Milestone Matters Newsletter
Spring 2007

“I really don’t know whether we’ll be printing The Times in five years, and you know what? I don’t care either…” Arthur Sulzberger Jr., Publisher of The New York Times, In the course of an interview at the most recent World Economic Forum in Davos, Switzerland
 

Dear Friends, Investors and Associates,

I am writing this from my Caribbean idyll where I am enjoying my annual respite from the winter rigors of Manhattan. Indeed my departure was delayed by chaos at JFK resulting from a fierce winter ice storm. Consequently the scheduled five-hour trip took twenty hours door-to-door and required a stopover in Barbados.

Days at the beach with my grandchildren, yoga practice and long walks are interspersed with deep dives into Anna Karenina which I aspire to remove from my list of great books as yet unread. I also continue my frustrating dalliance with sketching in the wake of a ten week art course.

Staying in touch with the pulse of the real world is much easier than in years past because PCs and Internet connections have become ubiquitous. In addition, there is resident on the island, an expatriate French entrepreneur, who presides over an excellent bakery and also provides daily delivery of a selection of 130 newspapers from around the globe. Much to my wife’s distress, we receive The Guardian, The London Times, The New York Times, The Sun, The Wall Street Journal, and The Financial Times. When on holiday, one can read these more thoroughly and at leisure. And being removed from the hurly burly, a clearer perspective emerges.

My view is that we are in the midst of a seismic shift in the landscape and conduct of capitalism. The looming Blackstone Initial Public Offering (IPO) is not just another financial services IPO, but the harbinger of a seminal change in the capitalist pecking order. At the $40 billion valuation currently under discussion, Blackstone will emerge as a behemoth. This will result in the 22-year-old firm being a potential rival to the likes of Bear Stearns and Lehman Brothers, both of which have been major actors within the financial arena since the middle of the 19th century.

Although Blackstone participates in only a subset of the businesses in which Goldman Sachs and the financial leviathans engage, CEO, Steve Schwarzman, has been clear that the firm intends to expand into other businesses organically and through acquisitions. With its new found cash and listed securities, it will have the means to do so.

It is probable that other firms which have made their reputations, like Blackstone, through hedge fund expansion and/or private equity investments, will also take the IPO path. If they are to compete in the U.S., KKR, Apollo, Carlyle and their ilk have little choice but to tap the public markets.

These financial upstarts have, heretofore, moved quickly and quietly outside the scope of the most stringent financial regulation. And, until recently, without regard for public opinion or the views of the Washington political class. Only within the past year, have the private equity powers and the hedge fund purveyors moved to organize a public relations campaign designed to counter pervasive criticism. They are tardy and have yet to find their voice.

The accretion of wealth and power always attracts opposition from those who hold that great concentrations of money and influence are inherently corrosive and not in the public interest. In addition, we frequently witness the emergence of jealousy, suspicion and envy which often results in the demonization of the newly rich.

Blackstone and their rising peers, in their role in the vanguard of global capitalism, can no longer tiptoe toward greater triumphs. Are they greedy self-seeking asset strippers who eliminate good jobs and/or shift them to low wage countries? Or, through intelligent investing and rationale restructuring, are they lubricating the capitalist machine and creating wealth and a higher standard of living for many constituencies? According to the Venture Capital Journal (Feb. 2007), during 2006, published articles on private equity were associated with the following themes: Job cuts: 817; Raiders: 581; Job Growth: 294; and Greed: 238. They will have to make their case.

Thankfully, unlike other arguments which inflame aspects of public debate such as those who favor secular administration versus those who would rely on the laws of Sharia, the capitalist discussion can marshal facts rather than ideology. The impact of private equity and hedge fund investing can be readily assessed and weighed to inform a rationale debate.

It is possible, but by no means assured, that these new dominant capitalists will enhance prosperity for all under the scrutiny of a watchful, wise and public spirited regulatory bureaucracy. The next decade will tell the tale.

With best wishes for a pleasant summer,

Edwin A. Goodman
General Partner
 

In February 2007, both MVP II and MVP III invested in Outside.in Inc. MVP II invested $55,000 and MVP III invested $220,000. This investment is MVP II’s fifteenth portfolio company and the fourth for MVP III.

Outside.in is a consumer new media company focused on local news and information. The Company’s website, www.outside.in, aggregates and organizes blog entries and other online news sources that cover stories specific to a zip code, neighborhood, or city. The site serves individuals seeking local information, for example, reviews of neighborhood restaurants, or community perspectives on local schools, real estate, politics, crime, or gossip. The Company is initially relying on a small group of editors to seed the database with links to relevant local blog entries and news items, but, over time, this function will be largely taken over by the Outside.in user community.

Milestone co-invested with Union Square Ventures and other investors in this $900,000 financing. Ed Goodman will serve as a board observer.


In March 2007, MVP II and MVP III invested in MedPage Today. MVP II invested $250,000 and MVP III invested $1.15 million as part of a $2.1 million financing round.

MedPage Today, based in Little Falls, NJ, provides 24/7 real-time breaking medical news for healthcare professionals. MedPage Today’s website helps physicians and other healthcare professionals monitor important new developments in healthcare by providing concise, timely, and actionable reporting on stories frequently emanating from medical conferences, journal articles, consumer media, and announcements by the FDA. The investment will be used for news coverage expansion, new product offerings, new distribution, and marketing. Todd Pietri will join the MedPage Today Board of Directors. Milestone invested alongside SJF Ventures and Peter Frishauf, founder of WebMD’s Medscape, in this financing round.


MVP III invested $100,000 in TargetSpot, Inc. on April 6, 2007, alongside Union Square Ventures and CBS Radio in this $1 million round.

TargetSpot provides a powerful ad serving technology and marketplace for advertisers and Internet broadcasters. The technology allows businesses and individuals to create, buy and place their own advertising messages within streaming media. In addition to its investment, CBS Radio will use the technology on its more than 100 music, talk, sports and news radio stations broadcasting live online.

Doug Perlson joins TargetSpot as its CEO after serving as COO of Seevast (formerly Kanoodle), the owner and operator of Internet-based marketing services businesses.

Oddcast, an MVP II portfolio company, developed the TargetSpot technology in house before spinning it off to TargetSpot.


MVP III invested $1,350,000 and was co-lead of a $6,250,000 round of investment in Connecticut-based Premise Corporation. Premise is a leading supplier of clinically-focused software solutions to optimize patient flow in hospitals. The Company’s products enable hospitals to use their hospital rooms more efficiently by providing hospital management with real time information on the type (intensive care, cardio etc.) of hospital beds and the status of these assets (occupied, available, cleaning needed, etc.). It also speeds and simplifies communication among hospital personnel about the status of beds and patient placement.

Premise now has over 50 customers, including leading hospitals such as Yale New Haven, Massachusetts General and the Cleveland Clinic. The funding will be used primarily to expand sales and marketing, and for general corporate purposes. Richard Dumler will join the Company’s Board of Directors.

 

Stewart Brand, emerged as a prominent proponent and actor within the counter-culture of the 1960s and founded The Whole Earth Catalog in 1968. The premise of the Catalog was that all information should be assembled and made available for the use of individuals. He was way ahead of his time in that he embraced the vision of Google but the facilitating technology was not yet at hand.

Mr. Brand recently remarked that, “information wants to be free” but also that it “wants to be expensive because it’s so valuable. The right information in the right place just changes your life.”

With the advent of the Internet, information is more voluminous and more ubiquitous. Silicon Valley companies like Google want the information to be free so they can attract viewers but publishers want to be paid for their “content.” Viacom’s recent decision to sue YouTube, is but the latest salvo in this ongoing struggle.

Sadly, there is a more sinister battle afoot which seeks to replace Mr. Brand’s weltanschauung with a scenario which places national governments in control of what information flows to their citizens. This view of the world has always been the policy of a number of authoritarian governments and, heretofore, effecting a policy of information containment has not been too difficult. The Internet has drastically altered that picture.

Recently, in the course of a spat between Greek and Turkish YouTube users, a Greek user uploaded unflattering videos of Mustafa Kemal Ataturk, the founder of modern Turkey. A court in Istanbul issued an order denying access to YouTube. State-owned Turk Telecom, the domestic Internet Service Provider, implemented the ban. But the incident invited international comment and ridicule and, most probably, further damaged Turkey in its efforts to burnish its EU credentials. The lesson is twofold, not only is this kind of information management difficult to enforce, it cannot be done quietly and can be counterproductive.

Regrettably, government interference in the flow of Internet information is common and accelerating. Ten nations known as “pervasive blockers,” regularly prevent their citizens from seeing a range of material. These aggressive censors include China, Iran, Saudi Arabia, Tunisia, Burma, Uzbekistan and Zimbabwe.

China appears to be the leader in developing blocking technologies and their “worst practice” techniques are being adopted by others. According to The OpenNet Initiative, a joint project of the Harvard Law School, the University of Toronto and Cambridge and Oxford Universities, 40 countries employ some degree of censorship and the list is lengthening.

Of course, as the censors develop more comprehensive techniques, the technology-forward cognoscenti are developing new ways to avoid the strictures. For example, there is now available a technique, dubbed Onion Routing, which permits the user to surf anonymously by using a server that is not linked to their normal Internet Service Provider and thereby disguises one’s location and identity. It would appear that everywhere, sophisticated people get the information they want while millions of ordinary citizen/consumers are information constrained.

The most dramatic battle and that with the most far reaching consequences is in China because of its size and political importance. It is a fascinating unfolding tale because information is crucial to support China’s dynamic industrial growth but problematic (from the Chinese government’s standpoint) in that it also is bound to foment political change.

Today, there are approximately 137 million people online in China and the government has announced that “thought guidance” is a cornerstone of its policies. It remains to be seen to what degree President Hu Jintao’s efforts to “purify” the Internet will succeed. Our perspective is that the President is on the wrong side of history and on the weak side of technological innovation. He will retard but not halt the information flow. Mr. Brand remains correct. Information wants to be free.
--------TBD


About Milestone Venture Partners

Milestone is an early stage venture capital fund with $50 million under management. We focus on technology-enhanced service businesses in the New York metropolitan area. Companies that we find attractive possess the nucleus of an exceptional management team, an attractive business model, and a compelling 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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