"Venture capitalists have created nearly one-third of the total market value of all public companies in the U.S."  The Money of Invention by Paul Gompers & Josh Lerner, Professors at Harvard University Graduate School of Business

Dear Friends, Investors and Associates:

The country appears to have returned to business-as-usual and the macro and micro statistics are decidedly bullish.  This might surprise foreign observers reviewing U.S. press reports of "the most divisive election in US history" with certain blue state citizens contemplating relocation to Canada or to other presumably more hospitable venues.  Of course, that assertion about the recent election is the kind of feverish rhetoric which cannot be proven true or false.  It is a judgment.  But upon reflection, one must wonder how the debates and divisiveness of 2004 compare to the comparable political debates in 1860, 1940, 1948 and 1968 to cite a few vintage years.

Whatever the merits of that argument, the country, despite the anguish of Iraq and the spectre of September 2001, appears to be moving forward at an enviable rate with GDP growth in the range of 4% per annum and most economists predicting that pace through 2005.  These same economic seers point out, with the benefit of hindsight, that job growth has settled in at about 220,000 per month and that (surprise) the average of these jobs are paying more per annum than the average of all US jobs as a whole.  So these are not only low-end service positions.

Although troublesome, oil price increases appear manageable because all commodities constitute only 10% of the total U.S. infrastructure cost, the largest component, by far being labor.  Of particular interest to us at Milestone, are the economic forecasts predicting significant expansion of capital spending by U.S. corporations in the course of 2005.

So, we are pleased to be looking at 2005 through this bullish macroeconomic prism which is certainly reflected within the venture capital markets.  Through the first nine months of 2004, there were 247 venture-backed companies involved in merger and acquisition events with an average valuation of $91 million.  And for all of 2004, 93 venture-backed companies raised capital through Initial Public Offerings.  This nearly equals the number of VC-engineered IPOs for the prior three years combined.  These newly public companies have appreciated, on average, 28% in the course of 2004 which compares favorably to advances of 8%, 7% and 2% in the S&P, NASDAQ composite and Dow, respectively, during the year.  Furthermore, the New York region venture market is robust. In 2004, it received the third largest aggregate amount of venture capital investments in the country.  (Silicon Valley - $7.1 billion; New England - $3.0 billion; New York - $1.4 billion.)

Not withstanding my perspective, there are other darker visions.  One is the perennial cry that the sky is falling, i.e. that there is too much money chasing too few opportunities.  This has been true only once in the history of the industry -- during the bubble of 1998-2000 -- and yet the cry goes up annually.

"MORE VENTURE CAPITAL THAN VENTURE DEALS?” BusinessWeek 1972.

"With a record of new capital garnered by the industry, industry participants and observers may once again be wondering if there are too many dollars chasing too few deals . . ."  Venture Capital Journal, February 1988.

Recently, a quotation, breathtaking in its arrogance, caught my eye.  The manager of a university endowment (fortunately anonymous) said about the venture community, "The smart money is rotating out and the dumb is rotating in . . ."  If this purveyor of smart money knows when to get into and out of venture investing, he is not just smart, he's a genius.  I suspect that a lot of the money that is rotating out now, lost their discipline and were excessively aggressive in 1998 - 2000, were damaged in the bursting of the bubble and are now trying to build an intellectual rationale on which to base their withdrawal from the asset class, which has been the most lucrative for investors over the long haul.

With best wishes for a peaceful and prosperous 2005,

Edwin A. Goodman
General Partner

« Milestone Investee, DPM, Acquired by Mellon
Derivatives Portfolio Management LLC (DPM), was acquired by Mellon Financial Corp. (NYSE: MEL) on February 28, 2005.  MVP II investors will realize a very attractive immediate return, and through performance-linked provisions of the sale agreement, have the opportunity to earn multiples of additional upside.

« MVP Invests in RichFX
In mid February, MVP II closed its ninth investment in RichFX, a NYC-headquartered company, which sells software to catalogue merchants to enable them to enhance their Internet sales to consumers by greatly enriching the online shopping experience.  With RichFX software tools, merchants can present a catalogue in digital form and allow online shoppers to browse through it in much the same manner as with a paper equivalent.  Features include digital "page turning," zooming in for closer inspection, color changes and 360-degree product views.

Based on Israeli technology, the company attempted to enter several different markets with uneven results since its inception in 1998.  However, in January of 2002, the board recruited talented new management and the company turned its attention solely to the online commerce vertical.  The firm raised $3.3 million from existing shareholders to implement the new strategy, joined by MVP II's investment of $650,000.  Ed Goodman acts as MVP liaison to RichFX and has board observer rights.

With over 200 customers ranging from Coach to Wal-Mart, RichFX is continuing on a rapid growth path. We are excited about the company's potential because of its excellent technology, strong management team and the traction it is achieving within the resurgent online e-commerce marketplace.

« Ecosystems Receives $260K Investment
Milestone invested in Ecosystems Design, Inc. of White Plains, NY on December 2, 2004.  Ecosystems provides software that enables large enterprises to better manage and control the digital information they own.  Ecosystems' products do this by providing information about the information (metadata) and about the users of this information.  Ecosystems customers include Honeywell, Lexis Nexis and Boeing.

Milestone was the sole investor in this $260,000 financing.  Richard J. Dumler has assumed a seat on the Ecosystems board of directors.

Despite many twists and turns, arguably since the founding of our republic, New York City has operated at the heart of global capitalism.  This leadership has been established primarily due to the nurturing of its capital markets which have grown mightily in size and sophistication.  Venture capital has played a critical role in this dominance.  By always concentrating on areas of technological innovation and explosive growth, the venture community has exercised influence hugely disproportionate to its size.

Although there have always been equity investors in fledgling enterprises, venture capital as an organized, rather than ad hoc activity, was initiated by a few wealthy establishment families in Manhattan after WW II.  Today, their organizational descendants, the Rockefellers' Venrock, the Phipps’ Bessemer Securities and the Vanderbilt clan's Whitney & Co. still finance a wide assortment of entrepreneurial firms.

The successful companies launched by these venture firms and the attendant wealth creation did not go unnoticed and in the course of the 60s and 70s many new venture firms were established, all eager to identify opportunities for rapid growth.  This led to the symbiotic relationship between risk capital and technological innovation.  Venture capitalists were both the beneficiaries and enablers of the entrepreneurial innovators and whole industries were brought into being through this marriage of technology and capital.  The semiconductor industry, the computer industry - both hardware and software - the offshoot personal computer industry and the biotech industry are but a few of the illustrious examples.  A milestone year worth noting is 1977 when a small company, Apple Computer (sales - $77 million), filed for an initial public offering and Genentech, one of the earliest biotech firms, was founded, backed by a consortium of California venture firms.  Few would have predicted then the current ubiquity of the PC, and the fact that 50% of drugs produced today are developed by biotech firms rather than old-line pharmaceutical companies.

Another obscure but seminal year in the history of the venture community is 1979, when the U.S. Department of Labor implemented ERISA (Employee Retirement Income Security Act of 1974) regulations in a manner which encouraged the U.S. pension community to invest a portion of their gargantuan asset base in venture capital funds.  In part, this regulatory reform was due to the tireless efforts of veteran venture capitalist, Ned Heizer, who, in addition to mentoring MVP partner, Richard Dumler, at Allstate Insurance venture operations, lobbied in Washington for this initiative.  Within a few short years, this change converted the venture community from a very productive but small investment activity favored by wealthy individuals and a handful of institutional investment pioneers, to an asset class that could attract money from the huge and growing pension capital pool.

During this period, capital raised annually by the community of venture firms grew from about $300 million in 1979 to about $3 billion per annum in the early 90s.  Drawn by the concentration of large technology firms, universities committed to ambitious science curricula and a highly educated work force, venture money focused increasingly on the promise of California's Silicon Valley and Massachusetts' Route 128.  Although New York continued as a major source of risk capital, with the exception of biotechnology firms, little venture money flowed to New York opportunities.

But in 1996, venture capitalists, forever seeking the next "Big Thing" - the next disruptive technology - discovered the web and began pouring money into a wide variety of Internet-enabled companies. Aggregate capital raised by venture firms annually exploded from $5 billion annually in 1995  to over $100 billion in the year 2000.  Excesses of all kinds ensued and inevitably, the Internet bubble popped in the latter half of 2000.  That is the headline story, but other critical changes occurred.  Of the eight thousand new companies created in the New York region, 2000 survived and a new Internet-centric community was established. The web has had a democratizing and decentralizing impact on entrepreneurial capitalism.  A small innovative enterprise (anywhere) could now communicate quickly and cheaply with putative customers everywhere.  Software could be demonstrated via the web, sold that way and distributed to customers in the same fashion.  This greatly reduced the costs attendant to marketing and sales.

We are now operating within what Milestone thinks of as the "Second Internet Wave."  Smart entrepreneurs have learned that the web is not a panacea but a hugely valuable tool which can be profitably harnessed.  Fresh Direct has learned from the Webvan debacle and many online merchants have learned from Boo.com.  Many industries including those prominent in the New York area such as financial services, healthcare services, pharmaceutical firms, advertising and publishing companies are learning how to utilize the services of nimble Internet-enabled vendors to solve problems and gain immediate return on investment.  Consumer use of the web is also accelerating rapidly, and advertisers are following, but utilization by all parties is much more sophisticated and productive.  Broadband availability (50% of all U.S. households and growing rapidly) is reinforcing Internet usage.  Every seven seconds a new website is created.

All this Internet-linked activity is creating countless opportunities and, as never before, deals abound in New York because the web plays to the strengths of New York's entrepreneurial Internet-centric class and the presence of thousands of corporate customers eager for productivity solutions that the web can enable.

15 February 2005, Young Startup Ventures' U.S./Israel Venture Summit

Madison Square Garden, NYC, Richard J. Dumler, Panelist

16 May 2005, Venture Association of New Jersey's 2005 Entrepreneurs Expo & Elevator Pitch Olympics
Morristown, NJ, Edwin A. Goodman, Judge

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

The Deal, Small is Beautiful, by Todd T. Pietri, January 10, 2005, page 15.
Excerpt: "The early stage venture capital industry has gotten itself stuck in the habit of thinking big--so big that it's approaching a dangerous tipping point."


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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