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Internet 2.0 – Time for the VC industry to look again at the

opportunities

George HadjigeorgiouCorporate Development, Yahoo!

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Internet 2.0 – Trends and Implications

2 Trends:

The users

The industry

2 Implications:

Implications for the VC industry

Implications for entrepreneurs and public policy makers

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5 long-term macro trends driving technology investment

Population is aging

“Time Compression”

Wireless – take it with you

Decreasing reliance on oil

Security

Biotechnology

Internet/ Connectivity

Energy/ Environmental

Technology

IT/Software

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Trend 1 (Users):

Internet 1.0 - User growth (“breadth”)

Internet 2.0 - User engagement (“depth”)

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Global Internet Users have been growing

Future usage growth will come primarily from Asian countriesFuture usage growth will come primarily from Asian countries

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Internet is becoming more essential across a range of demographics

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However, real action and engagement is due to begin just now

In Cable, once penetration leveled out around 60-70%, growth in usageaccelerated, increasing almost 3x, from 29 hours/month in 1990 to 81 in 04

In Cable, once penetration leveled out around 60-70%, growth in usageaccelerated, increasing almost 3x, from 29 hours/month in 1990 to 81 in 04

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Three key drivers of usage depth

In 1996, John Doerr said: “by the year 2006, people will remember the current Internet

experience as quaint, like black and white television with limited

sound”

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Internet 1.0 was all about “breadth” – Internet 2.0 is all about “depth”

Internet 1.0 - more users (“breadth”) massive change in how users get information and communicate

breadth of usage or driving total users

Internet 2.0 – more user engagement (“depth”) User experience is getting better due to:

experience and feedback

k better product integration of key sources of value

faster speeds, always on and accessibility,

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Trend 2 (Industry):

Internet 1.0 – Boom/bust cycle

Internet 2.0 – Healthy expansion/consolidation

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Internet 1.0 - traditional capitalist cycle

“Overinvestment may seem wasteful, but then it’s always easy to identify winners once the race is over…there’s no substitute for experimentation with business models as

well as with technology” – Hal Varian

“Overinvestment may seem wasteful, but then it’s always easy to identify winners once the race is over…there’s no substitute for experimentation with business models as

well as with technology” – Hal Varian

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The emphasis is shifting form ISPs to “Pure Internet” and Internationals

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Internet 2.0 – expansion and consolidation

Internet 1.0: Classic boom/bust cycle -> darwinism

traditional capitalist cycle

aggregate market value of the Internet survivors are above 1999 levels

mix of the top 10 Internet players has evolved

Internet 2.0: Healthy expansion/consolidation cycle

number of Internet companies is now expanding

significant consolidation on a global basis is likely over the next 5-10 years led by product integration and flush balance sheets

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Implication 1:

M&A can and will be an attractive exit strategy and the VC industry can help play an important

role in building the Internet ecosystem

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Internet 1.0 – Hyper investment and “fingers burnt”

Huge investments in start-ups – more business than technology

investments

Survival of the fittest – bust and “$1 acquisitions”

Leaders focused on custom build underlying technologies

2001-2004: “Internet-shy” investments

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Trends are changing

Some examples of recent acquisitions – Kelkoo, Musicmatch, Flickr, Oddpost, Farechase

Most of them backed by VCs – only one public company

Some examples of recent acquisitions – Urchin, Keyhole, Picasa, Dodgeball

Only some of them backed by VCs/angel investors

Some examples of recent acquisitions – Shopping.com, Gumtree, Loquo, Rent.com, Kurant, Marktplaats, Craig’s List, Baaze, mobile.de, Internet Auction Co.

Most of them backed by VCs – only one public company

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Implications for the VC Industry

Exponential growth in Internet industry

Internet industry leaders will typically acquire for two reasons:

Market share/brand

Talent and innovation – technology enabling companies

By building technology-enabling companies, the VC industry will help to move the whole industry forward and build the internet ecosystem

VCs will create a lot of the companies that will fuel innovation for the leaders of Internet 2.0

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Implication 2:

Entrepreneurs need to think beyond the country/regional boundaries whilst supported by

public policy makers to foster innovation

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Implications for entrepreneurs and public policy makers

Tax incentives for innovation

“World-class” talent in

universities and applied research

Infrastructure/ broadband

Focus on one or two “killer”

technologies

“Extroversion” – Think regional

and beyond

Killer apps and technologies

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In summary …

Internet 1.0 was all about user growth (“breadth”) – Internet 2.0 is all about user engagement (“depth”)1

Internet 2.0 will be characterised by consolidation in the industry

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VC industry can help play an important role in building the Internet ecosystem – M&A will be an attractive exit strategy3

4 Entrepreneurs need to be extrovert/ think beyond the boundaries of the country

5 Public Policy Makers can help to foster further innovation