Every year, WilmerHale, Ernst & Young and J. Robert Scott publish a very topical compensation guide for startups. In previous years, it’s always been bound in hardcopy and PDF and usually in the hands of VC firms. This year’s survey will be posted online. If you’re a startup executive, you can take the survey here.
Here is last year’s study.
2008 CompStudy Report in Technology
Over the last few quarters, a number of hedge funds have accumulated large positions in Apple Computer (AAPL). Apple features prominently in the top fifteen holdings of at least Blue Ridge Capital, Citadel, Conatus Capital, Eminence Capital, Galleon, Maverick Capital, Tiger Global and Tremblant Capital. In quite a few of these funds, AAPL has been a top holding for nearly a year now.
What’s going on?
It’s no secret there’s a shift underway in the mobile device market. Years after futurists predicted the coming rise of mobile computing, and years after multiple technology companies were burned one after the other by over-investing in this trend prematurely, e.g.
a number of factors are finally converging to create a mobility megatrend. The availability of cheap silicon, substantial improvements in network access (baked into SoC silicon), and inexpensive screens and interfaces, has meant a good mobile computing experience is finally possible for the end consumer.
It’s becoming clear to the market who the winner in this emerging space is. The chart below says it all.
In less than two years since when it launched a product in the industry, Apple has grown to capture half the operating profit of the entire mobile device industry. That’s simply phenomenal. For every $1 in profit the industry generates, Apple gets 50 cents. That’s happened virtually overnight, since the iPhone only debuted in 2007. If I was Nokia, I’d be sweating bullets.
To be fair, Apple’s margins do not necessarily come at the expense of the other manufacturers. Its gross margins on its iPhone are significantly higher than anyone else’s and as a result, Apple has grown the pie for the aggregate operating margins available in the industry. Almost all this growth accrues directly to Apple’s bottom line.
It’s acknowledged in the industry that handset market growth hit a plateau at 1.2 billion units per year. Incremental handset growth comes from the replacement market, not greenfields. That means new features and functionality are needed to drive upgrades, and the customer adoption of new phones, primarily smartphones, is where the game for EBITDA will be played. Smartphones are under-penetrated in every geography in the world, with only 30% penetration in North America and Europe and 15% penetration worldwide. In spite of a tough global economy, they are growing 25% yoy.
Not only does Apple have some of the best products in the smartphone market, they are one of the few handset manufacturers that’s been able to build a successful consumer relationship via a platform. You use your laptop to manage your email, calendar and contacts, and have it all wirelessly synced to your mobile phone. You snap photos with your iPhone and have those pictures synced to your machine at home. As a customer, who do you have your mobile relationship with? The carrier? Certainly not. Despite all of its best efforts to stand in the way, the smartphone turns the wireless network into a dumb pipe. Your trusted relationship, more than ever, is with the provider of services and mobile computing platform. That’s Apple.
If you have to switch providers, it’s likely an irrelevant and meaningless (read: commodity) switch. If you have to switch manufacturers and platforms, that probably becomes a bit more nightmarish. Apple stands directly in the center of this mobile computing revolution. If the services and platform are well played, it’s a center that’s increasingly difficult to be displaced from.
The only question now is how much of this is already priced into Apple’s stock.
There’s a widely held belief that European entrepreneurs can’t build large, valuable technology companies, and as a result, investment performance in the European venture asset class is poor. As my old statistics professor used to say, “correlation does not imply causation.”
Europe is perfectly capable of building great technology companies. Below is a graphic from a presentation of mine highlighting successful $1B+ companies built in the US, Europe and China. As you can see, the United States and Europe have been effectively on par with each other since the beginning of the decade.
Now some readers may argue that the graphic may contain a bit of data massaging. Betfair is an unrealized return, although there are rumors it plans to float a $2.5B IPO this year. VistaPrint is a US company but it started in Europe while Robert Keane was studying for his MBA at INSEAD and raised its first round of $8 million from Sofinnova, a French venture capital firm.
A more poignant criticism of the chart is that the $1B line is arbitrary. If you were to consider all the exits from $600M+ in Europe, the balance would tip in the US’s favor (DataDomain, Riverbed, etc are just shy of the $1B mark). Europe doesn’t tend to produce as many of the $600-$1B exits that have become the lifeblood of the US venture industry.
It’s still an impressive bit of data. Europe barely registers as a place to build companies to most people in the technology industry, The data shows otherwise.
If that’s the case, why is the overall European venture investment track record so poor? The data suggests that most European venture firms have a tough time beating the S&P 500. If valuable companies can be built in Europe, why do venture firms struggle so much?
This requires a more careful analysis and will be the subject of another blog post. The short answer is that there is a paucity of investors with sufficient operating experience and know-how about how to build valuable companies. Startups need all kinds of help to sacle, at each stage in their history. Unfortunately, the number of investors who can provide this is pretty minimal in Europe. When you look at the European venture scene, you find a lot of former investment bankers and management consultants, and only a handful of individuals who grok technology, can understand go-to-market challenges, have the ability to help build world-class engineering and commercial teams, and have a wide network across the technology landscape. It also doesn’t help that European investors are more risk-averse than their West Coast colleagues, which is a more pronounced phenomenon of the difference between East and West Coast investors. It also doesn’t help that venture investors in Europe capital-starve their investments, with the data showing that European startups get on average about 1/3rd of the capital that US startups are able to raise. And that’s just the investor side of the equation. There’s also the issue of finding the right technical talent, the challenges of growing a company in the wrong milieu, building the right investor syndicate, being plugged into the right networks, having startups that can quickly iterate and change plans, etc…
On a side note.
When I was last in Silicon Valley, a friend of mine who used to run search for Yahoo! challenged me to name the number of $1B+ companies founded (incorporated) after 2000 from Stanford/HBS who is starting up a new company challenged me to name the number of $1B+ companies founded (incorporated) after 2000. A few names came to mind. The obvious being Facebook but also Silver Spring Networks, which I think will get to a $1B+ outcome. He swatted these all down, saying none of them have had realized exits. The only one in the US he said fit the criteria was YouTube. Scary. If that’s the only one, and we’re in 2009, that’s a pretty ringing indictment of the venture industry’s inability to grow large valuable companies this past decade.
Last night, while having dinner with a colleague at ePlanet Ventures, I realized there is at least one more. Baidu was incorporated January 18, 2000, went public August 5, 2005 and is currently worth $12.81B.
Are there any others I’m missing?
