VentureBeat

Where is technology headed?

The Churchill Club of Silicon Valley just wrapped up one of its most anticipated events: the Annual Top Ten Tech Trends Debate. Five well-known and opinionated venture capitalists weighed in on what trends will take flight and what trends will fizzle out in the months ahead.

(The VCs are pictured, from left to right: Steve Jurvetson, Vinod Khosla, Josh Kopelman, Roger McNamee, Joe Schoendorf.)

The audience of around 300 people was asked whether it agreed or disagreed with the VCs’ predictions. I’ve ranked them below, according to how well they were accepted by the audience.

Last year’s predicted trends included a shakeout of Web 2.0 companies and the rising economic power of Brazil, Russia, India and China.

Trend 1: Customer data stored by different service providers will be combined to create more intelligent services. Josh Kopelman, managing partner at First Round Capital, a seed-stage venture fund, who founded online retailer Half.com (sold to eBay after a year for $300 million) said such customer data includes your financial records, dinner reservations, preferences in the iTunes store, random searches on Google and much more. In this way the Internet goes from satisfying explicit user needs (like searching for a friend to add on Facebook) to satisfying implicit needs (like telling who you should add and why adding them would be helpful to you).
Audience: 95 percent voted “Yes”.

Trend 2: Oil will have increasing difficulty competing with biofuels made from cheap non-food crops for transportation. Vinod Khosla (pictured left below, beside Kopelman), founder of Khosla Ventures, which focuses on alternative fuels and green technologies, said coal will become less competitive compared to reliable solar thermal and other alternative energy sources.
Audience: 90 percent voted “Yes”.

Trend 3: Water technology will replace abating global warming as a global priority. Joe Schoendorf, partner at Accel Partners, previously vice president of marketing for Apple, said the world is running out of usable water and this will kill millions more people in our lifetime than global warming.
Audience: 80 percent voted “Yes”.

Trend 4: The mobile device industry’s migration to smart phones will produce great disruption for big industry players. Roger McNamee, co-founder of Elevation Partners together with U2 lead singer Bono, and early private equity investor in technology, said the disruption will exceed what the PC industry experienced as it moved from character mode to graphical interfaces. Shifts in the competitive balance will hurt Motorola, Microsoft and probably LG Electronics, Samsung and Sony Ericsson. Apple, Nokia, Palm and RIM will do better. [McNamee's firm is an investor in Palm]
Audience: 75 percent voted “Yes”.

Trend 5: Booming market for healthy aging technologies Steve Jurvetson, managing director of Draper Fisher Jurvetson and well-known for his founding investment in Hotmail, said a booming market in such technologies will allow people in their 60s and beyond to continue working and living a good life. Every 11 seconds, a baby boomer from the 1940s turns 60. These people have time and money and are Internet-savvy, so they represent an enormous market for services like mental exercise programs and online education in various topics. It fits into a larger vision that could also include an eBay for information services that exceeds the market for physical goods.
Audience: 70 percent voted “Yes”.

Trend 6: Four-fifths of the world population will carry mobile Internet devices within five to 10 years. Schoendorf said mobile Internet devices are rapidly becoming the leading device category.
Audience: 50 percent voted “Yes”.

Trend 7: Algorithms will be constructed to develop new industrial chemicals, new biofuels and eventually artificial intelligence. This was Jurveston’s prediction.
Audience: 50 percent voted “Yes”.

Trend 8: The mobile phone is your most important device. This prediction by Khosla is similar to Trend 6, but he predicted an even more intimate connection with the phone: Mobile phone applications will extend beyond e-mailing to include a virtual credit card, your ID, access to location systems and personal information filing systems. If you lose your phone, your data on it will all be backed up on a network so that you can load it all on to a new phone. Ten years ago people thought it would be ridiculous to have a camera in your cell phone, in two years you will have two cameras per phone – one for taking photos of yourself, and one for taking photos of others.
Audience: 40 percent voted “Yes”.

Trend 9: There is going to be a venture capital shakeout. Lower costs and barriers to entry for startups will have a dramatic impact on the venture capital industry and lower returns. This was Kopelman’s prediction.
Audience: 40 percent voted “Yes”.

Trend 10: Within five years everything that matters to you will be available on a device that fits on your belt or in your purse. This was McNamee’s prediction, and it’s similar to Trend 8. This will cause a massive shift in Internet traffic from PCs to smaller devices.
Audience: 30 percent voted “Yes”.

[Photos by Cecilia Aronsson]

VentureBeat talked last night with Roger McNamee (pictured left), asking him why his firm, Elevation Partners, would want to buy into Palm, a company that many people see having a tough time ahead, given intense competition.

Some doubt its chances of survival as a standalone company.

[See our initial coverage of Elevation's $325 million in investment into Palm. Also see the Mercury News coverage. The Elevation-Palm deal comes amid a wave of M&A activity -- see coverage here of Flextronics' acquisition of Solectron yesterday. Finally, the acquisition of Avaya, a computer networking company, for $8 billion by Silver Lake Partners and TPG, announced yesterday, is the latest in a trend of massive private equity buyouts.]

Here’s how McNamee explains the Palm deal. His starting thesis is that mobile is big and getting bigger — that technology is increasingly allowing people to take and get content wherever they want. Only about seven percent of cellphones are smart-phones today. Within some time frame, say ten years, all devices will be smart-phones, he said. And with only a few players with the know-how to offer a full platform — he counts three, Apple, RIM and Palm — this bet makes a lot of sense, he said.

Here’s more on why: A significant cycle of hardware innovation over the past year has made mobile devices smaller, but those devices are imperfect, he said. Each of them — the Q, the BlackJack, the Pearl and the Palm Treo — have had their own limitations. “It’s really hard to do more than one thing really well,” McNamee notes.

Because hardware has made so many advances, the accompanying software makes a significant difference. Apple succeeded with the iPod not merely because it gives you a hard drive to carry tunes around with you, but also because of its surrounding architecture, including The iTunes store and supporting software. People won’t buy music from a platform that doesn’t have all these parts, he said. The same success has been seen by the video-console players, where McNamee has looked closely: One vendor takes charge of the key components and makes them all work together.

So what are the characteristics of the players most likely to succeed in the smart-phone industry? McNamee lists them: They’ve got to be innovative, have software, have good systems engineers and be ready to take risks.

Who fits the bill? “At a minimum, RIM, Palm, and in three weeks, Apple,” says McNamee, “But not everyone.” Many software makers failed at making the transition to graphical mode interfaces on the PC; similarly, many phone companies won’t transition either, he said.

Because all phone will one day be smart-phones, “this is not a winner-takes-all situation,” he said. He believes Apple’s iPhone will be successful. Its base of some 100 million iPod users, mostly satisfied customers, gives Apple a huge start. RIM also continues to do well. And Palm, too, has got what it takes. Having recruited Jon Rubinstein, and benefiting from idea guy Jeff Hawkins, the company has a team of innovators that is difficult to replicate.

And thus begins the slow, steady grind by Palm to reassert itself.

Here’s an entertaining video taken of Roger McNamee, of Elevation Partners by Kara Swisher.

McNamee’s office is ensconced in the middle of Silicon Valley’s Sand Hill Road, center of venture capital and the region’s large private equity firms.

McNamee turns around about two minutes in, and points to a golf hole right outside his office built by George Roberts of Kohlberg Kravis Roberts. McNamee of Roberts: “…he can afford to bring up the entire grounds crew from the August National Country Club, and they literally brought sod and sand from August National and put it back here. As far as I can tell, no-one’s ever been on it.”

Several years ago, during visits to this complex, we were told that KKR still had butlers and white gloved waiters serving visitors to their office. Seems nothing has changed. Some say the golf hole is evidence of froth in private equity. However, we’re not certain this is any different from what could have happened say, three years ago.

Web site readers can see video below.

Forget the Web 2.0 bubble, which is in the process of bursting.

Start worrying about the private equity bubble instead.

Our capitalist system has a habit of swinging between fear and greed (see Stu Phillips’ column today), and right now we’re seeing it lean toward greed • at least in private equity. Wealth has accrued, and investors — many of them public pension plans — are searching for places to put their excess capital. So they’re parking it with the huge private equity firms and hedge funds promising to put large dollars to work profitably. PE firms firms raised a whopping $198 billion in 2006, a record, and almost five times the amount raised in 2004. And they pumped $725.3 billion into companies, to take public companies private, and buying divisions from public companies that are trying to restructure. That’s another record, more than twice the level in 2004. The trend is expected to continue this year. One firm, Apollo Management, alone participated in $37 billion of transactions in just three days

Things are getting out of control. With PE firms buying up all these companies, they will need to sell or take those companies public again, in order to cash out of them. But no one knows how they will do that. If you try to sell these companies on the public market at the same time, the resulting downward pressure will kill the stock market (Stu Phillips says firms will have to hold their stakes, thus lowering returns, and causing a shakeout). Meantime, the excess cash is pushing up stock values artificially, because if a company doesn’t like its stock price, it knows it can get a premium price by selling to a private equity investor. Alternatively, if a company’s stock price dips too low, it becomes an acquisition target. So, of course the market has gone up! The Dow is at record highs.

We recently corresponded with Roger McNamee (pictured below), who two years ago raised a technology-focused private equity firm, Elevation Partners. He tells VentureBeat, in an email:

Private equity has been a turbocharger for the market. Every time private equity takes a company private, they pay a big premium and investors mark up the rest of group in the hope that another PE firm will come along. This has forced private equity to pay ever higher prices for the deals they do. As long as rates remain low and the economy is strong, private equity can pay up.

That’s the problem. Most economists say 2007 is likely to herald an economic slowdown. If it slows too much, we could be in for a choppy ride. It takes a long time to unload stock, even in the best of markets. McNamee helped buy disk drive maker Seagate in 2000 while he was at Silver Lake Partners. Though Seagate’s value rose within a year or two, and is now near an all-time high — creating handsome profits for Silver Lake on paper — the firm has been unable to sell Seagate shares very quickly. It still owns a large portion of Seagate shares — six years later. And that’s a near-ideal case. Continues McNamee:

For the past couple of years, private equity has been a safety net under the public market. Stocks go down less than you would expect on bad news because private equity is there….So many companies went private in such a short period of time, that you have to wonder what happens in three years when they all want to go public again. What happens if the market says no?

Another example is the purchase of Warner Music Group for $1.25 billion in 2003, by a group of investors led by Thomas H. Lee Partners. Within two years, Warner Music made dividend and other payments to those investors of $1.43 billion, in other words paying off the Thomas Lee and other investors the entire cost of the acquisition. Like Seagate, the investment represents a fortuitous case. However, even in these best of conditions, Thomas Lee has been unable to knock it all home with a sale. It is stuck holding to the company, with a declining stock price. Warner can’t merge with EMI, as originally envisioned, because European anti-trust regulators have said no.

The bubble might continue to grow for a while, because there’s so much cash still looking for a place to go. But its time for investors — and here we mean state employees and others whose pension fund money is being pumped into these PE funds — to start asking questions. It’d be too bad if joe public investor is left holding the bag again, just like in 2000.

(Update: Apologies, we’d meant to put a questionmark in the headline, so we’ve fixed. We’re checking on this rumor, but now we’re getting more doubts about this supposed sale)

Here’s the latest in Silicon Valley tech world:

Video site MetaCafe to be sold for $200 million? — That’s what this site says. We reviewed Metacafe, which recently moved to Palo Alto, here.

Common Sense Media, a site where families can review movies, films, TV shows, games, raises $4.25 million — The cash for the San Francisco company comes from the Omidyar Network. Christine Herron, an investor at Omidyar, has spoken highly about this company; the investment comes as little surprise.

Lots of VC deals — If you haven’t kept up with our left column lately, here are links to the venture fundings of PayByTouch, MontaVista (from a couple of days ago), and Pinger (we’ve since confirmed details of this one), respectively. Also Zipcar, largest car-sharing service, raises $25 million. This is the second round of venture backing for the company, and it comes from Greylock Partners, Benchmark Capital and Boston Community Ventures.

Has Google invested in Chinese peer-to-peer company Xunlei? — That’s what the rumor is. Xunlei is reported to have seen between 75 million to 100 million downloads of its software, and has raised previous funding from Morningside and IDG Ventures.

Google’s vanishing click-fraud case — Bizarre story about how Google has apparently dropped a click-fraud case. Michael Bradley, 32, reportedly was caught red-handed while trying to extort money from Google — investigators allegedly taped him across from an office at Google where he’d visited and threatened distribute a click-fraud technology he’d developed, unless Google paid up. The article makes your think Google found the technology so scary that it cut some sort of deal with Bradley, to avoid legal proceedings that would have brought the technology to light.

Yahoo’s woes in china continue — Yahoo China President Xie Wen has left “for personal reasons,” only 42 days after he had joined the company.

Jason Calacanis joins Sequoia Capital as entrepreneur in residence — Calacanis recently resigned from leading AOL’s Netscape property, and said Tuesday he’ll be joining Sequoia Capital, the big-name Silicon Valley venture capital firm. Previously, he founded Silicon Alley Reporter magazine and was a co-founder of Weblogs, a network blogs sold to AOL last year.

AskCity looking pretty good — Last week, we reported IAC and its search property, Ask, were launching a local portal site. It has launched, and it looks very useful. As mentioned, it makes sense for IAC to merge its various properties: Now you can select a restaurant, book a reservation through OpenTable, do a search for nearby events, such as a concert, book a ticket through Ticketmaster, find a map to chart your nights traveling, and do all this during one search session — and all at IAC’s properties.

We’ve put green arrows on the screenshot below to highlight the notable parts. At right is a place you can easily annotate it all for friends (place markers, or draw boxes on a map, and so on). On the left, you’ll see the four categories of search: businesses and services, events, movies, and maps & directions.