The Next Tenh Years: Great Opportunities Ahead

The world is going wireless big time.

At Nexit, we have been investing in mobile and wireless technologies for the past decade. We’ve always had a global mindset and have networked eagerly and deeply with key players in the domain.

These first ten years have presented us with some unexpected challenges (e.g. the dotcom crash and the credit crunch) that have spurred us to constantly develop and fine-tune our operation.

As a result of our continued tight focus in mobile & wireless, we are currently superbly positioned (both from the portfolio and team perspective as well as visibility-wise) to take full advantage of the predicted rapid growth and development of the market in the next several years.

Bigger as in Really Big

One indicator of the size of the mobile Internet wave is the number of devices out on the market. Here we seem to be on the same curve as before: again we may exceed the number of devices of the previous wave by up to a decade.

This would mean having tens of Billions of devices out there.

In one way, this is counterintuitive as the combined world population is just under 7 Billion. On the other hand, proponents of the Internet of Things concept predict up to 100,000 Billion including all kinds of wirelessly connected devices in the not-sodistant future. Suddenly, 10+ Billion devices does not sound very outlandish at all.

In this article, we present the case for why we believe the mobile and wireless sector is now more relevant and promising than ever.

History Repeating Itself – Only Faster and Bigger

Looking back at the rough half century of computing, we can divide it into four easily distinguishable waves with the fifth wave just now entering the picture:

Every wave has lasted roughly 10 years, each has been significantly larger (both revenue and market cap wise) than the previous one, and the initial growth has been faster than in any preceding wave. All waves have also produced significant new players into the market that have generated major new wealth for their investors.

Now the fifth wave – the Mobile Internet – is upon us.

We see five key ingredients being most central to the market size:

  1. Devices – better, more usable devices are a key to the usage of the mobile Internet. And by devices, we mean more than just the phones. Even though smartphone sales alone are predicted to be more than 500 million units by 2013, there is a plethora of other devices to consider: navigators (some 200 million chipsets may be sold in 2013 for applications other than phones), ebook readers, wifi equipment, bluetooth equipment (up to 2.5 Billion chipsets to be sold in 2013), etc.
  2. Wireless access – the actual bit pipe (cellular, Wi-Fi, WiMAX etc.) offered by the operators. The fast growth of this segment is both a boon and a threat to operators: while there is a lot of money to be made, their existing monetization models and network structures are not really optimized for the explosive growth in data usage
  3. Mobile software – in just over 18 months of existence, more than two billion applications have been downloaded from the Apple App Store. While most of these applications have been free, some significant revenue is already there as about $ 1.7 Billion in revenue is expected from the App Store in 2010 (with the developers getting 70 % and Apple getting 30 %). Other application stores are still in their relative infancy compared to Apple, but especially the Android Market is showing signs of life and revenue. The distinction between applications and services will become more and more blurred and will become meaningless to the end-users. What will be significant, though, are revenue models. While charging 5 dollars for a mobile app is nice, getting perhaps 1.99 per month sounds even better.
  4. Paid mobile services (including mobile online commerce) – this really is a monster category with everything from virtual goods to digital content to retail sales. But the attributes of mobile are irresistible in this segment: mobile is omnipresent, location-aware (as well as location-independent) and it has well-established payment mechanisms. In fact, it seems likely this segment will become the second largest revenuegenerator right after data access itself (actually generating more revenue than the devices).
  5. Mobile advertising – while advertising has been one of the key monetizers of the desktop Internet, its role is expected to be a more modest one in the mobile Internet. Yet, advertising has a historical tendency to follow eyeballs and with possibly 2 Billion active users during the decade, advertising will become a major source of revenue even if the mobile advertising is still in its infancy.

There Will Be Revenue

We don’t think the mobile Internet will necessarily generate tens of times the revenues of desktop Internet. But even here, significant growth is expected: several sources predict the mobile Internet market will be at least several times the size of the desktop Internet market.

We have assembled a number of estimates from different sources for the key segments and a rough consensus range of the estimates is presented in the following table:

Low End Est. High End Est. Devices $75 B $200 B Wireless data access $300 B $500 B Mobile software $10 B $20 B Mobile advertising $15 B $50 B Paid mobile services $100 $ 400 B Grand Total $500 B $1170 B The total number, depending on the estimates we choose is from $500 Billion to nearly $1.2 Trillion.

So it really seems to be a safe assumption that big is going to be VERY big – even if we factor in a safety margin of several years and lower growth than expected.

Handsets Define Ecosystems

Even if the device revenue is only 15–20% of the expected total market, the overall landscape is easiest seen through a mobile operating system context.

Two key reasons for this include:

  1. The handset (or, to be precise, the operating system) still dictates to a large degree what services and applications are available to the user. This may change as web-based services improve and start taking over but we are not there yet for some years.
  2. There is an accelerating movement towards handset vendor driven ecosystems (Apple App Store, Google Market, Nokia Ovi, RIM App World, to name a few) from operator-driven portals. From an application or service developers perspective, it is vital to have a well-functioning channel for your products and it now seems the vendor ecosystems are the mechanism for this.

There are few candidates for shaking up this picture. One viable possibility is Facebook (with an estimated valuation over $10 billion), which is fast becoming one of the core platforms of the consumer Internet and is growing very rapidly also in the mobile space. The power of the platform is underlined by companies growing in the slipstream such as Zynga, the Facebook game developer with valuation in excess of $3 billion.

Samples of Interest Areas for Nexit

Nexit is currently studying companies that:

  1. Develop infrastructure layer technologies that can help the leading players jockey for better position. All three are very actively making acquisitions and we don’t see this trend stopping in the coming decade. Some of the areas we think are very interesting and we are actively looking at include mobile video, location-based technologies, and mobile advertising technologies.
  2. Deliver superior user experiences or content that efficiently leverages the dominant distribution channels. A company developing an application or service that can give one of the big boys a leg up in their race is well positioned to make serious money.

We believe the best companies in these categories are going to generate outstanding shareholder value and provide good exits in relatively short time frames because of the strong acquisitionmindedness of the large players.

The Nexit Perspective: Good Times and High Returns Ahead

By now, it should not come as a surprise that we are excited about the next ten years. We see clear key themes and areas of growth and believe that finding companies and technologies with significant strategic value to the leading players can be turned into very attractive investments and high returns.

For a specialized, selective boutique venture capital company like Nexit, this sort of market offers some very interesting possibilities. Relatively small funds face a more level playing field than before as the balance of the tech market wealth creation has shifted from IPOs to trade sales. Trade sales based on strategic value (as opposed to just revenue) require smaller investments, are faster, and offer better opportunities for arbitrage – and the big players are actively looking for and making acquisitions with very attractive valuations.

We are not alone in making this conclusion. In a recent study, Silicon Valley Bank found that smaller funds ($50 - 250 M) indeed perform better than larger funds. According to SVB, seven times as many small funds as large funds achieve a 3x and greater total value to paid-in capital (TVPI) ratio.

While some of our conclusions may not be rocket science as such, we believe we have some key advantages over most other players in the game: the experience, insights, and network we have cultivated in our first decade, all ready to be exploited now.

Yours truly,
The Nexit Team