The Top of the Public Internet Pyramid

There is a very interesting article on Venturebeat by Glenn Solomon with a great graphic produced by Cowen and Company that separates public Internet companies by growth and profitability (see below).

Essentially it shows that there are very few companies growing revenue at over 30% per year that also have greater than 30% EBITDA margins and the 6 companies that fit in this category are all outside the US (Russia, China and Latin America). One of these companies, Yandex, was a company we invested in 11 years ago when the company raised its Series A round. Today it is the largest search engine in Russia and completed its IPO in June at an $8 billion valuation.

My partners’ investment thesis when this investment was made in 2000 was very straightforward: the Russian Internet market then looked like the US Internet market in 1993. It had 2% Internet penetration and this access rate was growing at 100% per year. There were no leaders in search, ecommerce or anything else; remember, it was like the US in 1993 (ie: Netscape had not even gone public). We all know what happened in the US from 1993 to 2000: Netscape, Yahoo, ebay, Amazon, the rise of Google, and so on.

So, my partners sought out Yandex, Ozon (leading ecommerce site) and others and backed great entrepreneurs in Series A investments based on what they thought would be massive market expansion that would emulate what had occurred in the US from 1993 to 2000 (in 2000 the US had grown to 44% Internet penetration). The results have been fantastic.

Glenn is very thoughtful in discussing the opportunity to invest outside the US in burgeoning Internet markets where the growth rates dwarf the US and the overall market opportunity in terms of end users is far greater. He sites China as a huge opportunity, which I agree with, but I would also include India in this opportunity set as well. I wrote a blog post recently analyzing the opportunity for US Internet companies to go global early in their development and India is a market where we think there is also great market dynamics. India has over 1.3 billion people, its Internet penetration looks like the US in 1995 and this rate is growing at nearly 20%.

Fundamentally, when you have a nascent market that has the potential for very rapid growth, the cost of customer acquisition will be much lower and the opportunity to establish leadership is much greater. The next ten years of Internet growth and value creation throughout the world will certainly be extraordinary, a technology wave of proportions that we literally have never seen before.

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