Risk Evaluation for Internet Investments

1. Risk Evaluation for Internet Investments Anya Eldan Managing Partner, Platinum Venture Capital 18 February, 2002

2. Investing in Internet Companies • Is Internet a burst bubble or a growing viable market? • Which companies are “Internet Companies”? • Should we invest in Internet Companies? • What are the risk factors in Internet Companies - what did we learn? • What is relevant to Israel?

3. Internet is Here to Stay (it is a huge success…) • E-Commerce: $1.23Trillion 2001; $6.8Trillion 2004; (Forrester Research) • Registered domains: 29.5M (NetFactual) • On-line population: 529M (Global Reach) • Value of top Internet company: AOL $125B

4. What is Internet Company? • Wireless browsing? WEB storage? On-line shopping? Content delivery acceleration? Payment engine? Web access load balancing? • Applications and Services specifically enabled by Internet and infrastructure technologies making those applications and services possible and effective

5. 10 Leading Internet Companies Annual Sales (in Bil. $) CompanyProfile Market-Cap (in Bil. $) • Internet-powered media and communications • Dynamic pricing online trader platform • Online retailer • Global Internet communications, commerce & media • Web-based financial services • Online consolidator of hotel accommodations • Online ticketing, city guide & classified services • eBusiness & Internet-marketplace solutions • Online investing services • Infrastructure SW enabling convergence of Internet & wireless communications 125 16 5 10 8 2.5 3.25 2.5 3 1.5 39 0.75 3.1 0.72 1.3 0.5 0.68 1 2 0.25

6. Is it time to invest in Internet (again)? • YES! • Internet markets are growing strong and are becoming mass markets • Internet technology is maturing past early adoption • Valuations are low • Exits are coming back (PayPal?) • Lessons are learned (maybe)

7. What did we learn? – Risk Factors (1) • Challenging new Business Models (eyeballs, viral marketing, revenue sharing) • Mass deployment required for success • Many new categories, only 2-3 will make it (execution! first mover? smart money? Luck!) • Speed of adoption is slower than expected (change of procedures, new infrastructure, scalability of technology)

8. What did we learn? – Risk Factors (2) • Management –inexperienced entrepreneurs, fast riches, no long term operational planning, no “relevant” management experience • Operations – Internet applications lack security, s/w quality, support of unexpected demand bursts, new logistics models • Brand Building – very expensive for new companies, reliance on new Internet media

9. Israeli Internet Companies • State-of-the-practice: • Don’t invest in applications and services • Invest in Internet infrastructure • Did we really comply?

10. Public Israeli Internet Companies • Internet traffic management solutions; 2001 Sales - $43M, Market-Cap - $170M • Integrated performance management solutions enabling businesses to test and monitor Internet applications; 2001 Sales - $361M, Market-Cap - $3Bil • software that assists organizations in monitoring & optimizing the performance of their IT infrastructure; 2001 Sales - $56M, Market-Cap - $525M • Web-based e-mail & messaging solutions 2001 Sales - $18M, Market-Cap - $5M • Internet communication infrastructure software enabling companies to communicate business-critical, time-sensitive information to their customers; 2001 Sales - $21M, Market-Cap - $60M

11. Private Israeli Internet Companies • Online comparison-shopping service; 2001 Sales - $12M • eCommerce search solutions based on intuitive free text search integrated with dynamic browsing; 2001 Sales - $14M • Integration solutions for B2B e-Commerce; 2001 Sales $3M • Web application security and control software for e-Businesses; 2001 Sales - $9M • Live on-demand collaboration, communication & eLearning platform; 2001 Sales - $9M

12. Reality Check : 150 Internet Companies from D&A • Applications: 38 • On-line Marketing, profiling, etc: 22 • Rich media on-line : 17 • Content distribution: 16 • B2B, CRM: 16 • Payment: 9 • Security: 8 • Wireless Internet : 8 • Internet technology: 8

13. Invest: Real Technology Advantage • Security • Image processing, compression • Enterprise s/w • Supply chain technologies • Algorithms for load balancing, optimization • Wireless technologies • Internet technologies (XML, Linux, PHP…) • Machine learning, natural language processing

14. Invest: Can bring to Market Now • Current Market Need – don’t have to create demand, no need for drastic behavior pattern changes • Short Penetration time – start making money from the start • Simple Channel – someone out there benefits from selling your product • “Standalone” Product - high entry barrier but low integration requirements with other products

15. Invest: Know to Execute • Simple Business Model – make money from selling product/service to single customer • yearly licensing is great! • preferably to established players • Revenue sharing a bonus • Reliability – old timers from s/w industry • Management – preferably entrepreneur • Nothing wrong with service – just don’t use Israeli team!

16. Invest: Perceived Exit Strategy • IPO of profitable companies – Y/2003 • Mainly M&A • Candidates: • Service companies looking for technology edge • Growing enterprise software companies looking for new products for existing channels • Margin increasing technologies

17. Investing in Internet Companies • Same as other investments but even more carefully: • Clear market need • Simple profitable business model • Execution skills • Barrier to entry • Deep pockets……for when everything turns out to be different