Monte talks to Deven Parekh

[Commercials]

Monte: Hello, everyone. It's Monte Cahn, your host. Welcome to Domain Masters. We are or I am on a whirlwind tour; been to several conferences over the last couple weeks and going to recap some of those for you. I have a really special guest tonight, Deven Parekh from Insight Venture Capitals Partners located in New York City and I thought it was important given some of the domain conferences that are coming up, especially the T.R.A.F.F.I.C. Silicon Valley show, where we're going to be talking to a lot of the bankers and the VC community about domain names and how they feel about it, having one of the key venture partners in key companies that invest in companies with domain names or have a domain-related strategy and Deven's been with the firm for quite some time and he has his own portfolio that he's been involved with evaluating includes such companies as Canoodle, Vendare (which is part of New.net or New.net is owned by Vendare), NetShops and many others that have literally hundreds of thousands of domain names. So, it'd be nice to get his perspective on where he sees the industry, what attracts companies to his firm and why he's attracted to the domain name business as well. And, so we'll spend some time with him as well. And just over the last couple weeks, the last week, I've been at Internext and CES and most recently the Affiliate Summit and there's a lot of activity with domain names going on at all three of those conferences as well. So we'll talk about that.

I'm going to break for a couple commercials. We'll be right back with Deven from Insight Venture Partners.

[Commercials]

Monte: Hello, everyone, welcome back to Domain Masters. As I mentioned, I have, I'm fortunate to have one of the general partners from one of the fastest growing venture capital firms in our space, Deven Parekh, on the phone and we're going to talk a little bit about his company, where they see the domain name, why they're attracted to domain name companies and domain names in general and get a little bit of an insight from him. Deven, you on the show?

Deven: I am. Hi, Monte, how are you?

Monte: Great, great. Thanks for taking the time to be with us tonight.

Deven: Thank you for having me.

Monte: I thought it was a really good idea to have someone like you on. We're about to roll into a couple key domain conferences and some other conferences but specifically T.R.A.F.F.I.C. Silicon Valley is a conference that's going to be focused around more of the VC and banking aspect of domain names and since you are involved with one of the fastest grown venture capital firms that really has a good insight on the domain name industry, I thought it would be a good idea to have you onboard. Why don't you give us a little bit of insight [laughs] – no pun intended - . . .

Deven: No pun intended.

Monte: . . . a little bit of insight about your particular business, your firm and how you got involved in this particular segment of the business.

Deven: Sure. Insight Venture Partners is a venture capital/growth equity firm that's based in New York. We have about $2 billion of capital under management. We focus on . . . the areas that we focus our investments in are enterprise software, technology and able services and most recently and probably our biggest focus has been over the last couple of years has been the Internet vector. And we, back in '99 and 2000, pretty much stayed away from the Internet. What we fundamentally found were business models that obviously were not profitable and the reason they weren't profitable is because customer acquisition costs was way too high. So people were acquiring customers online for $100 or $200 and selling them things for $5 or $10 or $15 and obviously, it's hard to make that up on volume.

Monte: Right.

Deven: So, we fundamentally stayed away from the Internet and then probably in 2002, we said lets take a fresh look at the Internet. But rather than starting by looking at e-commerce companies and content businesses, we said, why don't we look at the businesses that are helping get consumers into the online channel. Let's start with the Internet marketing company. Obviously, at the time, Google wasn't public but there was a fair amount of buzz that said this was a business model, a compelling one, that a lot of companies were using effectively. And so we started by looking at the online marketing segment and said, let's see whether or not we can actually effectively use online advertising as a way to get consumers online. And if you can, and if you can get people on the Internet, in an ROI positive way, then a lot of other business models make sense. Content makes sense. E-commerce makes sense. And other Internet-based services make. And we came to the conclusion that . . . we then talked to about over 600 companies in the Internet marketing space and ended up investing about $150 million across eight companies, that cover a broad array of Internet marketing services and came away with a strong conviction that in fact it is a powerful way and a very cost effective way to get consumers online and that actually works. So we then broadened our purview into looking also at e-commerce and content, two other categories that we've looked at very actively. As part of all that work, you know, one of the conclusions that we came to is that getting traffic is what's important. And it started by people saying, that's easy, I'll use Google. Or I'll use Overture. Or I'll use Canoodle. Or I'll use one of the other companies that are out there. And what's happened over time, obviously, everybody's figured that out and the cost of doing that continues to go up. If you're an e-commerce company, you're a content company and you want to drive traffic, you can do it, but year-to-year, the cost of doing that thing has become a lot higher.

Monte: Right.

Deven: And so what people are trying to figure out is, how do I get that traffic at the lowest possible cost, and I think there's two approaches that can be taken on that, and coming back to the domain contents here; one is obviously I spend my time trying to get better organic search, not paid search but organic search and drive traffic to my site that way; the other is to have the right domain, so that it actually gets a significant amount of type-in traffic. And so, I think that how we originally got to the domain market is we saw that early that if you had the right domain, not only would it help your organic, because the right top-level domain helps your organic search but you could also get significantly more type-in traffic, which drives your marketing costs significantly and can become a true competitor's advantage.

Monte: Right, right. So, so, are you a strong believer then in direct navigation as well for an overall traffic strategy to drive business to, you know, other businesses in general? I assume anyone . . . you're a big believer that anyone should go out and register different variations of their domains names and, for the obvious reasons, to direct traffic to their website but even to the point of forming their own online ad-networks through domain direct-navigation.

Deven: Absolutely. And I think that companies that don't do it, end up . . . what's going to happen is speculators are going to do it for them and the competitive disadvantage they'll be in is they'll still be dependent on somebody else for that traffic. So, competitively, if you want to have true long term defensible traffic, you want to do it yourself. You're the true owner of your own destiny and that you control your own traffic. Because if you don't and you're a category or vertical market that monetizes reasonably well, a speculator will do it and they'll drive traffic to your site but at the end of the day they control that traffic. And if somebody else will pay them more for that traffic, you won't own it anymore.

Monte: Yes, that's true. I definitely agree with that. And some of your companies . . . now you've made some serious investments in some of the companies that are doing this very thing, so name a couple of the key companies that people might know in the industry that have taken a strategy around domain names and made it very successful and why . . . what have they been doing differently from each other that has been successful for them? So, for example . . .

Deven: Ah . . . oh, I'm sorry . . .

Monte: No, no, I'm just saying for example, you have investments in Vendare, who has a very large portfolio of domain names, and you have a company called NetShops, which has a large portfolio but uses the domain names for different things.

Deven: Yes. So, Vendare's got a very large portfolio that numbers in the hundreds of thousands and they're approach to it, as distinct from NetShops which I'll come to in a second, is to take that true direct navigation approach, which is to say that there are plenty of categories out there where you can own domain that's not owned by who should own it, which is whoever it is that wants that traffic, that you can monetize extremely well and in fact you can arbitrize it. And really, fundamentally, when you think about it, it's a real estate play.

Monte: Right.

Deven: And you value it like you value real estate. It's . . . there's an upfront cost, there's an ongoing cost, there's a revenue stream and like you talk about real estate in the context of a cap rate, I think that within two years, people will be talking about domains in the context of a cap rate, 'cause it in effect the cash flow emulates real estate very closely.

Monte: Yes. Yeah, many people, many experts in the industry are starting to say if you look at the history of real estate and the appreciation trends of real estate, you will be able to look and predict what's going to happen with the domain name market over time as well.

Deven: Right. And just like with real estate, there's oceanfront real estate (cars.com), and there's, you know, inner-city real estate, which might be doyouwantasmallcar.com.

Monte: Right.

Deven: And they're going to get valued very differently because the amount of traffic's going to be very different. But, [inaudible]

Monte: And then there's [inaudible] . . .

Deven: [inaudible] extremely relevant.

Monte: And then there's real estate that's even west of that or even swampland today that could be the development diamonds in the rough for tomorrow.

Deven: And I totally agree with that. I think that the approach that Vendare has taken is go after categories that are monetizable, where people want that traffic, own the domains in that traffic and then optimize those landing pages, similar to say, what MarchX might do, optimize those landing pages and drive that traffic to good, high quality relevant sources but still fundamentally the attitude that you need to take and at the end of the day leads to the best monetization is relevancy. The more relevancy you put on that landing page, the better it is for a consumer who might have gotten there accidentally. And the more value there is for the consumer, the higher your click-through rate will. The better it is for the consumer, the better it'll be for you because the conversion rate will be higher.

Monte: Right, right. So, for those of you who don't know Vendare or don't know it by that name, Vendare acquired New.net. When was that acquisition?

Deven: That acquisition was in 2000, at the end of 2004.

Monte: Yeah, at the end of 2004. These are two IdeaLab-based businesses, right?

Deven: Yes.

Monte: And you guys have a fairly . . . you guys are, like, the second leading investor into that organization, correct?

Deven: That's correct.

Monte: Behind IdeaLab.

Deven: Yes. That's correct. NetShops takes a very different approach, which is an e-commerce approach. NetShops is a e-commerce company which has a common back-end fulfillment, common management, and common sales and marketing infrastructure, but they operate a hundred stores, online stores. And their portfolio, domain portfolio acquisition strategy is much more around making sure they own high quality domains in the categories that they're currently merchandising, as well as categories that they might want to merchandise in the future, and then monetizing those through commerce. And so theirs is a more so-called direct approach. They're taking the approach, I want to make sure that I own . . . I want to control my destiny and my traffic. I don't want to get to the point where either a competitor or a speculator is in effect the owner of my traffic.

Monte: Right. Right. And they have some pretty key brands that do very well on the web, I guess. They drive a lot of revenue to their sites through that direct navigation and those online stores sell anything from hammocks to furniture and what are some of the items they sell through the use of those domain names?

Deven: Hammocks, chess sets . . . pretty much any category. Outdoor furniture, patio umbrellas. But they all have their own sites. They are really merchandized to be specialists in that category. There's a third approach, which is we talked about, you know, monetizing, kind of, other peoples . . . monetizing traffic that other people want. There's own-your-own-traffic through name . . .so if you're merchandizing patio umbrellas you want to own patioumbellas.com. There's third approach where you invest in a company called New Egg, which is a mela-euphonics category, which is not a name that anybody but they 70% of their traffic through type-ins.

Monte: Oh, really.

Deven: Now, that's very, very powerful. They've done it differently. They'd invest it in building . . . they bought a domain that they named but then they built a brand around that domain. That domain now has huge value because it gets huge traffic. So there's three approaches. There's, you know, you can own domains and send traffic to other people; buy domains that are relevant to your business to create long-term defensibility in your business model; the third, and the hardest, is take your existing domain, whatever it is, and build enough of a brand around it that people come to it naturally.

Monte: Right. Right. And now, if you're in the domain name business and you're a player like that, what are some of the key things from an investment standpoint? Let's move the business attractiveness around a little bit and give the listening audience a little bit of an idea of what you look for as a general partner for your company that attracts you to certain firms now, whether they have domain names or not but what attracts a company like yours to one of these online companies that are up and coming? What do you look for?

Deven: You know, the thing that we look for the most today, and I think that's changed some over time, but I think the thing that we look for the most today is, outside of the motherhood and apple pie, right, you want good management teams, you want good markets, you know, all of your listeners have heard that 50 times. But I think that one thing that we really do focus on in online businesses – and that comes back to the domains – is defensibility and trust. Because a lot of companies, their Achilles tendon is their dependency on other people for traffic is so high that if that market changes or the underlying economics of their market changes (put it another way, keyword prices double), uhm, their whole business model doesn't work.

Monte: Right.

Deven: And, so, one of the areas I really focus on a lot of time on right now is really making sure that the traffic that a company has for their online business, whether they be e-commerce, whether they be a content company or whether they be an Internet service, that the traffic is defensible. And domains is a part of that strategy. It's not the only strategy but it's a part of that strategy. And, so, Insight in particular, we're an expansion stage investor, so we're looking for companies that at least have $5 million of revenue, have growth rates of 50% of higher and typically are break-even to profitable. That's what we look for. And then what we want to do is provide them the capital, sometimes for growing the business or if the company's very profitable (as many of these properties are), providing them liquidity to, for existing shareholders, so they can diversify their net worth and put . . . take the business to the next level.

Monte: Right, right. And something else that you do unique is that you have a pretty good core base of consultants that work within your business that you outsource out to the companies that you have in your investment portfolio.

Deven: Correct. [Inaudible]

Monte: I think that's a really good approach because a lot of investment firms . . .

Deven: [inaudible] who work on these investment portfolios on everything from . . . it can be anything from marketing, product marketing, market positioning, product positioning. They're really getting in there . . . they spend only all their time across software Internet businesses, so their expertise in those areas are very deep. They can really go in and have a big impact on these companies.

Monte: Right, right. Now, if someone wants to . . . and maybe this isn't for your particular company but maybe you can give some of the basic, like, three or four steps one would go to . . . one would go through if they wanted to raise capital in general in the marketplace. Since you've been doing this for a long time, you can probably help. Let's part of the listening audience has a great idea around their domain name or around their domain name portfolio; what are some of the key things that they can pick up on tonight's show that would help them get a structure around getting the idea on paper, getting something in place, showing that the models generating revenue and profit or has the potential to do so to make it attractive for a VC or a potential investor.

Deven: The first thing is, you know, uhm, you know, have, you know . . . the first one I'm going to say is really motherhood and apple pie, but its amazing how many people don't do it, which is have that shorter pitch where you can lucidly explain what the underlying rationale is, why you think it differentiated and why you think it will be valuable, but that you can give people 5 minutes. Not that I or somebody else will only give you 5 minutes but you need to grab people's attention quickly. And then you can give them all the defense as to why it makes sense. To grab people's interest quickly. And it's amazing to me how many people will spend a 1 hour meeting and I don't get to the punch line until a minute fifty-five and I'm looking at my watch going to my next meeting.

Monte: Right, right. Productivity is important.

Deven: Grab people early, get their attention, explain whey they're . . . why are they there, why is this compelling and why you think this is a great investment opportunity. You've got plenty of time to back it all up. Get there first. Second, you don't need 50 pages. You need three or five compelling pages of materials on why the underlying idea makes sense. Third, be realistic in your financial projections. Everybody comes in and says, oh, I did not revenue last year, I'm going to do 10 this year, I'm going to do 70 this year. And I think they do that because they think that's what they need to impress the VC and get them excited. The reality is people look at that and say, it's got no credibility.

Monte: Right, right.

Deven: Create a financial plan that's got credibility, that's believable. You're much better off exceeding a plan than putting a plan on the table that has no credibility that you'll probably never make, but you'll lose credibility. And, again, these seem, like, very basic, but you'd be surprised how people don't follow the basic blocking and tackling move. And then fourth, I'm like, you know, inside [inaudible] approach because our approach is we've got ten or eleven people full time that just call companies and so we're proactively contacting people. That's not the approach most VCs take. But what I would say is that the best way . . . you can get to a VC without knowing them but the best way to get to a VC is still through a reference. Meaning, if you know somebody who's worked with the firm that you're trying talk to, even if its relatively casually, an email from that person is a much more highly impactful than sending a hundred emails. Or, as an alternative, if you really want to go meet with XYZ Firm, then the thing to do is don't send an email to 50 VCs; send an email to 50 VCs – if you want to do that, you need to personalize each note. You need to send a note as to why you think that firm is a good fit for this idea.

Monte: Right.

Deven: Look at their portfolio, explain why your idea might fit with other things that they're doing, why it fits the themes that they're doing. Its amazing to me how many times I'll get an email from somebody who's starting up a new restaurant chain; to me, it looks like all they done is gotten some list of 400 people to email it to. And they've done no work to throw out that actually makes no sense for Insight to be looking at that.

Monte: Right.

Deven: So, I think it's the basic blocking and tackling, which people say, oh, yeah, of course. You'd be . . . maybe 10% of the people just follow what I just said.

Monte: Right. And those are some basic points. And then, and then, I think another point is once you are part of a having an investment from a venture capital firm, it might be in your best interest to know when to step away or let another set of managers or other people come in and really take the business to the next level, too.

Deven: Well, I think that is really important to set the expectations with the VC early; meaning, talk about that during diligence process or while you're thinking about getting to a letter of intent. Ask the VC, what do you think; do you think, do you see me running this business; do you think we need to bring somebody else in? Be open with them. If you think that you need to bring somebody in, tell them that. VC's are not scared off by that. They appreciate that. They appreciate the honesty with entrepreneurs who brought a business to a certain stage and need somebody's help to take it to the next stage. They're more likely to be impressed by that than the person who feels they can take the business to a billion dollars of revenues.

Monte: Right. Now, who are some of the firms that are below your threshold of a business that generates $5 million but maybe one that's more of a start up place? What are some of the more recognized firms that one might want to contact to pitch their initial plan?

Deven: You mean early stage?

Monte: Yeah, the early stage guys.

Deven: Well, you know, the early stage firms that are well known, you know, that do obviously e-commerce (now whether or not they do domain-specific deals, I don't know the answer to), you know, Highland Capital a domain deal, but they're like Insight, they're late stage firm. You know, the well known early stage firms that focus on the Internet are probably Piner Perkins, Benchmark, and Sequoia. I mean, those are the three firms that are . . . and Draper . . . Draper Fisher Jorgensen. Probably the four firms that have done the most early stage kind of Internet investing. None of them that I've seen have done anything kind of domain-specific. Not because they might not – I don't know for a fact that they're not interested in it; I just, it's a fact that I don't think they have.

Monte: Right, right.

Deven: The domain area we might consider going and looking at something . . . we probably won't look at a start-up but we would look at things that are below $5 million in revenues for one reason: the asset value, the fundamental asset value, that can be in excess of the revenue.

Monte: Right. The value of the domain names themselves.

Deven: Yeah, there's a real estate value there. So, you know, we would probably look at something that's less than $5 million in revenue that's in the domain space just because of the fundamental asset value there.

Monte: Right. What is your . . . now you mentioned the Highland deal because of the . . . you mentioned Highland because they've made an investment in BuyDomains and we talked a little bit about MarchX. Give me your perspective on both of those deals, 'cause I'm sure you know some of the details, but give me your perspective on first the MarchX deal, the acquisition of, you know, 80,000+ domain names and how that went down, where you see the advantages and the disadvantages of that deal and then let's compare it to the Highland acquisition of BuyDomain.

Deven: Well, you know, I don't . . . I know the company, I know BuyDomains the company. I don't really know what Highland's strategy is and that's not meant to say that they don't have a strategy; I just don't . . . I'm not aware of [inaudible] the CO that they brought in who's executing our strategy. I don't know what it is, so it's not . . . I'm probably not the best person to opine on their strategy. I think that . . .

Monte: Okay.

Deven: . . . they have a big domain portfolio and then they have a big, call it domain services type business, not dissimilar to Moniker.

Monte: Right, right.

Deven: And, you know, I think that historically their revenues came more from the sale . . . more from the domain services and over time I think they're figuring out that monetizing the domain portfolio makes more sense and, you know, they're probably benefiting from some of the same general trends, Monte, that probably your business is benefiting from . . .

Monte: Right, right.

Deven: . . . which is stronger growth in sales, both as an agent as well as in their case the principal. In the case of MarchX, I thought that was a very smart, strategic move on MarchX's part, because the one thing that MarchX didn't have, to my earlier point, was proprietary traffic.

Monte: Yeah.

Deven: And, Google has it, Overture has it; they didn't have it. And this was a very smart way to get significant amount of propriety traffic who's underlying revenue is probably going to grow as PPC grew, but beyond that had fundamental real estate value. So I thought that from a MarchX standpoint, that was a smart, strategic deal. I think they paid a full multiple for it but their stock at the time was valued pretty highly. And so, given where their stock was trading, I thought it was a smart deal for them.

Monte: Right, right. Now looking out into the future a little, where do you see this market going in the next one and five years or so, you know, one to five years in terms of, you know . . . what companies are doing, the roll up of the industry a little bit, the consolidation of some of these companies – your organizations outlook on the domain name business in general. Give us a little bit of insight on that [laughs].

Deven: . . . I think its very positive. I think this is real estate but a long time ago. And people are just figuring it out, right? We haven't figured out what is oceanfront and what's on Central Park West and where Miami is. I think there's general categories where people think, these are hot so we should buy these, but I don't think the true underlying value of these things are known yet. So, you know, when in 1971 when New York City had a fiscal crisis, you could buy a 10 to 14 room apartment on Central Park West for $250,000 and they were having a hard time getting it. Those apartments are worth $30 million right now.

Monte: Right, right.

Deven: And, so, I think that one thing is probably the case is that there'll always be exceptions, there will always be someone who overpaid for a domain just like there's always going to be somebody who overpaid for real estate. But, across the industry, I think generally speaking, what you're going to find is that people are going to feel like they do about real estate. Everybody I know, when they bought their house or their apartment – myself included – thought, boy, I topped at the market, and I'm probably going to lose money. And, literally, everybody I know is also up on their apartment.

Monte: Yeah. Yeah, definitely.

Deven: And that doesn't mean we all won't have a bump in the road along the way. But fundamentally, the line pointed up. And I think there's going to things that get bought today for prices that feel high today that are going to seem low in 10 years.

Monte: Right, right.

Deven: So, I'm very bullish on the space; you know, I'm bullish on it. It's no different than I would have been demographically bullish on second home real estate 20 years ago. Just demographically it made sense.

Monte: Right, right.

Deven: So, I'm excited. I'm positive on it. I think I've got plenty of portfolio companies that are benefiting from the trends. You know, I probably wish I own more personally [laughs], more domains personally. But I think that the trends are good and I think that its, uhm, you know, its an exciting business and I think, like other businesses, its going to go from being a speculators business (which is what it has been a lot of) to just being part of the strategy that most businesses have to conduct their business going forward.

Monte: Right, right. Well, Deven, lets hold on for a couple minutes. I'd like to visit some of the risks on the other side of what people should be looking out for and I'd like to get your take on what happened in 1999 and 2000 with the dot com boom and bust and do we have a chance, from your perspective, what are some of the things that eliminate that from happening again in the market from your perspective as a an investor in companies that are online and successful these.

Deven: Okay.

Monte: So, if you can just bear with us for just 2 minutes, we're going to break for another commercial and I'll be right back on with you.

Deven: Okay.

Monte: Okay. Stay tuned.

[Commercials]

Monte: Hello, everyone, welcome back to Domain Masters. I'm Monte Cahn and welcome back to my special guest, Deven Parekh from Insight Venture Partners. Deven, we were just talking about, you know, some of the positive things about the domain name market, and why you're bullish on it. What are some of the risk factors that everyone should be looking out for? Is there a possibility of dot com bust again? Or what's your firm's feeling about what's different today than was happening in 1999-2000?

Deven: Well, there's always a risk of a bubble. But I do think that there are some changes; there are some fundamental differences. If you look at '99 and 2000 and you look at e-commerce or you look at content, I think what you saw was, and again let's take content as an example, primarily your advertiser base was other venture-funded companies that were losing a lot of money.

Monte: Right.

Deven: If you looked at e-commerce, it was fundamentally companies that had negative gross margins, meaning they were not even making on . . . forget sales marketing; they weren't making money on product. They were just . . . they were . . . the view was just get to a lot of volume and you figure it out later. You're not seeing those type of businesses today. So you don't have business models that are fundamentally broken – of your going to have companies like that – but fundamentally across the Universe, there's very few of them these days. And so the underlying health of the business models today is getting a lot better than it was in '99 and 2000. So I think that's good. But I think that there are segments of the market that we have a risk in having a valuation bubble on. You know, absolutely.

Monte: For example, which ones?

Deven: Well, I mean, I think content is an example. I mean I think that's a category that we spent a lot of time looking at and I've looked at it for years and you know we've gotten more aggressive about looking at some stuff this year but I think what everybody in the space is doing is they're looking at some combination of MySpace, IGN and MarketWatch and saying, well, those companies sold for 18 to 20 times EBADA; if I'm a $2 million revenue company with $1 million EBADA; to employees, I'm worth $20 million or $30 million.

Monte: Right, right. They're using those as an example to rate they're own valuations.

Deven: Right. So I think that is there valuation inflation in some categories that is not sustainable and content's a good example of that. Great category, great long term prospects, great secular trends; pricing doesn't make sense. There's benefits to scale, meaning if you have a $50 million revenue company, you do get valued higher than if you're a $2 million revenue company. And so I think that there's more in some sub-sectors; there's some valuation bubble. I don't see the problem that I saw in '99 and 2000 where you just fundamentally 50 – 60% of the businesses that you saw didn't have a business model that you could see making money in the foreseeable future.

Monte: Right, right. And I guess a lot of the venture firms, or a lot of the companies, have learned a big hard lesson from the past is that they're not going to see investment money from a venture capital firm . . .

Deven: People don't want to fund losses in perpetuity anymore.

Monte: Right, right. Back then it was like, catch the wave, and you know, invest first and be the first one in and then worry about the business model later; where now, business acumen and a responsible business model is more important to drive . . . has the best chance of succeeding.

Deven: It actually matters [laughs] . . .

Monte: [laughs] yeah, it actually matters now.

Deven: So, maybe that shouldn't be . . . maybe that shouldn't be such a surprise, but fundamentally it is. I mean, that's just not the way businesses were being run.

Monte: Right.

Deven: And, you know, I think now, that is the way businesses are more likely to be run. So that's a huge positive and I think that's a big difference. So, the valuation bubble I don't see as much as the business model bubble.

Monte: Right. I think some other things that have contributed to the success of what's happening today versus yesterday, which are very common known things but people are more comfortable doing secure transactions online today, they're more comfortable putting their credit card down today, the peripheral costs are less expensive, bandwidth is less expensive. You can get transactions done quicker, get satisfaction from being online versus the past and I see that just continuing to improve and you're going to be able to do all kinds of stuff on your cell phones and, you know, PDAs, and all kinds of stuff that we're just dreaming about today, but I was just at this CES show in Las Vegas and I was just blown away at how much more advanced the world is compared to the United States in some of these devices and it's just going to drive more transactions . . .

Deven: Yeah, we lag in broadband penetration to Asia significantly and a lot of these new technologies emerged in other parts of the world way before . . . mobiles' the great example where the U.S. is lagging. I mean, Europe's been there for years. So, yeah, we'll get there, you know, sometimes we're slow but we get there and so I don't see some of the same fundamental problems that I saw in '99 and 2000 today as I did then. So that to me is a pretty big difference.

Monte: Well, what's your take personally and as a company on Google? Is it over? Is Google overvalued or is it undervalue?

Deven: You know, I'm not a stock analyst so I don't know that I have a strong personal view on . . .

Monte: Well, would you buy their stock today?

Deven: I don't own it. But I haven't owned. And obviously, I should have owned it. So, someone should have owned it in '85 when they went public. I think that one of the things that the market sometimes doesn't value appropriately or doesn't value, doesn't . . . value is they don't adjust for growth far in excess of the market and they don't necessarily adjust for business models which are fundamentally better. And its hard to adjust for that because there are not a lot of those business models. Google was one of those people who's got a business model that's fundamentally better and the thing about it is the free cash flow characteristics of that business are unbelievable. Now, having said all that, you know, it's now a $135 billion market value.

Monte: That's huge [laughs].

Deven: It's a $135 billion market value.

Monte: Yeah, its so huge, you know it's like . . .

Deven: Bigger than Time Warner, bigger than any media company out there. In fact, its bigger than, I think, the top three media companies if you combine them, I don't think it hits Google.

Monte: Right.

Deven: So, tremendous, tremendous market cap. I think their innovation has been unbelievable. They've done a great job executing. The question is A. is the market in Search going to grow at the same rate that it has been – I don't think so. I think the growth rates going to slow down. And then 2.can they innovate fast enough to diversify into faster growing areas. They've certainly put some very interesting seeds in a lot of markets. So . . .

Monte: What's . . . what's your opinion . . .

Deven: Here's the way I would say it. I'm probably not a buyer today but I'm also not so confident they won't do it to out-short the stock.

Monte: Right, right.

Deven: I wouldn't short it.

Monte: What's your feeling about their purchase of underground fiber and the conception that Google might own pieces or parts of the infrastructure part of the Internet?

Deven: You know, I don't necessarily know that the goal there – and I don't know, so let me start, I don't have any insider information, so what I'm stating here is my own personal opinion – the . . . I don't think they're goal is to own a piece of the Internet backbone. I think their goal is simple. I think that they will . . . I think that you'll have WIFI access everywhere within the course of the next couple of years and it might be free. And, I think Google's the likely supplier of it. I mean they're testing that in San Francisco and they're going to test in other markets and I think if it's a decent test, they'll roll it out. And they will monetize that through advertising.

Monte: Right. So if more people have online access, they're more like to search on Google . . .

Deven: And if you want free access your home page has got to be Google. I mean, there's ways where you have to take the Google toolbar or there's ways to basically monetize that access and so I think that it's a . . . I think what they're trying to do is make sure that Google is integrated into . . . already, it's a part of everybody's . . . almost everybody's online life. Now they're just saying whether you're mobile, whether you're traveling, whether you're at home . . . no matter where you're are, we want Google to be the index you use to deal with the Internet.

Monte: Right.

Deven: The interface you use to deal with the Internet. And to that they've largely succeeded, they haven't succeeded in the other channels yet but don't underestimate them – I wouldn't underestimate them. So I think they're doing a fantastic job. I think the one risk they have is that I think that a lot of publishers are getting nervous about them. They're starting to view them as a competitor . . .

Monte: Because they're taking over, literally taking over their own advertising networks.

Deven: Right. And so the publishers are getting nervous and that's creating opportunities for others but, you know, I certainly wouldn't say that they've got huge weaknesses in their model.

Monte: Right, right. And where, just briefly, where do you feel that Yahoo! and Microsoft fit into this overall search picture or how do you think they're diversifying enough to make themselves different.

Deven: Well, I think Yahoo!'s still definitely a relevant player here. I mean, they've got a tremendous amount of traffic. They've got a much more diversified set of revenues and I really like Yahoo! and I think they've done a . . . I think Terry Semel's done a fantastic job at Yahoo! really leveraging an asset into multiple categories extraordinarily well. I think that on the margin Google's going to continue to take share. I talked to the company that I'm invested in as well as other companies; certainly Google's taking more share of their dollar every day. So, I think Google, on a relative market share basis, I think Google will take more share but I also think that Yahoo! has got a lot of other things beyond search to grow.

Monte: Yeah.

Deven: And so I feel good about Yahoo! Microsoft, you know, I feel that the train's left the station on search. They weren't there when the train left.

Monte: Right.

Deven: So I think its going to be a challenge for them to be a real player on search. They spent a lot of money on their search product; its still really not as good as Google and Yahoo! So I think they're going to have a challenge but don't underestimate one thing – they own a lot of desktops.

Monte: Yes, they do.

Deven: And there's a lot of ways to monetize those desktops and nobody's in a better position to do that than Microsoft. So I think they have a shot but their shot is not necessarily going to be because they have a better product; they just might have better dis . . . through desktop ownership they just might actually have better distribution.

Monte: Right.

Deven: And that's going to be their card. Whether they play that card well or not, I don't know. But I don't view them as a strong player, you know, in search. There's plenty of other things that they are strong in.

Monte: Yup.

Deven: Search is probably not the one I'd pick though.

Monte: Hey, what's your . . . just to get your thoughts around some of the other segments that possibly you guys aren't invested in today that you're moving towards. Are you looking at a mobile investment strategy?

Deven: We actually are investors. I mean, we . . . we were investors in a company called Airborne Entertainment which since has been sold which was basically all mobile content. We're investors in a company called Infusio which is based in Europe but has got . . . has the Microsoft Halo game for online handsets. Its got the Neopets for online handsets for both North America and Europe. So we've been active investors in mobile and are continuing to look at more. So, that's a category that we like, have invested in, and we'll probably continue to invest in.

Monte: And what other non-obvious segments are you looking at these days, just because things are different today than they were a couple years ago?

Deven: You know, that is . . . I would say right now we're . . . what we're basically trying to do is say . . . what we're trying to basically say is that what are the markets . . if you look at Internet services, what other services that people are currently doing offline that will . . .

Monte: That will eventually be moving online.

Deven: That will be eventually moving online that it'll make it easier, better and cheaper for consumers to access those services at more touch points.

Monte: Right, right.

Deven: That's a high-level theme. But that's a high level theme that we're really digging into across multiple verticals. We just invested in a company called VidX, which is one of the standards for video distribution and you know, it was probably imbedded in 70% . . . their software is probably imbedded in 70% of the DVD players sold in European countries. And so we think video online is a huge category and . . . so there's a lot of interesting markets that offline-online shift is impacting.

Monte: Well, that's great, that's great. Well, I couldn't disagree with you, that's for sure. Well, Devon, I really appreciate your time and you've definitely given us some insight on your company and some of the areas of opportunity and also it was also nice to hear some of the key points that one can look to do if they're interested in having a VC firm come and look towards their business model so that they can do things on the Web. Any last thoughts or anything before we break away, on just general advise for those that want to start up a business and want to be successful? I know that you touch other areas, like we talked a little about search engine optimization and you guys are mixed in with that with some of your holdings as well. Anything else you can give an insiders view on?

Deven: No. I think we covered it earlier so.

Monte: Okay, great, great. Well, I really appreciate your time and I'd love to have you back on the show at some point in the future and I really appreciate it.

Deven: Okay, thanks a lot Monte. Take care. Bye bye.

Monte: Okay, have a nice evening. Okay, folks. Well, my special thanks to Deven Parekh from Insight Capital Partners and we will wind up the show. Next week we'll have another live show. I believe I will be back in town finally. I've been on a whirlwind tour for about 10 days. So we'll be back on the show with another live version of Domain Masters and like I said in the show right before New Year, I think what we're going to do is a little anniversary edition coming up soon since we finished our first year of successful broadcasts, and kind of recap the year and maybe have some of the guests to give their view of what's going on in our industry and how to be more successful going forward. So with that, I will let everyone go. Have a great day and be the master of your domain.

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