The Knowledge Web: People Power – Fuel for the New Economy pot

United States Education & Training Services Knowledge Enterprises 23 May 2000 Michael T Moe, CFA Director of Global Growth Research (1) 415 676-3570 michael_moe@ml.com Henry Blodget Senior Internet Analyst, Global Coordinator (1) 212 449-0773 henry_blodget@ml.com The Knowledge Web Part 1: People Power – Fuel for the New Economy Highlights: Technology is the Driver of the New Economy and Human Capital is its Fuel The Internet’s Capability to Deliver a Total Human Capital Solution Creates a Powerful Investment Opportunity Merrill Lynch & Co Global Securities Research & Economics Group Global Fundamental Equity Research Department RC#60214529 The Knowledge Web – 23 May 2000 Knowledge Enterprises Group Michael T Moe, CFA Director of Global Growth Research (1) 415 676-3570 michael_moe@ml.com Education Services Global Internet Research Kathleen Bailey Vice President (1) 415 676-3572 kathleen_bailey@ml.com Henry Blodget Senior Internet Analyst, Global Coordinator (1) 212 449-0773 henry_blodget@ml.com Neil Godsey Assistant Vice President (1) 415 676-3574 neil_godsey@ml.com Kirsten Campbell Assistant Vice President (1) 212 449-3113 kirsten_campbell@ml.com Michael B Armstrong Industry Analyst (1) 415 676-3585 michael_armstrong@ml.com Business & Employee Services Thatcher Thompson Director (1) 212 449-8787 thatcher_thompson@ml.com Chandy Smith Assistant Vice President (1) 212 449-0841 chandy_smith@ml.com "Albert Einstein"™ Licensed by the Hebrew University of Jerusalem, Represented by the Roger Richman Agency, Inc., Beverly Hills, CA 90212 www.albert-einstein.net" The Knowledge Web – 23 May 2000 Introduction to the e-Knowledge Industry The new economy moves at a pace never seen before The new economy is a knowledge economy based on brainpower, ideas and entrepreneurism Technology is the driver of the new economy, and human capital is its fuel The knowledge economy is people-centric Our economy has evolved from manufacturing-intensive to labor-extensive Fundamental to success in the new economy is how companies obtain, train and retain knowledge workers The knowledge enterprise industry is over $2.2 trillion We expect the online component to grow from $9.4 billion to $53.3 billion by 2003, a 54% CAGR Ubiquitous PCs and high-speed bandwidth will facilitate access to knowledge anytime, anywhere The Internet democratizes knowledge, increasing access to it, lowering its cost and ultimately improving its quality We believe combining the “richness” of an offline experience and the “reach” that only the Internet provides creates a network effect that allows scale knowledge enterprises to be born Moreover, we see significant potential advantages that offline operators can achieve by leveraging their experience and brand online e-Commerce has forced all traditional businesses to compete at Internet speed In a 4% unemployment economy with 65% of all the new jobs created requiring skills, 70% of Fortune 1000 CEOs are saying that finding qualified workers is a major issue for growth “Time-tocompetency” is a bottleneck or a strategic advantage depending on how effective an organization is at finding and training knowledge workers Domestic online corporate learning is expected to grow from $1.1 billion in 1999 to $11.4 billion in 2003, a 79% CAGR, and online staffing and recruiting, critical functions of human capital management, is projected to grow from $5.8 billion in 1999 to $28 billion in 2003, a 48% CAGR The information revolution that began with the birth of the PC is really the knowledge revolution e-Commerce is to the knowledge revolution what the railroads were to the industrial revolution We think enterprises building “knowledge tracks,” or infrastructure, into the corporate market, K-12 community, and higher education spaces are poised to enjoy explosive growth Integrating quality educational content with testing/assessment and certification programs is the new education paradigm for the 21st century In the knowledge economy, assessment is the currency with which all skills are valued The four engines of the new economy – computers, telecommunications, healthcare and instrumentation – employ approximately 50 knowledge workers per 100 employees and are growing These technology-intensive industries are growing 3-6 times as fast as economy-wide job growth Career vortals, providing continuing education, employment opportunities and relevant information, will be knowledge nerve centers for vertical knowledge communities Colleges and universities are the most wired community on the Web, with over 90% of college students accessing the Internet, 52% of them daily Students spend nearly 19 hours per week on the Internet, 84% of the time pursuing academic activities College students currently spend $105 billion annually, with $1.5 billion of that online Higher ed hubs provide educators and e-commerce companies access to this very compelling demographic The Internet creates one economy and one market As large as the online higher education market is in the U.S., the global opportunity is significantly greater Unlike the U.S where post-secondary education is relatively available, access to world-class post-secondary institutions in many parts of the world is limited Currently, there are 84 million students enrolled in higher education worldwide Global demand for higher education is forecasted to reach 160 million by 2025 − if online learning captures even half of this growth, there would be 40 million students for online education We predict that in the next five years, there will be global virtual universities with potentially millions of students enrolled We project that the online higher education market will grow to $7 billion by 2003 in the U.S alone The number of K-12 schools connected to the Internet has climbed from 35% in 1994 to 96% today Today’s kids are the Internet Generation − Generation i − and are as comfortable on a computer as on a bicycle With 53 million schoolchildren, three million teachers and 23 million families, the K-12 marketplace encompasses a huge number of potential users The Internet is the world’s greatest library and gives a student in Minot the same access to knowledge as a student in Manhattan Key for improvement in learner outcome is getting parents involved − the homeschool connection − and email has already proven to be an effective communication tool between parents and teachers The Internet is all about disproportionate gains to the leaders of a category The gigantic opportunity has not been lost on investors, with over $3 billion in venture capital funds flowing into knowledge enterprises in the past fifteen months alone By focusing on knowledge enterprises that contain the P’s (People, Product, Potential and Predictability) and other key differentiating factors, notably the network effect outlined in this report, we hope to identify the Yahoo!s from the yahoos and provide outsized investment returns for what we see as an outsized opportunity The Knowledge Web – 23 May 2000 Fast Facts: The New Economy • • The pay gap separating a high school graduate from a college graduate was 50% in 1980 Today, it has reached 111% Looked at another way, a 30-year-old male with a high school diploma earns just two-thirds of what he earned 25 years ago Even so, only 21% of American adults over the age of 25 have a bachelor’s degree or better In 1980, the price-to-book ratio of the ten largest publicly traded companies in the U.S was 1.2x Today, the price-to-book is 12.1x, or ten times greater This multiple expansion correlates directly with the increased productivity of a company’s intangible assets – its human capital • On average, each employee at the leading “New Economy” companies is “worth” $38 million based on market cap-per-employee In contrast, each employee at the leading “Old Economy” companies is worth about $689,000, or less than 2% of employee value at the New Economy companies • Venture capital funding in knowledge enterprises amounted to over $3 billion since January 1999, or about triple the total invested in the previous years • • • • At the end of 1999, more than 196 million people were using the Internet worldwide The number of global Internet users is expected to more than triple to 638 million by 2004, a 27% CAGR The “free agent” mindset of today’s knowledge worker is evidenced by the fact that the average person entering the workforce today will work for between and 10 different employers versus to a decade ago Only 15,000 businesses currently recruit online, but this figure is expected to increase to 124,000 by 2003 Worldwide, the Internet economy is expected to mushroom from $361 billion in 1998 to more than $2.8 trillion in 2003 In 1999, nearly 720,000 IT positions went unfilled Today, one of every five IT jobs remains unfilled, and nearly 75% of new openings fail to receive interested and qualified candidates • Worldwide business-to-business (B2B) commerce dwarfs B2C commerce in both size and growth Total B2B Internet revenue is expected to top $2 trillion in 2004, up from $80 billion in 1999, a 91% CAGR • Firms are stepping up their e-commerce outsourcing initiatives as they move from building stand-alone sites to Internet-enabled supply chains and customer service systems The result is a rising median outsourcing budget, from $750,000 in 1999 to a projected $1.5 million in 2001 • The amount spent on online advertising is expected to increase tenfold from $3.3 billion in 1999 to $33 billion in 2004, a 58% CAGR • At the end of 1998 there were approximately 88 Internet stocks Currently, there are approximately 400 with nearly a half trillion dollars of market cap • Approximately 50% of the total Internet market cap is accounted for by the five largest Internet companies, providing evidence for the belief that, on the Internet, the winners “take all.” • Studies have shown that effective management of human capital can improve shareholder value by up to 30% • By our estimates, the e-knowledge market will reach $53.3 billion by 2003 from $9.4 billion in 1999, growing at a CAGR of 54% • Reflecting the transformation of technology in our economy, in 2000, skilled jobs will represent 65% of all jobs This is expected to expand to 85% by 2005, up from just 20% in 1950 • Knowledge Services – education and corporate learning for the new economy – is a $740 billion industry in the U.S and a $2-trillion industry globally • Web-based corporate learning should enjoy explosive growth, measuring $11.4 billion by 2003, up from $550 million in 1998, an 83% CAGR • By 2002, technology-based training will capture the majority of dollars for IT training, at 55% versus the 45% share captured by instructor-led methods • In 1996, 44% of students enrolled in higher education programs were adults over 24 years of age, up from 28% in 1970 • The ratio of students to computers in our nation’s K12 schools is rapidly improving, falling from 16-to-1 in 1992 to approximately 6-to-1 in 1999 • Nearly every K-12 school in the country (96%) has at least one Internet-linked computer To date, 51% of classrooms have Internet-connected computers • The number of K-12 students with Internet access has grown from virtually zero in 1994 to 10 million in 1996 and is projected to grow to 40 million by 2002 • 47% of 16-22 year-olds are on the web and control $37 billion in spending 40% have bought and paid for something online By 2003, 62% of 16-22 yearolds will be on the web • College students spend nearly 19 hours per week on the Internet, with 85% of their time spent on academic pursuits • The domestic broadband market will expand to 2.3 million homes this year, up 200% from approximately 750,000 in 1998 By 2004, we expect broadband to reach 48% of Internet users, or 30 million households The Knowledge Web – 23 May 2000 CONTENTS n Section Page Part 1: Introduction to the Knowledge Economy Executive Summary and Thesis Price-to-Opportunity: The New Valuation Metric 15 The Four P’s 22 Mind Over Matter: Human Capital in the Knowledge Economy 31 The Emerging New Economy 36 The Technology Revolution 45 e-Commerce: The Current e-Business Wave 53 Advertising Exploding Online 56 The Coming Bandwidth Tidal Wave 60 10 “Kingmakers” will Determine the Winners Part 2: Generation i The K-12 Market 65 75 11 Generation i – @ Home, @ School, @ Play 77 12 Generation i – the K-12 Education Market 78 13 Kids with Clout: K-12 Marketplace is Huge 84 14 Investment Opportunity 86 15 Today’s Children Are Web Savvy “Clickerati” 87 16 K-12 Education Is Ripe for a R*e*volution 96 17 The K-12 E-Education Landscape 106 18 Linking Homes and Schools – The Next Online Land Grab For e-Portals & Hubs 107 19 Learning Redefined – Content Goes Digital 115 20 e-Commerce 125 The Knowledge Web – 23 May 2000 n Section Page 21 Infrastructure 131 22 Supplemental Services 143 23 Issues in K-12 e-Learning 149 24 The Empire Strikes Back? Publishing & Media Companies vs Web Upstarts 153 25 Appendix 165 Part 3: Higher Web – Universities Online 167 26 Higher Web – Universities Online 169 27 The World Wide Web of Higher Education 170 28 The Market Opportunity 178 29 The Global Opportunity 181 30 Infrastructure – “Webifying” the University 184 31 Community and Commerce 193 32 E-Hubs – All Roads Lead to the E-Hub 201 33 Universities Online 207 34 The Corporate Market Opportunity 216 35 Appendix 223 Part 4: Corporate e-Learning – Feeding Hungry Minds 225 36 Corporate e-Learning: Feeding Hungry Minds 37 Corporate e-Learning 228 38 Size of the Market 236 39 The Corporate e-Learning “Net-scape” 242 40 Content 261 41 Assessment 227 273 The Knowledge Web – 23 May 2000 n Section Part 5: Human Capital Management – People Power Page 291 42 Human Capital Management: People Power 293 43 Trends & Predictions 294 44 Human Capital Management 296 45 Countering the “Brain Drain” 298 46 The Industry “Net-Scape” 301 47 The Net Shakes Up Human Capital Management 308 48 The Human Capital Management Landscape 314 49 Investable Themes 322 50 Select Company Profiles 323 51 Appendix 352 The Knowledge Web – 23 May 2000 Introduction to the Knowledge Economy The Knowledge Web – 23 May 2000 Executive Summary and Thesis Technology is the driver of the New Economy, and human capital is its fuel “Take our twenty best people away, and I can tell you that Microsoft would become an unimportant company.” – Bill Gates When the puck goes in the net, all the sticks go in the air Likewise, attributing what or who deserves the credit for the incredible economic boom we are experiencing is a crowded stage Silicon Valley, Alan Greenspan, the fall of the Berlin Wall and, of course, the Internet are all lead actors amongst the cast of thousands in the New Economy script Technology is the driver of the New Economy, and human capital is its fuel In today’s world, knowledge is making the difference not only in how an individual does, but also in how well a company does and, for that matter, in how well a country does While the future possibilities of the knowledge economy look both exciting and, at the same time, daunting, the transformation to a knowledge economy is now evident In today’s knowledge-based global marketplace, human capital has replaced physical capital as the source of competitive advantage • Most striking—the dramatic pay gap between those with education and those without has more than doubled in less than 20 years Looked at another way, the purchasing power of a 30-year-old man with a high-school diploma has dropped by over one-third over the past two decades • Also significant—our analysis illustrating a seismic shift in how the market values companies, discounting traditional analysis of earnings derived from physical capital and replacing it with analysis of earnings power derived from human capital • Finally, the structural changes that have occurred in our economy mean that the new jobs being created today are service and skill-based jobs rather than manufacturing jobs In 1950, unskilled jobs constituted 60% of all jobs, with professional and skilled jobs representing the remainder Fast forward the clock to today, and it is expected that 65% of all new jobs created will be skilled jobs and that by 2005 skilled jobs will represent 85% of all new jobs created Fundamental to the investment opportunity is the significant demand imbalance for knowledge workers versus the supply of skill-based jobs The truly revolutionary impact of the Internet is just beginning to be felt In the old economy, geographic distance needed to be mastered to shop, be serviced or to learn In the new economy, distance has been eliminated We are rapidly evolving into one economy and one market In today’s knowledge-based global marketplace, human capital has replaced physical capital as the source of competitive advantage A key result of the confluence of technology and the Internet Economy is the need for better, faster and smarter workers The reality of a 4% unemployment rate in the U.S., the “free agent” mindset of the most talented workers, and the fact that only 21% of the U.S adult population has a college degree is making this task more difficult than ever before e-Commerce forces even traditional businesses to operate at Internet speed, with “time-to-competency,” now a major factor determining the competitiveness of all companies The truly revolutionary impact of the Internet is just beginning to be felt In the old economy, geographic distance needed to be mastered to shop, be serviced or to learn In the new economy, distance has been eliminated We are rapidly evolving into one economy and one market We see the e-knowledge market being the next major growth phase of the Internet, following huge business and investment opportunities in business-to-consumer (B2C) e-commerce and business-to-business (B2B) commerce and services The Knowledge Web – 23 May 2000 Evolutionary Phases of e-Business Growth e-Knowledge B2B Commerce: VerticalNet, CommerceOne B2C Commerce: Amazon.com At no previous time has human capital been so important, meaning finding, attracting and retaining knowledge workers will be mission-critical functions – and high growth sectors – in the New Economy Growth of Internet Market Content: Yahoo!, Lycos Access: Prodigy, AOL 1992 1994-5 1995-6 1998-9 2000 Time Source: Merrill Lynch Global Growth Group At no previous time has human capital been so important, meaning finding, developing and retaining knowledge workers will be mission-critical functions – and high growth sectors – in the new economy Accordingly, we look at the continuum of human capital solutions holistically – a Knowledge Web – and believe the most important companies will have an appreciation for and/or involvement in a comprehensive solution We believe those companies that can link different elements of the human capital value chain – stretching from recruiting to assessment to training and through retention – while leveraging the Internet’s capabilities to deliver a total solution, will be the big winners The Knowledge Services Continuum: The Human Capital Value Chain Find & Recruit Assess Train Test Certify Retain Source: Merrill Lynch Global Growth Group Unleashing the Killer App The death of distance and the compression of time have powerful implications in the knowledge-based economy The biggest investment ideas are often where there is a problem – and the bigger the problem, the bigger the opportunity There is no bigger problem in the global marketplace today than how to obtain, train and retain knowledge workers Seventy percent of Fortune 1000 CEOs cite the ability to attract and keep adequately skilled employees as a major issue for growth and competitiveness Given that essentially all of the 20 million net new jobs that were created in the past 20 years were from small and mid-sized companies, obtaining, training and retaining talent is even more critical to what has become the growth engine of the new economy 10 The Knowledge Web – 23 May 2000 Therefore, online learning companies should partner with broadband providers and schools to provide educational products on the Internet that can be accessed from home and the classroom Already, numerous broadband providers have invested in knowledge services with this very idea in mind Examples of Broadband Investments in Education Date April 1998 August 1999 1999 February 1998 April 1999 April 1999 1999 March 1998 1998 & 1999 December 1999 January 1998 Company Arista Systems Campus Pipeline Classroom Connect Cogito Learning Media, Inc HyCurve Interactive Learning International JuniorNet Lightspan Lightspan (FKA Curriculum Television) Net Library NetSchools Ninth House Network One Touch Systems, Inc Amount ($mm) $4.0 $28.0 $28.0 $7.0 $12.0 $70.0 $32.0 $20.6 $100.0 $40.0 Investors Safeguard Scientifics Dell Computer Corporation Media One Vulcan Ventures, Allen & Co US Web/CKS Intel Corporation RCN Corporation Sony Corporation, Microsoft, Liberty Media Group, Comcast Microsoft Liberty Digital Vulcan Ventures Chase Capital Partners Intel Corporation Source: Venture One, Securities Data Corporation n The Race to Widen the Pipes Online learning companies should partner with broadband providers and schools to provide educational products on the Internet that can be accessed from home and the classroom Broadband technology has been wrapped up in the classic chicken-and-egg dilemma Namely, what will come first: The enabling broadband technology or broadband content that demands improved technology? Until recently, it appeared that both the content and technology were developing simultaneously, yet tentatively Now, however, it appears that the infrastructure battle is on and the technology will pave the way for the content “The historical records show that humans have never, ever opted for slower.” – Stephen Kern, historian Cable companies, telco’s, satellite/wireless companies and ISPs are locked in an epic battle over standards, protocols, open access and kilobits per second Digging through all the techno-jargon, though, the key statistic that stands out is that cable modem and telco ADSL services offer download speeds that are exponentially faster than traditional dial-up access Comparison of Home Internet Access Technologies Analog Modems Bandwidth 56 Kb Cable Modems Mb to 10 Mb (shared) DSL 128 Kb to 1.5 Mb ISDN 64 Kb or 128 Kb Availability Excellent Worldwide Limited/Improving over time Limited/Improving over time Good/Unavailable in some areas Cost of Hardware $150 or less $300 or less Monthly Fee Free with Internet access $30-$60 $300 or less $30-$500 $250 or less $30-$100 Source: IDC’s Home Access Communications Options, February 1999; Merrill Lynch Internet Research 61 The Knowledge Web – 23 May 2000 Perhaps even more important, however, is the “always on” nature of broadband Internet service With broadband, consumers can access the Net in the same way they use a television – or a refrigerator, for that matter It’s right there just waiting to be used – always on, always ready, no connection time needed In addition to anytime access, broadband offers anywhere access, as consumers will be able to access the Net in every room of their house using numerous different devices and appliances Perhaps even more important, however, is the “always on” nature of broadband Internet service This improved convenience is great for consumers, but a double-edged sword for business With broadband, they will have 24/7 access to customers, but the bar for customer service expectations will increase substantially As bandwidth capacity increases, online content will be enriched to include enhanced graphics and video These improved features will drive more users online as the content becomes that much more engaging Exploding Bandwidth Capacity Will Meet the Demands of More Engaging Content Kps per Action 7,880 10,000 1,800 1,000 1,000 300 300 Graphics Attachment Voice Attachment Kps 120 100 25 10 10 E mail Mes s age News group/Chat F ile Attachment Acces s Web Acces s Video Attachment Voice/F ax over IP Video over IP Source: Merrill Lynch n Expected Adoption Rates Broadband adoption is at the lower left-hand position of its expected S-shaped growth curve right now, and adoption rates appear ready to explode By 2003, broadband is expected to account for 37% of U.S online subscriptions, or 27.4 million total subscriptions That’s up from just 800,000 broadband subscriptions at the end of 1998, when broadband accounted for less than one percent of total Internet subscriptions Some date in between, probably in late 2001 or early 2002, will be the tipping point, and e-businesses must be ready for it if they want to grab the all-important early adopters By 2004, we expect broadband to reach 48% of Internet users, or 30 million households “We’ll have infinite bandwidth in a decade’s time.” —Bill Gates The same dynamic network effects dictated by Metcalfe’s Law that have driven exponential growth in Internet usage will be in force during broadband adoption That is, we believe as more consumers move to broadband, businesses will have greater incentive to produce broadband content and devices, which, in turn, will spur even more consumers to adopt broadband, starting the cycle over again This virtuous cycle will be akin to throwing gasoline on the already blazing Internet-usage inferno As convergence causes the Internet to look more like the television, we expect millions of consumers will begin using it for the first time, as it becomes less intimidating and more familiar to them 62 The Knowledge Web – 23 May 2000 At the same time, existing users will delight in the revolutionary experience of broadband, using the Internet for everything from daily tasks, like checking the weather, to more engrossing activities, such as taking a real-time college course at a far-off university High-speed interactivity will seamlessly integrate Internet content, e-commerce and online advertising creating a unique, all-encompassing experience that fully engages the user High-speed interactivity will seamlessly integrate Internet content, e-commerce and online advertising creating a unique, all-encompassing experience that fully engages the user Broadband Usage Expected to Explode 80.0 70.0 60.0 50.0 Millions of 40.0 Subscribers Dial-up subscribers 30.0 Broadband subs 20.0 10.0 0.0 1998 1999 2000 2001 2002 Dial-up subscribers 24.0 41.3 46.0 48.3 47.0 2003 45.3 Broadband subs 0.8 2.6 5.8 11.0 18.8 27.4 Source: Forrester Research, “From Dial-Up To Broadband,” April 1999 Broadband Drives Increased Internet Usage Average Hours Spent Online (Boston Area) 22.5 25 20 Hours Per Week Broadband has the potential to increase the level of direct interaction between teacher and instructor, solving one of the major challenges in implementing e-learning programs at the adult level Moreover, the rich, engaging, interactive media possible through broadband has compelling use in classrooms at all levels Not only will broadband subscriptions increase, but we also believe total Internet usage will also increase once broadband is readily available A recent Wall Street Journal survey found that 65% of respondents said that increased transfer speed would lead them to increase their Internet usage MediaOne recently completed a study of Boston-area Internet users and found that broadband subscribers logged onto the Internet ten times as frequently as users with traditional dial-up access Broadband subscribers also spent on average 22.5 hours per week online, or nearly five times as much time online as did dial-up users 15 10 4.7 Broadband Users Dial-Up Users Source: Media One, Boston Area Households Only 63 The Knowledge Web – 23 May 2000 Clearly, we believe that knowledge services companies will be primary beneficiaries of the coming bandwidth tidal wave Clearly, we believe that knowledge services companies will be primary beneficiaries of the coming bandwidth tidal wave Broadband has the potential to increase the level of direct interaction between teacher and instructor, solving one of the major challenges in implementing e-learning programs at the adult level Moreover, the rich, engaging, interactive media possible through broadband has compelling use in classrooms at all levels "@Home’s service is all about a broadband, rich-media environment, and our churn rate is below the U.S death rate." – Mark Stevens, Excite@Home exec, 64 The Knowledge Web – 23 May 2000 10 “Kingmakers” Will Determine the Winners Wall Street and venture capital firms, perceiving the growing demand for knowledge services, will provide capital to those knowledge services firms offering the best solutions to the biggest problems We believe two powerful groups will determine which knowledge services companies win These “kingmakers” are investors, particularly Wall Street and venture capital firms, and enterprise-wide strategic relationship managers, including management consulting and enterprise-wide technology solutions providers Investors will provide the best knowledge services companies with the capital they need to invest in the opportunities open to them, and the strategic relationship managers will open doors for them by recommending their knowledge services to clients We note that the lines between these two groups have become blurred Many of the companies listed in the table below as strategic partners and consulting firms now have venture capital arms, as well Likewise, venture capital firms dispense much more than money, usually offering advice, networking opportunities and management expertise Examples of Important Kingmakers Favorite Bookmarks of William Savoy, President of Vulcan Ventures www.ceoexpress.com www.egreetings.com www.ebay.com www.healthanswers.com Venture Capital Accel Partners Arcadia Partners Bessemer Venture Partners Charles River Ventures Chase Capital Draper Fisher E.M Warburg Pincus & Co GE Capital, Equity Capital Group Kleiner Perkins Caufield & Byers Sequoia Capital Sprout Group Vulcan Ventures Strategic Partners Cisco Compaq Dell Gateway Intel Kaplan Ventures Knowledge Universe Microsoft Oracle PeopleSoft SAP Sun Consulting Firms Andersen Consulting Bain Cambridge Deloitte & Touche Ernst & Young IBM IXL Enterprises KPMG Peat Marwick McKinsey & Co PriceWaterhouseCoopers Scient Viant Source: Merrill Lynch Global Growth Group Wall Street and Venture Capital In Silicon Valley and elsewhere, investment capital comes with something else just as important as the actual dollars, if not more so: A resume Wall Street and venture capital firms, perceiving the growing demand for knowledge services, will provide capital to those knowledge services firms offering the best solutions to the biggest problems As has been proven time and again on the Internet, it takes several rounds of significant capital infusions to succeed online Brand-building, perfecting the product offering and attracting the best talent are three critical success factors demanding significant financial strength As such, we believe investment groups will be kingmakers of knowledge services companies in the new economy "Student loans are a wonderfully cheap way to finance a startup.” – Harvard MBA student Iggy Ioppe In Silicon Valley and elsewhere, investment capital comes with something else just as important as the actual dollars, if not more so: A resume Having the “right” financial backers can give a company a tremendous advantage in the competition for funding in future rounds, including the IPO, and on the competitive playing field Potential clients, for example, will use a company’s roster of financial backers as a metric to help determine the likely success of the firm They will at least partially base their selection of a particular product on their belief that the company will survive long-term The “right” financial backing is one key to 65 The Knowledge Web – 23 May 2000 ensuring survivability Venture capital investment in the knowledge services sector has skyrocketed in recent years According to SDC, venture capital firms have invested nearly $2.2 billion in 1999, more than triple the total invested in the previous eight years So far this year, venture capital firms have invested almost $800 million in the sector We are now starting to see the fruits of these investments hit the public markets Venture Capital Investment in Knowledge Enterprise Companies Is Growing Rapidly ($millions) $2,500 $2,220 $2,000 $1,500 $1,000 $798 $500 1999 1998 $179 1997 $232 $154 1996 1995 $28 1994 $29 1993 $9 1992 $10 1991 1990 $19 $0 $101 2000ytd Venture capital investment in the knowledge services sector has skyrocketed in recent years Source: Securities Data Corp., Venture Source Through April n K-12 Venture Capital Investment In 1999, venture capitalists invested $469 million was invested in the K-12 space Companies garnering the largest investments were Edison Schools ($60 million), FamilyEducationNetwork ($51 million), ZapMe! ($50 million) and Lightspan ($32 million) Edison, ZapMe! and Lightspan are now publicly traded companies So far in 2000, investment has continued to pour into the sector Venture capital firms have put $352 million into the space in 2000, including sizable investments in bigchalk.com ($55 million), Schoolpop ($48 million) and Highwired.com ($30 million) We are now starting to see the fruits of these investments hit the public markets n Higher Education Venture Capital Investment In 1999, venture capitalists invested $270 million in the higher education sector netLibrary ($95 million), Embark.com ($39 million), VarsityBooks.com ($40 million) and Campus Pipeline ($25 million) won the largest support As is the case in the K-12 space, venture capital has continued to flood in so far this year In 2000, venture capital firms have invested $222 million in the higher ed space, or nearly as much as they did in all of 1999 Campus Pipeline has received another $55 million in private funding this year, and University Access ($42 million) have also won major financial backing n Corporate Learning Venture Capital Investment Last year, venture capitalists invested nearly $1 billion in the corporate learning space, although we note that this figure includes $500 million in Knowledge Universe, alone Two other notable corporate learning companies receiving large venture investments in 1999 were Saba ($50 million) and DigitalThink ($38 million), both of which conducted public offerings already in 2000 The spigot remains open so far in 2000, with venture capital firms putting $164 million into corporate learning companies this year Ninth House ($40 million), TrainingNet ($34 million) and WebCT ($25 million) have received the most investment yearto-date 66 The Knowledge Web – 23 May 2000 n Human Capital Management Venture Capital Investment Venture capital firms invested $478 million in the human capital management space in 1999 The largest financing went to Hire Systems ($79 million), Jobs.com ($72 million) and CareerBuilder.com ($48 million) So far in 2000, Jobs.com has raised another $8 million in private funding, and CareerBuilder has raised an additional $11 million Personic ($18 million) and techies.com ($22 million) have also raised substantial sums from venture capital firms this year 67 The Knowledge Web – 23 May 2000 Venture Capital in Knowledge Enterprises (1999 and YTD 2000) Company Name K-12 (1999) Adaptive Learning Technology, Inc Advantage Schools, Inc American Education Centers, Inc Aspen Youth Services, Inc Athletes & Coaches Choice, Inc BrainPlay.com (FKA Thunderbeam.com) Cambridge Academies Inc Centrinity (FKA: MC2 Learning Systems) ChildrenFirst Inc ChildU, Inc., Classroom Connect Amount ($mil) Firm Name $0.2 $26.4 $0.3 $0.8 $0.3 $4.0 $15.0 $6.0 $2.5 $6.5 $31.0 EDEX International Property Limited Edison Schools eduTest.com Epylon.com e-school.edu Inc FamilyEducationNetwork Games2Learn.com (FKA: A Better Way of Learning, LLC) KidsEdge Highwired.com (FKA: Highwired.net) JP Kids JuniorNet Learning Technologies, Inc Lightspan Partnership (FKA: Curriculum Television) MaMaMedia Nest Entertainment, Inc Netschools New Century Education Corporation Shopforschool, Inc SmarterKids.com, Inc $35.0 $0.3 $20.0 $0.3 $2.0 NA TopTutors.com VoiceWeb Corporation ZapMe! NA $3.4 $50.0 Tutor.com K-12 (2000) Advantage Schools, Inc Apex Learning Bigchalk.com ChildrenFirst Inc class.com eduTest.com Edventions, Inc Epylon.com Highwired.com (FKA: Highwired.net) IQMind PowerSchool, Inc 68 $0.9 $60.0 $0.5 $5.8 $1.0 $51.0 $0.6 $25.0 $7.0 $7.0 $70.0 $0.8 $32.0 $4.0 Total $469.4 Murphree Venture Partners Bessemer Venture Partners, Kleiner Perkins Caufield & Byers, Fidelity Ventures Ltd., Excelsior Private Equity TL Ventures Sprout Group, Frazier Healthcare, DLJ IV WSI Holding Corp Other VC Firm Sequel Venture Partners, Sevin Rosen Management Co E.M Warburg, Pincus & Co., LLC Canaccord Capital and Taurus Capital Markets Carousel Capital, Burr Eagan, Deleage and Co., Lazard Frere and Co., and Individual Investors Group One Capital Brentwood Associates, Waller-Sutton Media Partners, L.P., Cambria Group, Media Technology Equity Partners, LP, MediaOne Group, Intel 64 Fund LLC, Hillman Company St George Development Capital Vulcan Ventures, UBS Capital, Rothchild Other VC Firm Undisclosed Investor and Individual Investor Austin Ventures, L.P Harcourt, Josten’s, Intel, Sprout Group, the Morningside Group, AOL, DLJ First Analysis Venture Capital, Apex Strategic Partners, Infrastructure & Environmental Fund III NA Charles River Ventures and North Bridge Venture Partners Sutter Hill Ventures and H&Q Venture Associates RCN Corp., Boston Capital Ventures, Euclid Partners, Dominion Ventures, Dominion Fund Hambrecht & Quist Private Equity Accel Partners, Comcast Interactive Cap Group, Corporate Investor, Kleiner Perkins Caulfield & Byers, Liberty Media Group, Microsoft, Naussau Capital, L.L.C., Other VC Firm, Sony Corp., The Ignite Group NA Cornerstone Equity Investors, LLC, Prudential Private Equity GE Capital, Vulcan Ventures and Cherry Creek Netschools Investors LLC Lepercq Capital Management, Inc (AKA:Lepercq de Neuflize In) Delphi Ventures and Affinity Ventures Advent International Corporation, RRE Investors L.P, Commonwealth Capital Ventures II, L.P., North Bridge Venture Partners III, L.P Idealab Sevin Rosen Fund, Canaan Partners QuestMark Partners, Ares Management LLP, Gilat Satellite Networks Ltd., Sylvan Learning Systems, Inc (NASDAQ: SLVN), and Headwater Capital, Lease financing by Hewlett Packard (NYSE: HWP), Hambrecht & Quist, Xerox (NYSE: XRX), Leasing Technologies International, Imperial Bank, Terminal Marketing and Transamerica internet.com, garage.com, Norstar Capital, Individual Investors $28.0 Credit Suisse First Boston, Bessemer Venture Partners, Kleiner Perkins Caufield & Byers, Fidelity Ventures Ltd., Chase Capital Partners, and Nassau Capital $20.0 Warburg, Pincus, Maveron Equity Partners, Vulcan Ventures, and Kaplan $55.0 Goldman Sachs Capital Partners II, Blumenstein/Thorne Information Partners II and Patricof & Co Ventures $16.0 Carousel Capital, Burr Eagan, Deleage and Co., Lazard Frere and Co., and Individual Investors $7.5 NA $0.3 NextGen Capital $8.8 River Cities Capital Fund and M Group Inc $30.0 Highland Capital Partners, Intel and ITV/Infinity $30.0 Charles River Ventures, North Bridge Venture Partners, Broadband Ventures Group LLC, DHM Arcadia Partners, Comdisco Ventures, Longworth Venture Partners and Haebler Ventures $3.3 AsiaTech Ventures $31.2 E.M Warburg Pincus & Co., Group One, and Snider Capital The Knowledge Web – 23 May 2000 Venture Capital in Knowledge Enterprises (1999 and YTD 2000) (Continued) Company Name Project Achieve Schoolpop, Inc Schoolpop, Inc Simplexis.com Viviance Wasatch Interactive Learning wwwrrr.com Amount ($mil) Firm Name $15.0 The Sprout Group, Arcadia Partners and Jostens Inc $41.0 Meritech Capital Partners, The Reader’s Digest Assn, Inc., Accel Partners, Chase H&Q, Wit Capital and Thomas Weisel Partners $6.8 Accel Partners, Individual Investor $30.0 Internet Capital Group, The Washington Post Company’s Kaplan, Inc., W.R Hambrecht, Commerce One, Inc., Schoolhouse Partners $14.0 3i Group, Private Equity Holding AG $5.0 NA $11.0 North American Funds Total $352.8 Higher Education (1999) Academic Systems Corporation Alta Colleges, Inc BlackBoard Campus Pipeline Cenquest, Inc (FKA:Amicus Interactive, Inc.) Cognitive Arts Collegestudent.com Convene.com EduPoint.com e-education, Ltd (FKA: JonesKnowledge.com) Embark.com (FKA: SNAP Technologies, Inc and CollegeEdge) netLibrary, Inc NextEd Ltd OnlineLearning.net (FKA: THEN) Pensare SMARTHINKING.com Thinkwell Corporation UNext University Access VarsityBooks.com Versity.com WebCT (FKA: Universal Learning Technology) Learning Express Higher Education (2000) Achieva Campus Pipeline Cogito Learning Media Collegeclub.com Egenda.com Eduprise.com Medschool.com OnlineLearning.net (FKA: THEN) Pensare Planet Alumni University Access $0.2 Kleiner Perkins Caufield & Byers, Hambrecht & Quist $4.9 BCI Growth V, L.P $12.2 Carlyle Venture Partners and Merrill Lynch KECALP, Aurora Equity Partners I, Novak Biddle Partners, L.P., Internet Capital Group $25.0 Inktomi, Dell Computer, Jim Mattei, C.E Unterberg Towbin, McKinsey and others $4.5 Hummer Winblad Venture Partners, Sevin Rosen Fund VI, L.P $15-20 NA $1.0 Abacus Ventures $7.2 New Enterprise Associates, Kensington Value Fund and Podesta Education Investors $3.7 Enterprise Partners IV, L.P $0.2 Fidelity Venture Associates, Other VC Firm $39.0 Norwest Venture Partners, Morgan Stanley Dean Witter Ventures Fund, Morgan Stanley Ventures Fund, Sienna Limited Partnership, Doll Capital Mgmt., Itochu Canada, Ltd., Pon North America, Excite@Home, Vertex Technology Fund II, Recruit Co., Ltd Of Japan $95.0 Sprout Group, Houghton Mifflin, McGraw-Hill, Liberty Digital Inc., Follett Corp., Blackwell Ltd., EBSCO, ABC-CLIO, Bain Capital, Berger New Generation Fund, Tango, and Weiss Peck & Greer LLC $0.6 Fidelity Venture Associates NA St Paul Venture Capital, APV Technology Partners $7.0 General Electric Venture Capital Corp (Gevenco), Associated Venture Investors III, L.P, Associated Venture Investors-Silicon Valley Partners, L.P., Media Technology Ventures, Battery Ventures IV, L.P., AIG $0.8 Paul Stephens of RS Investment Management and Steve Walker of Steve Walker & Associates $3.3 RHO Management, CenterPoint Venture Partners NA Knowledge Universe, Thomas Pritzker NA Arcadia Partners, Others $40.0 Tribune Company and Carlyle Venture Partners, L.P $11.2 Venrock Associates, Piper Jaffray Technology Fund, Sigma Partners, Global Retail Fund, Other VC Firm and Individuals $14.6 BancBoston Ventures, Boston Millennia Partners, CMG@Ventures, Kestrel Venture Partners NA Allen & Co and Individual Investors Total $270.4 $15.0 Draper, Fisher, Jurvetson, Individual Investors $55.0 Meritech Capital Partners, American Express Financial Corporation, Hewlett-Packard Company and DRW Venture Partners $20.0 Open to new investors $40.0 Seligman New Technologies Fund $5.0 Harron Capital, Gamma Investors, and Rose Glenn Capital $18.0 Arena Capital Partners, Chase Capital Partners, Frontenac Company and Learning Tree International $12.0 Cornerstone Equity Investors IV, LP, Audax Private Equity Fund, L.P $0.2 St Paul Venture Capital, APV Technology Partners $12.3 GE Capital, Associated Venture Investors III, L.P, Associated Venture Investors-Silicon Valley Partners, L.P., Media Technology Ventures, Battery Ventures IV, L.P., AIG- Unspecified Fund $2.5 Jostens, Inc $42.0 Investor AB, GE Equity and Pearson/FT Knowledge Total $222.0 69 The Knowledge Web – 23 May 2000 Venture Capital in Knowledge Enterprises (1999 and YTD 2000) (Continued) Company Name Corporate Learning (1999) AbleSoft Acadio.com Avulet, Inc Brainbench Click2learn.com Cyberstate University DigitalThink Amount ($mil) Firm Name $2.0 $3.0 $1.5 $3.0 $10.0 $9.7 $37.7 Docent $17.0 EHQ, Inc emind (Yipinet) Formanet Global English HealthStream $2.0 $12.5 $1.0 $6.0 $17.8 Horizon Live Distance Learning, Inc $6.4 Hungry Minds HyCurve, Inc Innovative Community Technology Services iSong.com Janus Technologies Jet Software (AKA Qarbon.com) Knowledge Planet Knowledge Universe KnowledgeNet LearnNow, Inc MindLeaders (FKA: DPEC, Inc.) MindLever.com NetCertification Inc Ninth House Network notHarvard.com Online Learning Network Paragon Solutions, Inc ProSofttraining.com Pryor Resources, Inc Saba Software $11.0 $0.8 $3.0 $30.0 $3.4 $2.0 $20.0 $500.0 $16.5 $4.0 $3.0 $4.1 $0.5 $9.0 $6.6 $1.3 $7.4 $3.0 $156.0 $50.0 SightPath (FKA:ClearView Technologies) $8.0 SkillSoft Corporation $3.8 Teach.com, Inc $1.2 TechOnLine, Inc $3.5 TrainingNet, Inc $14.4 Vault.com, Inc (FKA: VaultReport.com, $8.0 Inc.) Virtual Education $2.1 Total $1,001.9 Corporate Learning (2000) eMind (Yipinet) IBT Technologies, Inc KnowledgeNet Ninth House Network notHarvard.com 70 $14.0 $6.4 $15.0 $40.0 CIP Capital, LP, Penn Janney Advisory Inc., Liberty Partners Trans Cosmos and Individual Investors Onset III, Other VC Firm Lycos Ventures, L.P Marshall Capital Management and Vulcan Ventures Novus Ventures, Sigma Partners, Compass Technology Ventures ServiceMaster, Torstar, Walden Capital Management Corporation, Hambrecht & Quist Private Equity, Hambrecht & Quist Venture, Cambridge Technology Capital, Bankers Trust Technology Partners INVESCO Private Capital, Advanced Technology Ventures, Norwest Venture Partners, Comdisco Ventures, BancBoston Ventures, Arcadia Partners, Gilde Investment Management Flanders Language Valley Fund Knowledge Universe, Radar Reinfrank, and Co Flanders Language Valley Fund Mayfield Fund Scripps Clinic, Vanderbilt University, Morgan Stanley Dean Witter Venture Partners and Charles N Martin, Jr., CEO of Vanguard Health System First Analysis Management Co., Argentum Capital Partners II, L.P., Early Stage Enterprises, L.P., Jefferson Capital Partners I, L.P Stuart Skorman and dozen angel investors Hambrecht & Quist First Analysis Venture Capital, Sequoia Capital Flynn Venture Partners, Undisclosed Venture Investor VentureBank@PNC, Edison Venture Fund and Individual Investors Flanders Language Valley Fund, Other VC Firm Knowledge Universe, HarbourVest Partners LLC, KnowledgeSoft, Individual Investors NA Morgenthaler Partners, Sierra Ventures and Trinity Ventures Pennsylvania Early Stage Partners, Other VC Firm River Cities Capital Fund II, L.P., Other VC Firm and Individuals Alliance Technology Ventures II, Mid-Atlantic Venture Fund, North Carolina Enterprise Fund Mercury Ventures Ltd HMI and Individual Investors TL Ventures, Austin Ventures Madrona Investment Group, Other VC Firm Mesirow Capital Partners VI, Bluestem Capital Partners II, L.P., Other VC Firm Hunt Capital Growth Fund II, Other VC Firm Thayer Capital Partners, Patricof & Co Ventures, Inc Norwest Venture Partners, Advanced Technology Ventures, Invesco Private Capital, Comdisco Ventures, Credit Suisse First Boston, BancBoston Ventures, Arcadia Partners, Gilde Investment Management Netherlands, Berkeley International Capital, Sequoia and CrossLink Greylock Management, Intel Corporation Warburg, Pincus Ventures L.P., Individuals, Other VC Firm Ohio Partners, ARCH Venture Partners SCP Private Equity Partners, Other VC Firm Charles River Ventures, Bessemer Venture Partners, Blue Rock Capital, Individuals Deutsche Bank AG, American Lawyer Media Holdings, Inc., Ingram Industries Inc., Hollinger Ventures, Other VC Firm First Analysis Venture Capital (FKA:First Analysis Corp), Other VC Firm Knowledge Universe, Radar Reinfrank, and Co Counsel Corp., Thomas Weisel Partners, Q Investments, Individual Investors Berkeley International Capital, Morgenthaler Partners, Sierra Ventures and Trinity Ventures Chase Capital Partners, Merrill Lynch, Hambrecht and Quist, and Arena Capital, HMI and Individual Investors $8.5 Austin Ventures, TL Ventures, Silicon Valley Bank, and individual investors The Knowledge Web – 23 May 2000 Venture Capital in Knowledge Enterprises (1999 and YTD 2000) (Continued) Amount ($mil) $14.0 $7.0 $33.7 $25.0 Company Name Parlo, Inc TechOnLine, Inc TrainingNet Inc WebCT (FKA: Universal Learning Technology) Firm Name Goldman, Sachs & Co., Sevin Rosen Fund , RHO Management SCP Private Equity Partners, Other VC Firm BCI Partners; Hikari Tsushin (Japanese Telecom Company, HLM Management, Sirios Capital and others Chase Capital Partners, Duke University, BancBoston Ventures, Boston Millennia Partners, CMG@Ventures, Kestrel Venture Partners Total $163.6 E-cruiting/Human Capital Management (1999) AdminiQuest Administaff Career Horizons Career Choices, Inc CareerBuilder.com $18.1 $8.0 $1.1 $2.4 $47.7 Careerstaff Unlimited CRUEL WORLD (FKA: Career Central) $0.9 $35.0 Guru.com HotJobs.com Jobs.com Hire Systems Hire.com $19.0 $16.0 $72.0 $79.0 $8.4 Icarian JobDirect.com Niku Corp $18.0 $5.5 $40.0 Opus360 SkillsVillage Techies.com $40.0 $8.8 $13.6 Techies.com $25.0 Vivant WebHire.com NA $20.0 $478.5 Total Sequel Venture Partners, Piper Jaffray Ventures Pyramid Ventures, Texas Growth Fund Corporate Venture Partners, Harvest Partners, European Development Capital, Noro-Moseley Partners Lombard Investments, Inc New Enterprise Associates, 21st Century Internet Venture Partners, TTC Ventures, ADP, FBR Technology Venture Partners L.P., GE Capital, GE Pension Fund, and Microsoft RS&Co., Bayview Fund c/o Robertson Stephens Softbank Technology Ventures, Individual Investors, IDG Ventures, Allen & Company Incorporated, Arthur Rock & Co., Technology Crossover Ventures, QuestMark Partners, Sycamore Ventures Greylock Capital, August Capital Generation Partners, Bessemer Venture Partners and Boston Millennia Partners idealab Capital Partners, CBS Corporation, Individual Investors Accel Partners, Washington Post Company, Tribune Company Murphree Venture Partners, Eos Ventures, G51, Crosspoint Venture Partners, Kleiner Perkins Caufield & Byers, TL Ventures Wheatley Partners, H&Q Technology Fund, Fidelity Ventures, Kleiner Perkins, Presidio Venture Partners Canaan Partners, Scripps Ventures, Soros Fund Management Amerindo Investment Advisors, Charter Growth Capital, Essex Investment Management Company, LLC, Soros Private Equity Partners LLC, CNET, Inc and TATA Consulting Safeguard Scientifics, CrossPoint Ventures, Odeon Capital, Cambridge Technology Ventures Atlas Venture, Individual Investors Omega Venture Partners , Norwest Venture Partners, Dain Rauscher Wessels Investors, and Winton Partners CNET, Red Hat, East Peak Partners LP, SI Investors, ZDNet, Norwest Venture Partners and Crosslink Capital, and Individual Investors Internet Capital Group, Associated Venture Investors Softbank Capital Partners, Yahoo! E-cruiting/Human Capital Management (2000) CareerBuilder.com $11.0 GE Capital Equity Capital Group, GE Pension Trust, New Enterprise Associates, 21st Century Venture Partners, Automatic Data Processing (ADP), TTC Ventures, and FBR Ventures Jobs.com $8.2 Adecco SA Personic $18.0 AIG Developed Markets Private Equity Fund, L.P, BancBoston, Battery Ventures, Technology Crossover Ventures Techies.com $22.0 J & W Seligman & Co., Winton Partners, Crosslink Capital, Norwest Venture Partners, Individual Investors, Ziff-Davis Publishing, CNET, Red Hat, SI Capital, Dain Rauscher Wessels Investors Total $59.2 1999 Total YTD2000 Total $2,220.2 $797.6 TOTAL(1999 and 2000YTD) $3,017.8 Source: Securities Data Corp., Venture Source, EduVentures.com, Company Press Releases 71 The Knowledge Web – 23 May 2000 Enterprise-Wide Strategic Relationship Managers Partnerships with management consulting firms and other enterprise-wide strategic relationship managers will be tremendous assets for many knowledge services companies Having implemented ERP, sales force automation, JIT and other enterprise-wide solutions that leverage technology in recent years, companies and academic institutions will now turn their attention to enterprisewide learning solutions, some of which will be able to work as solutions to existing enterprise management technology Partnerships with management consulting firms and other enterprise-wide strategic relationship managers will be tremendous assets for many knowledge services companies We believe these enterprise-wide strategic relationship managers will be kingmakers of knowledge services companies in the New Economy With the percentage of wired schools and institutions of higher learning approaching 100%, the need will arise to leverage the technological infrastructure they have put in place Management consulting firms, such as PriceWaterhouseCoopers and KPMG, are already building strong education-related consulting practices Institutions will be relying on these consulting firms to help them choose and implement enterprise-wide learning solutions To drive future growth, knowledge services companies should align themselves with these kingmakers They should develop comprehensive solutions to the needs of their target market, make these solutions compatible with existing infrastructure and design them to be as easy to implement and use as possible Knowledge services companies that are able to provide such solutions will be crowned by the kingmakers, who already have built a strong rapport with clients in search of enterprise-wide solutions A recommendation from such a firm provides instant credibility for a knowledge services company Top-Performing IPOs 1999 was a phenomenal year in the IPO market by anyone’s standards Looking at the top performing IPOs for 1999, it is apparent that the “usual suspects” play a major role in the success of target companies Well-known venture backers Benchmark Capital, Kleiner Perkins and Crosspoint each invested in several of last year’s top IPOs, including four of the top five performers As phenomenal as the numbers were for 1999, the stage is set for new records to be set in 2000 For instance, the total global dollar volume for the first quarter alone in 2000 was $32.1, breaking the old record of $10.8 billion in the first quarter of 1999 Furthermore, the average deal size for first the quarter of 2000 was $220 million, surpassing the combined average for all four quarters of 1999 at $191 million 1999 was a phenomenal year in the IPO market by anyone’s standards As phenomenal as the numbers were for 1999, the stage is set for new records to be set in 2000 IPOs in 1999 by Industry ($ billion) $6.7 $1.6 Banks , Brokers , Fin Services Telecom m unications $6.6 Com puters $3.4 Sem iconductor $17.3 Electronics Internet Services Internet Software $19.2 $3.9 $0.8 $4.9 Source: IPO.com 72 Media Retail The Knowledge Web – 23 May 2000 Top 25 Performing IPOs of 1999 Rank Issuer Brocade Comm Sys Issue Date 5/24/99 Ticker Symbol BRCD Split Adj Price Offer Price 3/31/00 4.75 160.63 Performance Since IPO 3,282% Investors Crosspoint Venture Partners, Mohr Davidow Ventures, Bill Joy, LSI Logic, J.F Shea & Co., JAFCO America Ventures, Bay Partners, US Information Technologies, Weiss, Peck & Greer Venture Partners, Norwest Venture Partners, Imperial Ventures, Andreas Bechtolsheim Commerce One 7/1/99 CMRC 7.00 173.31 2,376% Canaan Partners, Bluewater Capital Management, Foundation Capital, WI Harper Group, European Technology Holdings, SAP America, RB Webber & Co., GE Capital, Equity Capital Group, RHO Management, Charter Growth Capital, Nexus Group, LLC, MSDW Venture Part., MCI, British Telecomm Redback Networks 5/17/99 RBAK 11.50 283.44 2,365% Sequoia Capital, Accel Partners, Mayfield Fund, Kleiner Perkins Caufield & Byers, Lighthouse Capital Partners, Comdisco Ventures Juniper Networks 6/24/99 JNPR 11.33 267.00 2,256% Kleiner Perkins Caufield & Byers, Benchmark Capital, New Enterprise Associates, Institutional Venture Partners, Crosspoint Venture Partners, Ericsson, Siemens AG, Newbridge Networks, UUNET Technologies, Inc., Lucent, AT&T Ventures, Qwest Com., Anschutz Family Investment, Northern Telecom, 3Com Corp Enterprise Partners Ariba 6/22/99 ARBA 11.50 220.00 1,813% Benchmark Capital, Crosspoint Venture Partners, Technology Crossover Ventures, Van Wagoner Capital Management, Amerindo Investment Advisors, DMG Technology, VISA International, PeopleSoft, Intel Corporation VerticalNet 2/10/99 VERT 8.00 151.00 1,788% Koch Ventures, Internet Capital Group, Wheatley Partners, EnerTech Capital Partners, Lehman Brothers, Lambros LP Vignette Corp 2/18/99 VIGN 9.50 177.94 1,773% Sigma Partners, Austin Ventures, Attractor Investment Management, Charles River Ventures, CNET, H&Q Venture Associates, LLC, Amerindo Investment Advisors, GS Capital Partners, Partech International, JGE Capital Management, MSDW Venture Part., Olympus Partners, Goldman Sachs Group Phone.com 6/10/99 PHCM 8.00 146.94 1,737% ABN-AMRO Bank NV, BCE Mobile Communications, Bell Atlantic, CitiCorp, Greylock Capital, Itochu Technology, JK&B Capital, KLM Pension Foundation, Kyocera International, Inc., Matrix Partners, Nexus Group, LLC, Paribas Principal, Inc., Reuters Ltd, Siemens Mustang Ventures, Sienna Holdings, Sofinnova Ventures, Van Wagoner Capital Management, Weiss, Peck & Greer Venture Partners TIBCO Software 7/13/99 TIBX 5.00 87.50 1,650% Reuters Ltd., Cisco Systems, Mayfield Fund 10 Internet Capital Group 8/4/99 ICGE 6.00 93.39 1,457% Comcast ICG, CPQ holdings, Internet Assets, Inc., Safeguard Scientifics, R.A.F Ventures Inc 73 The Knowledge Web – 23 May 2000 Top 25 Performing IPOs of 1999 (Continued) Rank 11 Issuer Vitria Technology Issue Date 9/16/99 Ticker Symbol VITR Split Adj Price Offer Price 3/31/00 8.00 113.13 Performance Since IPO 1,314% Investors ABN-AMRO Bank NV, BCE Mobile Communications, Bell Atlantic, CitiCorp, Greylock Capital, Itochu Technology, JK&B Capital, KLM Pension Foundation, Kyocera International, Inc., Matrix Partners, Nexus Group, LLC, Paribas Principal, Inc., Reuters Ltd, Siemens Mustang Ventures, Sienna Holdings, Sofinnova Ventures, Van Wagoner Capital Management, Weiss, Peck & Greer Venture Partners 12 Kana Communications 9/21/99 KANA 7.50 86.00 1,047% Amerindo Investment Advisors, Aspect Telecommunications, Benchmark Capital, Draper Fisher Jurvetson, Draper Richards, J.H Whitney & Co., Stanford University 13 Purchasepro.com 9/13/99 PPRO 8.00 89.50 1,019% Jefferies & Company, Lexington Investor Group 14 Art Technology Group 7/20/99 ARTG 6.00 63.00 950% SOFTBANK Technology Ventures, Tudor Investment Corporation, Bain Capital, Individual Investors, Gemini Investors LLC, Wyndcrest Partners, GMN Investors 15 Foundry Networks 9/27/99 FDRY 12.50 126.00 908% Benchmark Capital, Compaq Computer Corporation, Greylock Capital, IBM, Intel Corporation, Netscape Communications, Novell, Oracle, SAP America 16 Silknet Software 5/5/99 SILK 15.00 141.50 843% Zero Stage Capital, CMGI @Ventures, BancBoston Ventures, Vertex Management Inc., Intel Corporation, JAFCO America Ventures, Goldman Sachs Group 17 E.piphany 9/21/99 EPNY 16.00 148.50 828% Information Technology Ventures, Kleiner Perkins Caufield & Byers, Discovery Ventures LLC, APV Technology Partners, KPMG Peat Marwick, Cambridge Technology Capital, L.P, VISA International 18 Liberate Technologies 7/27/99 LBRT 8.00 72.00 800% Edison Venture Fund, Poly Ventures, Kinetic Ventures 19 Agile Software Corp 8/19/99 AGIL 10.50 75.13 615% Mohr Davidow Ventures, Sequoia Capital, Accel Partners, Integral Capital Partners, Charter Growth Capital, Glynn Ventures, H&Q Venture Associates, LLC, Needham Asset Management 20 F5 Networks 6/4/99 FFIV 10.00 71.06 611% Encompass Ventures, Britannia Holdings, Individual Investors, Cypress Partners, Menlo Ventures, IDG Ventures 21 Proxicom 4/19/99 PXCM 6.50 44.19 580% GE Capital, Equity Capital Group, General Atlantic Partners, FBR Technology Venture Partners L.P., Washington Post 22 Akamai Technologies 10/28/99 AKAM 26.00 160.06 516% Polaris Venture Partners, Battery Ventures, Baker Communications, Trust Company of the West, Cisco Systems, Apple Computer, Microsoft 23 Digital Island 6/29/99 ISLD 10.00 60.06 501% Vanguard Venture Partners, Crosspoint Venture Partners, Bay Partners, HMS Investments, Crescendo Ventures, Stanford University, Cisco Systems, National Semiconductor, JAFCO America Ventures, Partech International,Japan Associated Finance Company, US Information Technologies, U.S Growth Fund, Nippon Enterprise Development, Bass Associates, E*trade, Chase Capital Partners, Arbor Investors, L.L.C., Tudor Investment Corporation, Candle Corp., Merrill Lynch KECALP 24 Red Hat 8/11/99 RHAT 7.00 40.25 475% Benchmark Capital, Compaq Computer Corporation, Greylock Capital, IBM, Intel Corporation, Netscape Communications, Novell, Oracle, SAP America 25 Braun Consulting 8/10/99 BRNC 7.00 30.00 329% NA Source: SDC, FactSet 1999 IPOs are ranked by price performance through 3/31/2000; current prices may differ materially due to recent market volatility 74 The Knowledge Web – 23 May 2000 [EWBX] MLPF&S or one of its affiliates was a manager of the most recent offering of securities of this company within the last three years [IZAP, POVT, SABA, SCIL] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years [APOL, EWBX, IZAP, LTRE, NLCS, POVT, SABA, SCIL, SLVN, SMTF, TMPW] The securities of the company are not listed but trade over-the-counter in the United States In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale MLPF&S or its affiliates usually make a market in the securities of this company Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High Appreciation Potential Rating (a: Int Term - 0-12 mo.; b: Long Term - >1 yr.): - Buy, - Accumulate, - Neutral, Reduce, - Sell, - No Rating Income Rating(c): - Same/Higher, - Same/Lower, - No Cash Dividend Copyright 2000 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) All rights reserved Any unauthorized use or disclosure is prohibited This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by SFA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of 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This research report is prepared for general circulation and is circulated for general information only It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall Accordingly, investors may receive back less than originally invested Past performance is not necessarily a guide to future performance Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk 75 ... Industry The new economy moves at a pace never seen before The new economy is a knowledge economy based on brainpower, ideas and entrepreneurism Technology is the driver of the new economy, and... Appendix 352 The Knowledge Web – 23 May 2000 Introduction to the Knowledge Economy The Knowledge Web – 23 May 2000 Executive Summary and Thesis Technology is the driver of the New Economy, and... programs is the new education paradigm for the 21st century In the knowledge economy, assessment is the currency with which all skills are valued The four engines of the new economy – computers,