Milestone Matters Newsletter
Spring, 2005

The March of Technology: "I am currently 7 miles above the earth on a SAS flight somewhere over the North Sea. I’m writing this e-mail from one of the first planes to have a high-speed continuous connection to the Internet.  I am connected using standard wireless access and in addition to e-mail, I have three IM sessions running with instantaneous response, and I also just executed a trade on NASDAQ.  The last haven from the “connected world” has now been obliterated.”  E-mail message from a Milestone friend, April 18, 2005

Dear Friends, Investors and Associates:

One of our challenges here is to discern trends that might create new investment opportunities for the fund and/or influence the fortunes of our portfolio companies.  I find that, like professional futurists, a careful ongoing review of a wide assortment of media can reveal prophetic developments.

The IT Review section of the Financial Times recently quoted a prominent West Coast venture capitalist who pronounced "Many of the apparently outrageous predictions made during the first dot com boom . . . were all correct, just time shifted."  The notion that we are in the midst of a second wave in terms of the utilization of the Internet - an insight asserted by a few seers (Note: “The Next Big Thing” by Milestone’s Richard Dumler, Waters Magazine, November 2002) - has made its way into the stream of conventional wisdom as evidence accumulates.

I think this realization is akin to stepping back from a pointilist painting to get perspective and see the whole.  Only then do the myriad number of individual dots of paint tell the story.

One overarching theme in this digital Internet revolution is the democratization of the dissemination and consumption of information which is accelerating rapidly.  I think both Benjamin Franklin and Mark Twain would be thrilled that a new website is created every 8 seconds and by the prospect of the current growing army of 9 million bloggers in the U.S.  Although they might be chagrined by the fact that the enthusiasm to communicate is not always matched by elegance of expression.

In addition to the Internet, the enablers of these changes include wireless links, ever more powerful and capacious personal computers and PDAs (personal digital assistants, also known as feature-rich mobile phones).  We are heading rapidly toward a time when your PDA will house all your data, permit you to communicate by phone, e-mail or instant messaging, pay bills, charge purchases, access information from countless databases and lock and unlock your house and car.

The prophetic signs are apparent.  Consider that 90% of AOL subscribers between 18 and 34 years old first access the Web for product information.  Forrester forecasts that by the end of 2008 there will be 36 million U.S. households with Digital Video Recorders (DVRs).  Sixty percent of these viewers will watch only recorded material and of this group, 92% will excise the advertising.  This represents a huge and growing dark spot for advertisers who must find other conduits through which to reach their target audiences.  The battle is on between consumers and marketeers.  Consumers understandably feel that the 3,000 daily marketing messages to which they are currently subject, is sufficient.  Marketeers, on the other hand, are seeking new methods to reach them.  These methods will be more varied and pervasive than heretofore, giving birth to the term, "holistic marketing."  For example, males in the 18-34 year-old group, save for Monday Night Football, spend less time watching television.  A promising approach to reaching them is emerging whereby marketeers are embedding product messages within the story lines of video games to which these young men are strongly attracted.  Under the lofty rubric of "New Media" in the UK, a company recently introduced the installation of TV monitors positioned over urinals to deliver advertising messages. (I'm not making this up!)

Thomas Friedman, in his new book, asserts that "the world is flat" in so far as the digital revolution is leveling the competitive playing field.  For example, innovative software can be produced anywhere and inexpensively sold and delivered to any user anywhere who is linked to the Internet.  This puts a premium on creativity and technological education and Internet linkage.  The world, certainly in the latter two readily measurable categories, is gaining on the U.S. rapidly.  Finland, France and South Korea have more advanced Internet infrastructures.  In South Korea, 31 million of the population of 48 million use the Web on a regular basis.  And China and India are producing more trained electrical engineers than the U.S. by a wide and expanding margin.

The Internet is roiling the traditional telecommunications market as well. VoIP (Voice Over Internet Protocol) has facilitated voice communication over the Web for some time but now this trend is accelerating.  A venture-backed company, Skype, which permits a consumer to download its software in order to facilitate free VoIP calls, now has 33 million users worldwide and is signing up 155,000 new customers each day.

All these trends represent a threat to many established large enterprises and an exciting opportunity for nimble young companies, many of which fall within Milestone's strategic ambit.  We continue to try to ferret them out and will keep you apprised of our progress.

With best wishes for a pleasant and restorative summer,

Edwin A. Goodman
General Partner

Octagon Research Solutions Raises $3.5M
Octagon Research Solutions (Wayne, PA) closed a $3.5 million follow-on round of expansion equity financing from existing investors Milestone and Edison Venture Partners.  In recognition of the company's outstanding progress, the price of the round was significantly higher than the prior round.

Octagon provides R&D process management solutions for the pharmaceutical industry and is the industry  leader in electronic   submissions to the FDA. Clients include AstraZeneca, Barr Laboratories, Endo Pharmaceuticals, Johnson & Johnson, Sanofi-Synthelabo and Wyeth.  The proceeds will accelerate development, marketing and sales of Octagon's ViewPoint process management software solution.

SKEPTICS WRONG
Buoyed by the meteoric growth in the use of Internet search engines and the corresponding growth of search-focused advertising, Google continues to dazzle investors.  The company had $3.2 billion in revenues in 2004.  Google fulfills daily 200 million searches of 8 billion web pages.   The company is growing at a rate of 100% per annum.

THE WIRED WORLD
There are now over 700 million PCs in use around the world most of which are linked to the global Internet and many of which partake of enriched services via broadband high speed connections. Observers predict that, within five years, PDAs, with comparable capabilities will number 2 billion, twice the total currently in use.

THE LAW OF UNINTENDED CONSEQUENCES
We note that the Sage of Omaha recently commented with concern on the feverish move to establish boards chock full of ‘Independent Directors’ (outsiders who own no shares and are paid for their board participation): “In our view, based on our considerable boardroom experience, the least independent directors are likely to be those who receive an important fraction of their annual income from the fees they receive for board service.

We agree with Buffet that to have directors with significant ownership in the enterprise is more likely to result in corporate governance that builds shareholder value. One might call this approach "The Venture Capital Model.”

CHANGING LANDSCAPE
Hedge funds are growing in number and size and consequently so are the range and size of their investment appetites. Last year, 23 large U.S. companies were bought by hedge funds for aggregate consideration of $30 billion. At the opposite end of the spectrum, hedge funds are entering the private equity business despite the skeptics who criticize them for lacking private equity skills. As David Rubenstein, the prescient founder of the Carlyle Group pointed out in a recent speech at the Super Return industry conference in Frankfurt, hedge funds have lots of money, lucrative incentive structures and considerable flexibility. As to talent, he said, "They will be able to buy private equity people."

QUALITY SELECTION MATTERS
From 1991 through 2001, a global sample of private equity funds surveyed yielded an average IRR of 6.9%. For the same period, in a study conducted by MIT and Harvard Business School, of 417 private equity firms in which professionally managed endowments invested, the average return was 20.5%. At Yale University, which boasts one of the most sophisticated and oldest private equity programs, the return on this asset class since the inception of the program is 30.6%.

Takeaways:  PC Forum 2005

By Lou Mazzucchelli
(In memory of Hunter S. Thompson)

The hot sun beat down on the Fairmont Scottsdale Princess and the polished concrete in the copiously - fountained courtyard felt like an Itanium processor without a heat sink.  I figured I could find all the cold tequila I wanted once I got through the registration process for PC Forum 2005.  PC Forum - a cloying combination of smug success and naked ambition that Esther Dyson's been running for over 20 years as some fevered crossbreed between the Oprah Winfrey Show and a Stuart Smalley self-affirmation meeting.  This year the conference theme was "The World-Wide World - IT Ain't Just The Web Anymore!"  OK, so Yahoo! donated! some! punctuation! but when was IT ever only about the World Wide Web?  Just because the high-tech market went on some peyote-fueled binge a few years ago doesn't erase 40 or 50 years of history.  Or maybe it does - and now we get to read Mark Cuban's revised version.

I navigated the maze of 50" Sony LCD high-definition televisions that would be used for software demonstrations later in the conference, found the registration desk, got my stinking badge, a tote bag that looked like it would be right at home on the shoulder of any Botswanan tourist, and some program material.  Then I went to the front desk of the hotel to check in so I could dump the stuff in my room and hit the pool before things started . . .

The World Wide World
Sunday is typically where PC Forum wears its social conscience on its sleeve, so Esther welcomed us and asked the audience to "focus outside of white engineers in silicon valley."  Howard Gardner, a Harvard professor, discussed the issue of trust in society and the concept of "trustees," publicly-acclaimed persons of stature who would hold the public trust and cited, interestingly, the recently late George Kennan as an example.  Compare that with a recent poll in Cambridge, MA that named Alan Greenspan, Oprah Winfrey and Jon Stewart as current "trustees" in the eyes of those polled.  Andy Stern, President of the Service Employees International Union, offered these compelling factoids:  thirty years ago, GM was the largest employer in the U.S., 1 in 4 private sector workers were union members, and one GM union job could support a family.  Today, Wal-Mart is the largest employer in the U.S., 1 in 12 private sector workers are union members, and it takes two to three Wal-Mart jobs to support a family.  To Sterns' credit, he was forthright in his criticism of past (and current) union behavior focused solely on collective bargaining, declaring that, in the main, unions were "male, pale and stale."  However, he was not apologetic in claiming that unions were historically the most effective anti-poverty and wealth distribution system - without direct government expense.

Tales From The Worldwide Trenches - How IT Companies Operate Globally
On paper, a great panel.  Steve Ward, CEO-to-be of Lenovo is to lead off.  But wait - didn't Lenovo used to be Legend?  And didn't Legend used to be owned and run by the People's Army?  Now this spawn of Estridge and Mao is about to move its headquarters to New York and is talking about listing on the NYSE.  What would George Kennan say about that? 

Security And Identity:  You Talking To Me?
All of the panelists subscribed to the maxims that perfection is unattainable and that the eternal struggle between usability and security will persist.  However, I fell off my chair when Scott Charney of Microsoft said "There will always be users who double-click and enable actions that disable their machines" - hello?  Why are users to blame here?  Isn't this an operating system problem?  Wasn't he awake during Peter's talk on virtualization?  Oh, wait.  He's from Microsoft.  Never mind.

Health Care: No Patient Left Behind?
Carol Diamond of the Markle Foundation noted that "Healthcare IT is automating things that don't work well".  Caroline Kovac of IBM piled on by noting that, in a trillion dollar system (U.S. healthcare, all in), there's probably $450B of waste.  Larry Augustin of MedSphere noted that 100,000 people die each year in the US due to preventable medical error - 7,000 due to illegible handwriting (there's a case for Catholic schooling…)
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Mr. Mazzucchelli, a fan of the late Hunter S. Thompson, is a veteran venture capitalist, an entrepreneur and a longtime denizen of the IT industry.

6-8 June 2005, IIR Family Office Forum

Chicago, IL, Edwin A. Goodman, Panelist

7-8 June 2005, Young Startup Venture's New York Venture Summit

Edwin A. Goodman, Panelist

9 June 2005, Long Island Capital Alliance's LI/NY Metro Capital Forum

Melville, Long Island, Edwin A. Goodman, Panelist

Buyside, Why Venture Capital Now, by Edwin Goodman, February, 2005, page 47.
Excerpt: "The short answer to this article title is, "venture capital always," which is to say that all legitimate asset classes which offer a history of competitive returns and sufficient critical mass must be included in the asset allocation mix of an astute money manager."


About Milestone Venture Partners

Milestone is a traditional venture capital partnership. We focus on early stage, technology-based 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

"Investing in Early Stage Technology-Enhanced Service Companies in the New York Metropolitan Area"


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