1.0 conference.   Anticipation of the Internet’s future buzzed at a level that has not been seen since the days of the bubble.   The excitement could be noticed in the hallways as conference attendees strained to hear presentations through doorways of overcrowded rooms.  It could be heard in bold assertions from people like veteran Internet analyst Mary Meeker, who claimed, “I have never seen as much innovation taking place as I do right now.”    And it could be observed in conversations with eager entrepreneurs who talked too much about their companies being acquired someday and too little about their plans for generating profits.

Apart from the high energy, however, the Web 2.0 gathering was markedly different from Internet conferences of the late 1990s.  First, the perceived leaders of the Internet have changed.  Relatively young organizations like Mozilla chatted about new, pioneering developments while AOL, Microsoft and other previously feared giants of the 90s spoke of repositioning their businesses to catch up with current user trends.  Presentations by start-up companies were also refreshingly different as many entrepreneurs eschewed the dominate-the-world script of yesteryear and instead talked about their ideas with a combination of passion and pragmatism.  Perhaps most interestingly, a new Web 2.0 media emerged to report on the Web 2.0 event itself as dozens of bloggers and podcasters in the audience posted highlights of the forum, opening the conference content to anyone who cared to know what was going on.

So, what exactly was going on at the Web 2.0 conference?  Or, more importantly, what exactly is Web 2.0?  Described broadly, Web 2.0 is a recently coined term reflecting a widespread belief that there’s something qualitatively different about today’s web.  Beyond that, a precise definition has not yet gelled.  The term represents a variety of attributes that people find intriguing about the current phase of the Internet:  blogging, mashups, open information, collective intelligence, social networking, renewed innovation, revived enthusiasm, etc.  We at Milestone think that the Web 2.0 description inspired by O’Reilly Media and found at Wikipedia is on target: “a perceived transition of the World Wide Web from a collection of websites to a full-fledged computing platform serving web applications to end users.”  Successful Web 2.0 companies are those that make the most of the inherent advantages of this web-based platform.  A few of these advantages include the following:

Software As a Continuously-Delivered Service.  Whereas the godfather of Web 1.0, Netscape Communications, aimed to dominate the web browser software market, Web 2.0 companies are inclined to focus instead on delivering services over the web platform.  Google, for example, is a pure web application that is neither sold nor packaged.  Instead, its value is delivered as an ongoing service that is unburdened by software release cycles, extensive licensing contracts, and other friction points of traditional software companies.  As a result, Google can focus on another important competency:  providing continuously updated, relevant data to users.

Online Tools for Self-Empowerment.    Some of the most powerful companies associated with Web 2.0 are those that provide web-based tools that help other organizations accelerate the growth of their businesses.  eBay, for example, has thrived by developing an online marketplace and tools of trust that enable numerous individuals and merchants to expand their commerce activities.  Google allows large and small organizations to create highly targeted advertising campaigns in a matter of minutes through an online self-service program called AdWords that serves thousands of advertisers.

Harnessing Collective Intelligence.  Successful Web 2.0 companies have also embraced the power of the web to harness collective intelligence.  Google’s breakthrough in search capabilities occurred when founders Sergey Brin and Larry Page decided to trace which web sites were being most frequently cited by other websites, thus allowing the collective views of others to shape search response relevance.  Tagging has also emerged as an interesting attempt to tap the power of the masses.  This technique calls for individuals to categorize items according to freely chosen keywords, such that a collaborative, highly scalable and flexible set of metadata can develop.  For example, an individual can post a photograph of a newly born golden retriever on Flickr’s website and tag the picture with the words “puppy” and “cute.”  The picture of the puppy is more likely to be retrieved by someone else searching under these natural words than under pre-determined words dictated by traditional top-down taxonomies.

Some investors have asked whether the excitement over Web 2.0 signals a frothy market environment.  We certainly need to guard against that possibility, but we believe a more fundamental question is whether Web 2.0 represents something truly meaningful.  To the extent Web 2.0 serves as a rallying call that moves us all beyond the misfires of Web 1.0 (slapping a “.com” on every industry) and focuses us on the more enduring advantages of the Internet (continuously updated services, self-empowering tools, collective intelligence, greater collaboration, etc.), then it will serve as an important catalyst for advancement.  And if the ideas emerging from Web 2.0 inspire greater creativity among entrepreneurs and restore confidence in investors who back entrepreneurs, then it will have played a significant role in re-revving the engines of innovation.

The jury is still out on the ultimate significance of Web 2.0.  We believe the term accurately reflects the fact that very positive changes are taking place, and we will continue to assess the ability of entrepreneurs to translate those changes into successful businesses.

-----------Alan S. Kelley, Principal
 

The Greatest Threats to Long-Term

Private Equity Returns

Source: Franklin Park LLC


 

Venture Capital Journal, Look for Early Stage Returns to Surge, by Edwin Goodman, September, 2005.
Excerpt: "Having suffered from the aberrations of the 2000 bubble and the consequent debacle, I firmly believe that venture capital has recovered and returns will revert to their historical mean . . .."


About Milestone Venture Partners

Milestone is a traditional venture capital partnership. We invest in early stage, technology-enhanced service companies in the New York metropolitan area. The Fund targets companies that possess the nucleus of an exceptional management team, a compelling business model, and a large market opportunity.



Milestone Venture Partners
551 Madison Avenue, 7th Floor
New York, NY 10022 
V: [212] 223 7400
F: [212] 223 0315
www.milestonevp.com

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