Milestone

“We have a fondness for smart but perhaps inexperienced underdogs . . . given the choice between cutoffs and sandals or cufflinks and Brioni, we are going to take the first every time.” Mike Moritz, General Partner, Sequoia Capital (investor in, among others, Google and YouTube) Fortune, October 30, 2006

Editor's Corner

Dear Friends, Investors and Associates:

I am filled with optimism for 2007. It would appear that we are at a pivotal point in the Iraq adventure and the die has been cast in the form of the Baker panel’s assessment and the mid-term elections. Within a year, that long suffering land will be on its way to stabilization under its elected government and U.S. troops will be returning home. Alternatively, the Bush “surge” will fall short and political pressures will force the re-deployment of U.S. forces. Either way, the U.S. might soon be disentangled from the human and financial costs and the attendant political strife.

The big and largely ignored story of 2006 has been the continuing outstanding performance of the U.S. economy despite Iraq. We are entering the sixth year of an extraordinary economic expansion. Gross domestic product is growing at a rate of 3.5% per annum. Corporate profits and employment are at all time highs while inflation is 2.54% and unemployment is a manageable 4.5%. So the macro economic picture is benevolent for investors.

The private equity market is a participant and a stimulant to this engine of economic growth as more mega funds such as KKR and Blackstone raise ever larger pools of capital and target giant enterprises. This part of the private equity community is about the movement of huge amounts of equity capital and the use of leverage in search of modest double digit growth with comparable risk. Regulations such as SOX are providing these private equity firms with a healthy deal pipeline.

The other major private equity trend is that arena favored by Milestone which is associated with technology innovation driven by the Internet. Depending on some permutation of life circumstances, friends, career choice and perspicacity, most people became aware of the Web in the early to mid 90s. The growth and ubiquity of the Internet has grown exponentially since then. Most pundits agree that we have entered the second growth phase - that characterized as “Web 2.0”.

My partners, who have enabled me to avoid more than my fair share of follies, have warned me to avoid “Web 2.0” commentary which they regard as the third rail of punditry. It seems to me that lack of clarity regarding a new phenomenon is no reason not to wrestle with it in order to gain a better understanding.

At the first Web 2.0 conference in October of 2004, two Internet gurus, John Battelle and Tim O’Reilly, set forth some criteria for Web 2.0 applications that are worth noting. They pointed out that in the Web 2.0 environment one must think of the entire Web as the pertinent platform and of the user as the controller of his own data. They elaborated regarding key ingredients of Web 2.0 applications, i.e.:

One could go on at some length. The point is that in each instance, the Web 2.0 manifestation harnesses the power of the Internet in new and more useful ways. For example, Britannica Online was a great step forward in that it made all the Britannica information readily available online to any Internet connected person and enabled the editors to readily add new information and to be comprehensive in current as well as historical terms. Of course, Wikipedia can do these things, but in addition, it has democratized the creation and editing of content. Through its Web collaborative philosophy (known as “wiki”), it has hugely expanded the base of “expertise” which provides that content and lowered the cost of production.

These enriching Web 2.0 applications can often be launched with limited capital and yet have huge potential to provide services that can be monetized and thereby make businesses and individuals more productive. At Milestone, we hope to finance some of these enriched Web 2.0 applications, secure in the knowledge that the technology is fast changing and that Web 3.0, amorphous but discernible, will soon be upon us.

With best regards for a Happy and Prosperous 2007,

Edwin A. Goodman
General Partner

In December 2006, both MVP II and MVP III invested in LifeMed Media, Inc. (aka “dLife”). MVP II invested $200,000 and MVP III invested $800,000. This investment is MVP II’s fourteenth portfolio company and the third for MVP III. dLife is a consumer healthcare media company focusing on the diabetes market. The Company creates original, branded content to help diabetics, those at risk of developing diabetes, and diabetic caregivers to improve the management of this chronic disease. Milestone co-invested with Cross Atlantic Partners and Battery Ventures in this $9.5 million financing round. Todd Pietri will serve as a board observer

The board of SkillSurvey (www.skillsurvey.com), an MVP II portfolio company, recruited Ray A. Bixler as the firm’s new CEO in November of 2006. Mr. Bixler, a seasoned sales and marketing executive, assumed his duties on December 4th 2006. Mr. Bixler has compiled an admirable track record in a series of sales and marketing positions of increasing responsibility since beginning his career in 1988. Most recently, Mr. Bixler served as Vice President of Sales, Mid Atlantic region at Caliper (www.caliperonline.com). Caliper is a 40 year-old global human resources consulting and assessment firm which assists its 25,000 clients in assessing potential hires and fostering the further development of its employees. We are very excited by the initial impact of Mr. Bixler’s arrival. With his sales experience and his knowledge of the human resources marketplace, he is having success on the direct sales front and also in fashioning strategic alliances with key channel partners including his former employer.

Time Bombs

The perceived exuberance for things Web 2.0 has lead to the obvious question, “Is this another Internet Bubble?” For many reasons, I think not. But in my mind, it does raise a larger question, “Are we in a bubble economy?” Much like the initial non-effect of the cries of “irrational exuberance” in the late 90s, the U.S. and world economy have chugged steadily forward despite the eminence of the naysayers (notably Buffett, Rubin, etc.).

Even the marginally economically aware among us (which tellingly excludes most of the American public) are familiar with the twin Chimeras of the U.S. economy, the U.S. fiscal deficit and the U.S. trade deficit. The trouble with these bad things is that they often produce good things that people like. The U.S. trade deficit allowed us to consume 7% more than we produced in 2006. And we used dollars to pay the folks who sold us these goods, principally the OPEC cartel and the Chinese. They in turn used these dollars to buy debt of the U.S. which enabled the U.S. government to spend more than it took in taxes by about, a much less than expected, $250 billion. What other country can do this? Is this a great country or what!

Indeed all of these benefits do flow from a singular American preeminence and position. All of this is based on trust and in some instances possibly fear. All of this has a certain resemblance to a perpetual motion machine. The trust derives from the fact that over the past century the American economy and political system have been the most open, stable, and productive in the world. The fear derives from the fact that any attempt to decouple one’s economy from the US economy risks bringing the roof down upon one’s own economy. There is currently equilibrium, but underneath there are ticking time bombs.

None of these time bombs is hidden. All are out in the open and being talked about, most importantly in the President’s recent State of the Union address. When he talks about curbing the “unsustainable growth” of entitlement spending, the President was referring to the coming wave of baby boomers who start getting benefits now which will accelerate rapidly hereafter. Some would argue that it is a bit much to be talking about this problem after greatly increasing entitlements through the Medicare Drug bill. What everyone (Brookings, AEI, CBO) does agree on is that by about 2030, based on demographics and the historical trend of medical inflation at an annual increase of 2.5% in excess of inflation, all federal taxes collected (assuming the long term average of 18% of GDP) will just cover Medicare, Medicaid, and Social Security outlays with little left over for everything else, like defense or education, for example.

When the political discussion turns to education, globalization, and energy independence, what everyone is talking about, whether they realize it or not, is the trade deficit. One of the hidden costs of the Iraq war is that the discussion of this topic is not now front and center on the public agenda, despite the rumblings one occasionally hears. There are no easy ways to solve any of these issues and the devaluation of the dollar is certainly not a magic elixir that will solve the problem. In the short run, devaluation likely increases the deficit by making the goods we import more expensive; in the longer run it risks making people unwilling to hold or accept our currency. One need only think about what the deficit might be if we had to pay for oil in euros or pounds sterling at recent exchange rates.

What is required to solve these problems is political will and societal consensus. The position of Britain at the turn of the 19th Century was not too different from ours today. Yet during the 50s, 60s and 70s, it fell economically behind its defeated enemies. Class warfare and its policy repercussions hobbled what had been a world leading economy. The problems facing the U.S. economy are real and large. Innovations over the Internet will not solve them, though they can be solved, but only if all of the stakeholders in the U.S. become deeply involved in making the upcoming political debate one focused on real problems, facts and solutions, not the past or ideologies.

About Milestone Venture Partners

Milestone is an early stage venture capital fund with $42 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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Milestone Matters Newsletter Winter 2007

Milestone Matters Newsletter
Winter 2007