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

1. Internet 2.0 – Time for the VC industry to look again at the opportunities George Hadjigeorgiou Corporate Development, Yahoo!

2. 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

3. 5 long-term macro trends driving technology investment Biotechnology • Population is aging • “Time Compression” • Wireless – take it with you • Decreasing reliance on oil • Security Internet/ Connectivity Energy/ Environmental Technology IT/Software

4. Trend 1 (Users): Internet 1.0 - User growth (“breadth”) Internet 2.0 - User engagement (“depth”)

5. Global Internet Users have been growing Future usage growth will come primarily from Asian countries

6. Internet is becoming more essential across a range of demographics

7. 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

8. 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”

9. 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,

10. Trend 2 (Industry): Internet 1.0 – Boom/bust cycle Internet 2.0 – Healthy expansion/consolidation

11. 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

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Implication 2: Entrepreneurs need to think beyond the country/regional boundaries whilst supported by public policy makers to foster innovation

19. Implications for entrepreneurs and public policy makers “Extroversion” – Think regional and beyond Killer apps and technologies Tax incentives for innovation Focus on one or two “killer” technologies “World-class” talent in universities and applied research Infrastructure/ broadband

20. In summary … Internet 1.0 was all about user growth (“breadth”) – Internet 2.0 is all about user engagement (“depth”) 1 2 Internet 2.0 will be characterised by consolidation in the industry VC industry can help play an important role in building the Internet ecosystem – M&A will be an attractive exit strategy 3 Entrepreneurs need to be extrovert/ think beyond the boundaries of the country 4 5 Public Policy Makers can help to foster further innovation