Happy Holidays

Our musings will be scant over the next few days. We’ll resume in earnest early next year. In the spirit of holiday reflection, though, we’re recapping below some the themes followed over the past year — we’d welcome your thoughts about any or all of them, especially on how you think they’ll develop over the next year. We’ve been challenged and inspired by your contributions in 2004, and we look forward to more of them.

Wishing you warm and happy holidays,
Matt & Mike

1) Tech Darwinism — Technology rampages forward, destroying all those who lie in its path. Internet companies are still killing old-line businesses. In just the latest example, two local rental listing firms closed their doors as users flocked to online listing service Craigslist.com. One was RentTech, another was the 34-year-old Homefinders, of Berkeley. Workers were laid off, but here’s the quote from Craigslist’s founder, Craig Newmark: “I’m personally bothered by the loss of jobs,” Newmark told the SF Chronicle. “But a lot more people benefit” when the Web replaces information middlemen, he said. And on the cycle goes, in telecom (VOIP, wireless and Internet infrastructure technologies are driving mergers like Sprint-Nextel), software (Oracle-Peoplesoft), security (Symantec-Veritas) and so on.

2) Search technology is hot — Google’s IPO was a blockbuster, and despite the bumps, wildly successful. About two years ago, Google’s buzz started spawning a generation of me-too’s, and revived some other early players like AskJeeves. There have since been hundreds of other search-related companies, all trying to get their slice of the expanding pie of search advertising dollars. Now there’s even a voice search engine, Speegle — a name that conjures up, in our mind at least, the name Smeagol, of Lord of the Rings and thus not bad market timing given this month’s release of the extended version of Return of the King.

3) Too hot? — Search, like other tech sectors, will see its boom and bust. For now, venture capitalists are still rushing in. Both anecdotal and hard data evidence suggest things are heating up (see our recent Merc story here). It seems everyone and their brother has entered the business of targeted ads — the gold behind search. It’s hard to make judgment calls on individual private companies without getting to look under the hood. But check out the news emerging yesterday: FastClick.com, a Santa Barbara online advertising start-up, has filed to go public on the Nasdaq. This comes just three months after the company raised $75 million, the year’s largest first round of venture capital. See Dan Primack’s story here, which notes the four-year old company’s original plan for that round was to raise money primarily to “provide liquidity” for both angel investors and company founders. This is an interesting dynamic: Pay the main guys a big check, effectively extinguish part of the fire in their belly, and then take the company public — on net revenue of only $13 million for the first nine months of this year. Hmmm.

4) China — Silicon Valley entrepreneurs and venture capitalists are grappling with China’s rapidly expanding market and economy. Most see it as an opportunity, but Don Valentine, partner at Sequoia Capital, predicts a massive bubble burst sometime within the next few years. Confusing information, governmental whim, and weak contracts are serious drawbacks. As Donald Straszheim points out, China’s data is so unreliable that last year only one Chinese province reported GDP numbers lower than the national GDP! And here’s a cheery Christmas story for you: Another foreigner in China gets forced out of his own company. A reader puts it succinctly: “If you don’t get the legal-regulatory down right, you can get screwed…”

5) Energy — China’s energy consumption rose 15.1% in the first 11 months of the year, and is burning as much coal as it can find. The U.S. is too dependent on foreign oil, and is searching for alternative sources too. Could result in serious tension (see here and here). This represents a great opportunity for new ideas.

6) Disclosure of venture capital results. We’ve blogged about the recent settlement by CalPERS. The accord means the nation’s largest public pension fund will now disclose the financial performance of the venture firms it invests in, as well as the fees it pays to those firms. There’s also possible state legislation afoot to limit further disclosure. This is significant because it may set standards for the rest of the nation’s industry. Second is the question of what we gather from the disclosures. Has the state — i.e., CalPERS — been doing a good job investing? Well, turns out initial conclusions that CalPERS may be paying above-market fees was a misunderstanding. Again, Dan Primack made some good observations here and here. We’d said here that CalPERS was paying 25 percent carry, compared to an industry average of 20, based on our reading of the analysis by Peter Scheer of the CFAC. We circled back for clarification from Scheer, and he explained that CalPERS is paying more like 20 percent. So while we don’t have any definitive calculations yet, it’s not bad news. Obviously, the main benefit of disclosure is this: It shines a bright light down the hitherto dark corridors of money and power at state institutions. Elected officials and the staff they hire will feel even greater pressure to invest taxpayer’s money in venture funds that do well — not in mediocre ones chosen because of cozy relationships. The trick is to make sure venture firms can live with the disclosure, so that they feel good about working for taxpayers.