Perhaps Gordon Brown does listen to business after all. After the furore over the government's plans to hike capital gains tax from 10 per cent to 18 per cent - with potentially damaging consequences for UK entrepreneurialism - Labour may just back down a little. The Treasury is understood to be looking at ways to exempt business owners from the tax rise and generally appease the CBI, Federation of Small Businesses and outraged Daily Telegraph leader writers. A pronouncement may take months, but could come as soon as a week or so.

In other words, this is the time for the venture capital industry to lobby like crazy or face years arguing for changes to a tax that has been set in stone. The British Private Equity and Venture Capital Association really needs to step up to the plate on this one. In the past, it has been (rightly) criticised for putting private equity interests before those of the venture capital community. But in recent times it has been pedalling hard to prove it champions grass-root investors too. Leadership of the BVCA has now been assumed by Simon Walker, whose lobbying powers ought to be second to none given his compelling CV - he has been communications secretary to HM The Queen, director of corporate affairs at British Airways and a member of the Downing Street Policy Unit. At the BVCA, Mr Walker will have to represent more interests than he has in the past and a certain dynamism and vigour are also vital prerequisites of the job.

There is no reason to suppose he does not have those qualities - and I'm sure many readers know him better than I - but they have not been much in evidence yet. Despite the acuteness of the current situation, Mr Walker has not been particularly vocal in the public arena, although let us allow the possibility that he has been lobbying hard behind the scenes. But we must hope that he is knocking on the Treasury's door and keeping its phones ringing every single day until the CGT issue is settled. That is his duty to BVCA members.

The web is awash with news stories about Microsoft's acquisition of a 1.6% stake in Facebook. I was intrigued by Don Dodge's post on the subject which noted that this is "setting a tone for the company, and sending a strong message to advertisers, publishers, employees, and investors, that Microsoft is serious about being a leader in on line media." Given that my last post highlighted Microsoft's acquisitions in fiscal 2006 I was curious to sift back through these deals to see what sort of tone a company's acquisitions set? The chart below shows acquisitions by Microsoft, Google, and Yahoo from July 2006 to June 2007. To add some context I've colour coded these based on a rough sector classification.



One clear theme from this list is the importance of advertising. aQuantive and Rightmedia were two headline deals but ScreenTonic, Adscape, and AdInterax reinforce the notion that advertising is critical to all three.

Google's acquisitions were arguably the most diverse, although this reflects their scattered product offerings. Also, these companies were operating in common consumer spaces such as photos (Neven Vision and Panoramio), mapping (Endoxon), collaboration (Jotspot), video (Youtube and possibly Marratech for video conferencing), peer to peer file sharing (Xunlei), and presentation software (Tonic Systems and Zenter). Yahoo had half as many acquisitions and they seemed to be more focused on content than technology. Companies like rivals.com (sport site), wretch (a Xanga equivalent from Taiwan), and Bix.com (American Idol on the web) appear to be aimed at purchasing audiences. This seems reasonable in a world where advertising is incredibly valuable.

Microsoft's acquisitions look very different in comparison. With the exception of health-focused Azzyxi and Medstory, their other purchases generally aim to improve enterprise software experiences. Given the investment of their existing corporate customer base, it's no surprise that they're spending money to alleviate that pain.

Returning to the original question though, it certainly doesn't look like Microsoft is gunning to become an industry leader in online media. While the above analysis does stop at June 07 and they subsequently acquired AdEcn (advertising platform), Parlano (collaboration), Jellyfish (shopping comparison) and Facebook, I'm very curious to see what will be next in their shopping cart.

What company sold 71m software licenses for a single product in fiscal year 2007 while delivering over 27 per cent growth in two separate billion dollar product lines and also expanded revenues by over 25% in 46 countries? Naturally, it's software behemoth Microsoft. These are just a few of the staggering statistics pulled from the 2007 Microsoft Annual Report. While most of the stats quickly grow mind numbing, it's an interesting set of data for putting venture capital investments in perspective.

Consider that Microsoft spent $7.12bn on research and development in fiscal 2007. Over that same period, the total value of disclosed investments in all European venture backed companies was about $8.79bn. It's a bit hard to fathom that the total investment in all the 412 information technology companies (~$2.5bn) during that same time was only a third of the R&D budget of a single software company. The graph below highlights total European Venture Backed investment compared to the Microsoft R&D budget over the last three Microsoft fiscal years (July through June).

 

Thankfully though, money isn't everything. Innovation at a small start-up is much more productive and rapid than at a large company. Microsoft sometimes decides that its legions of researchers and developers can't build what their billions in cash can buy. In 2007 alone it shelled out $1.34bn to purchase 13 companies: TellMe Networks Inc, Softricity, Winternals, Azzyxi, Gteko, DesktopStandard Corporation, Colloquis Inc, Secured Dimensions, Medstory, devBiz Business Solutions, ScreenTonic SA, Engyro, and Stratature (plus $6bn for aQuantive). The TellMe acquisition was estimated at $800m indicating the average acquisition price for the other twelve companies was around $45m.  While the stats on Microsoft's research budgets may be a bit depressing, investors on this side of the pond should be happy to know that Microsoft plucked 30 per cent of this year's acquisitions from Israel, France, and Turkey.

Most people are growing weary of the glut of social networking sites. And most people that track innovative companies are growing weary of hearing about another social network getting funded. However, I was surprised to read that UK Travel network companions2travel is trying to raise funding from its own members. According to PEHub, company executive Nathan Green had hoped to offer his network's 16,000+ members the chance to invest and own a part of the company. Although that article focused on the legal obstacles to making this a reality in the UK, I found the concept intriguing.

Now that the functionality of social networks is a commodity, the real value is related to the actual people that are involved. Realistically there are a finite number of active travelers who wish to participate in travel networks, and yet in the past quarter alone two European travel networks, TripsByTips and Dopplr, raised their first round of institutional funding. If travelers are dispersed across multiple sites, these networks are less valuable. If functionality isn't distinct enough to lure new customers, then the best option for attracting people to one place is a financial incentive.

In a previous post I suggested some networks would pay valuable advertising targets to join networks as members. Companions2travel is aiming for the financial incentive approach too. However, there's a totally different risk/reward profile and it requires a commitment for the longer term. This is actually a benefit in that it keeps a core group of committed users interested in the long term success of the network. This is something which most online communities dream of.

As for whether it's feasible, the numbers actually look promising. Consider another travel social network WAYN. They raised 11M USD in late 2006 when, by some estimates, they had already passed 4M Users. For a mere $3 apiece they could have exceeded the investment which was led by DFJ Esprit. Companies get a lot more than money from venture capitalists, but this certainly seems appealing as a seed stage or bootstrapping option. Surely the staggering valuations thrown around for Facebook provide a nice incentive for individuals to buy a stake in the networks in which they participate.

Although there are legal complications with this type of arrangement, I suspect there's a way to make it work. After all, consider that MyFootballClub.co.uk has attracted over 50,000 people paying £35 who are aiming to acquire a real a football club.

Today's capital gains tax changes were a shock to most of the UK. Even the most cynical of Brown-watchers could not have believed his government would hike CGT from 10% to 18% for business owners and investors. If any further proof were needed that no politician should be allowed to attain office without business experience this was it. But the deed is done and now we've got to deal with it.

The question is, how? The clock has started running down on a six-month timeframe during which investors and entrepreneurs have to decide whether to sell or not to sell. Selling a £1m business on March 31 will incur a tax bill of £100,000, whereas selling it a day later will hit owners for a further £80,000. But if the case seems clear, it isn't. Clearly prospective buyers will factor sellers' desperation into their offers, maybe offering £960,000 (thus sharing the tax benefit) for the business on the condition the deal is completed before the tax rise takes effect. And then there is the risk that owners are panicked into selling out at the wrong time in the business's growth model - perhaps just before its marketing and sales efforts start to trickle down to the bottom line.

There are further reasons why selling now could be a mistake. For a start, economic conditions are not conducive to achieving a successful sale. Evidence from Library House's own database shows that credit conditions have increased the amount of deals done over the last three months - with the most likely reason being that owners are prepared to accept lower offers amid an uncertain economic outlook. Then there are seasonal issues: for instance, some people will have used their CGT allowances by the time year-end comes round and would have to factor in an unplanned extra item.

There are probably a host of other issues to take into consideration. But, overall, it doesn't seem a terribly good idea to sell out at short notice to take advantage of a tax break. If an investor really believes in an asset, a piffling 8 per cent shouldn't matter either way. Should it?