Morgan Stanley Dean WitterVenture Partners February 1999 Venture Capital Perspectives on the Ag.com Industry
Morgan Stanley Dean Witter Overview • Morgan Stanley Dean Witter is a preeminent global financial services firm that maintains leading market positions in each of its businesses — Securities, Asset Management and Credit Services. • Currently over 53,000 employees in 550 offices operating in 25 countries • $425 Billion in Assets Under Management • The Investment Banking Division is a worldwide leader ranking among the top institutions in mergers and acquisitions, underwriting of equity and equity-related transactions, high yield financing and corporate debt issuance. • In the Internet and Technology Space, Morgan Stanley Dean Witter is the market leader • $15.4 Bn in Initial Public Offering volume(1)(2) • $357.5 Bn in Technology Mergers and Acquisition volume(3)(4)(5) Source: Securities Data Corporation, 1999 Institutional Investor All-America Research Team Notes: (1) Full credit to sole bookrunning managers. Credit split equally between joint bookrunning managers (2) Includes all U.S. technology issues greater than $10MM from 01/01/95 to 1/20/00 (3) 01/01/95 to 1/20/00. Includes worldwide transactions completed and announced greater than $25MM (4) Full credit given to target and acquirer advisor (5) Excludes spin-offs
Morgan Stanley Dean WitterVenture Partners Overview • Limited Partnership with $1.1 billion under management • Currently investing $550 million fund – MSVP IV • The vast majority of MSDWVP’s funding originates from independent sources • MSVP I and MSVP II both top quartile performers • Invest in Early and Expansion Stage Companies and Growth Buyouts in the U.S. and Western Europe • Focus on Information Technology and Health Care • Equity Investments of $5 to $25 million • Actively involved in portfolio companies at the board level • Part of Morgan Stanley Dean Witter Private Equity - $8.0 billion under management • Utilize Morgan Stanley Dean Witter’s global resources and relationships
Our Active Role as Venture Investors • Select industry-leading companies to partner with • Marshal Morgan Stanley’s resources and leverage our brand name on behalf of our portfolio companies • Work with portfolio companies to develop their businesses • Contribute capital • Help set up strategic partnerships • Assist in business planning/strategy setting • Help build out management team • When the time is right, help them secure the right investment banks for their IPO – or sale • If it makes sense, continue to work with post-IPO
MSDWVP’s B2B Strategy What We Look For in B2B Markets • Large, Fragmented Market – no concentration of buying or selling power • Transaction Randomness – buyers who change suppliers on a regular basis • Dynamic Products – scrappage and spoilage; changing values based on product quality and shelf-life • Inefficiencies in Supply Chain – opportunity to create value through supply chain optimization...manage complex business information online • Opportunity to Create a Sustained Competitive Advantage – create barriers to entry & benefit from networking effects, velocity • Gross Margins and Gross Income Opportunity • No Established “Winner” Yet – unless, of course, we can back them!
Some Things We’ve Learned from B2C Apply to B2B... • First Mover Advantage and Critical Mass – whoever signs up the buyers/suppliers/partners first will have strong potential to keep them • Increased Productivity – B2B success will be based on increasing customer’s productivity by reducing cost, improving service and/or saving time • Deep Beats Broad – focusing on solving all of the needs of an individual market may beat solving some of the needs of lots of markets • Markets will be dominated by one, perhaps a couple, players
...But Some Things Will Be Different from B2C • Domain Expertise – companies need to understand the industry to understand the problem that needs to be solved • Strong Back-End System Integration – businesses need to keep records so system integration is key, this creates much higher switching costs than B2C and is the key to customer retention • There are a lot of verticals to be dominated – so, there may be a lot more dominant players (read: great investments) than in B2C, at least in the early days • Purchases/commissions can be big • Session stickiness may not be key – business users want to do business quickly and save time
Displacing Will Be Much Harder inB2B than in B2C • Harder to “Amazon” the entrenched • In B2B, buyer/seller relationships matter, “golf is golf” • B2C switching costs are nominal • B2B switching costs are high – both offline and online • Lower risk strategies: • Add value to channel without replacing • Create channel where one does not currently exist • Riskiest strategy – replacing current channel
Agriculture Is Attractive • Large, Fragmented Market • Transaction Randomness • Dynamic Products • Supply Chain Inefficiencies • Opportunity for Sustained Competitive Advantage • Gross Income • No Established Winner $400+ Bn 10s of suppliers 100s of distributors 1000s of dealers 2.2 million farms Few long-term contracts Spoilage/switching Multiple tiers, suppliersdon’t have relationships with buyers Highly possible In some segments Backing a leader,no incumbents (yet) ü+ ü ü ü+ ü ü ü+
How Do We Evaluate Ag.com Companies? • Value created by Ag.com ® Revenues to Ag.com ® Earnings ® Success • Websites increasing efficiencies in value chain are interesting Solution: Inefficiencies in the Ag value chain: Rationalize distribution system, eliminate inefficiencies Automate transactions and customer service, add self-service functionality Virtual marketplace Automate and web-enable order tracking Immediate knowledge of demand enables faster shifting of inventory Build markets of scale online Multiple-tiered distribution adds complexity Fragmented buyers are costly to sell to and service Regional distributors cannot sell outside their geography Difficult and costly to track orders Excessive returns and unused inventory in channel Illiquid markets and price translucency create inefficient spot markets for commodities
Near-Term Opportunity Size of Gross Margin Opportunity Size of Opportunity ($Bn) Inputs Y Y Y Y Y Y large medium large small large large 6-7 25 9-10 11 6 15 Seed Feed AgChem Fertilizer Vet Supplies Equipment Agriculture Opportunities • Large opportunities exist on the Input side: • Even larger opportunities exist on the Output side: • Produce • Livestock • Grains • Fiber • Meat • Crops
Keys to a successful Ag.com • Management team with drive, vision and ability to execute • Focused on measurable efficiency improvements • Emphasis on fulfillment, logistics and back office support • Gross margin opportunity critical to financial viability of company • Selling products that can easily be purchased online • Focus on driving transactions, not just community or content
How Will the Internet Change Agriculture? Wholesaler Sells to Retailer Buys Market, Sell Ag Input Producers Service Buys Internet Internet Retailer Market Info Buys Channel Sale Inputs Sell Drive sales Outputs Farmer Distributors • All processes, from transfer of input producer’s inventory to the eventual sale of product to a retailer, are integrated with Web sites or a Web site that creates streamlined processes and efficient markets, tracks product information, hosts farm management software and serves as the information system for the agriculture industry.
How Will the Internet Change Agriculture? Predictions/Possibilities • Farmers manage all aspects of business using hosted applications on a website • Farmers buy (and return) agricultural inputs directly via the internet; including financing and shipping • Inputs manufacturers track sales real time, down to the county level, hold 50% of their current inventory level • GMO-related outputs tracked “from dirt to dinner plate” via smart chips embedded in livestock and Web-based database • Farmers educate themselves on new products via on-line tutorials, online chats with experts. For more assistance, they contract with service providers at an on-line marketplace • Farmers can get a single bill for all of their inputs and services, with online financing options available
B2B Exchanges Evolve to Collaboration Hubs • It’s not just buying and selling over the Web • Collaboration implies a more expansive concept to include many business processes • Project management, replenishment, knowledge management, forecasting, planning, analytics • Big B2B exchanges will be Integration and Hosting Platforms instead of just trading exchanges