Startable - Healy Jones’ & Prasad Thammineni’s Blog

1. First of all I’d like to congratulate oneForty of TechStars Boston for closing on a seed funding round. There are some other interesting companies in the TechStars Boston program and I’m hopeful that they too will be successful in finding funding to continue to grow their businesses.
2. Secondly, congratulations are in order for the team over at CloudSwitch for closing on a second round of financing recently. Commonwealth Capital has invested capital into the business, shortly after the company closed on an investment from my former employer, Atlas Venture, and Matrix Partners. There is a simple reason as to why this company was able to raise capital so efficiently in such a difficult funding environment. A well-respected founding team led  by Ellen Rubin was joined by John McEleney, an experienced Boston-area CEO. As I’ve blogged about before, team matters when raising venture capital. (I know, I’m pretty much linking to Innovation Economy today. I guess Scott Kirsner is just writing about interesting stuff today!)
3. Microsoft is going to sell Razorfish, according to the Financial Times. Pretty interesting stuff. Razorfish is the “creative” arm of aQuantive… Other online ad technology companies have proven that they don’t need a real ad agency arm to do well in the space (such as Google). So does creative matter for online advertising? Well, beyond the basic idea that more interesting display ads are more likely to get clicked, yes, I think it does. Here’s why: social media is growing in importance in online marketing. I’m not talking about targeted ad campaigns run through Facebook’s ad service, but instead the need to engage customers with interesting messages through Twitter, fan pages on Facebook, via engaging iPhone apps, and in other one-to-many social media services. I think it’s pretty clear that customers are getting really good at cutting out the clutter, but are getting pretty into fun “messages as a game” or “messages as entertainment” type marketing programs. I do not believe that simple mathematical formulas can create solid engagement in these areas yet.
4. Finally, the thing I’ve been thinking about for a while: “The Top 100 Networked Venture Capitalists.” I actually think the title to this Techcrunch article is a bit off, it should be the top networked venture capital firms, but anyways… a while ago some academics parsed venture capital returns by how many other co-investors a particular venture firm invested along side of:

They looked at historic venture returns and found that “better-networked VC firms experience significantly better fund performance,”

But who cares about venture capitalists’ returns. What the entrepreneur needs to think about is which venture capital funds are going to help his/her startup the most. The list presented on Techcrunch is a pretty good indicator of the funds that adopt an aggressive investment syndication approach. As I’ve mentioned several times in the past, syndication is a very good idea. If you are an entrepreneur and you are looking for a list of venture capital firms that you should try to network into, this list isn’t a bad place to start. These are the VCs who have the relationships you will need to find additional capital to support the growth of your company. Your fund raise doesn’t stop after the Series A, and these funds are the best at helping their portfolio companies find their next round of financing.

Matt Greitzer of Razorfish posted a thought-provoking piece on the evolution of the ad agency business last Friday over at MediaPost. In his post, Matt talks a lot about how the ad business was wed to a business model of creative + ad buying, and attempted to add value by its ability to make better (i.e. cheaper via volume-type discounts) ad purchases for their client… and then marked up the ad buys by 15%.

Obviously this model is challenged by online ad networks, where anyone, regardless of their volume, can purchase the same online ad unit at auction for the prevailing price. As Matt says:

In an auction-based environment like search, or the budding ad exchange field, buying clout is meaningless. Creative is still important, but what’s even more important is campaign optimization and segmentation, the effective use of which enables the creation of highly qualified audiences independent of the media on which those audiences are found. The media themselves are now interchangeable (feel free to debate me on this last point). Optimization and segmentation require people and technology, and the relentless downward push on agency commissions causes the agencies themselves to under-invest in both.

This got me thinking. Under-investment in technology may end up killing a number of ad agencies, but the forces that cause this sort of under-investment make a lot of sense when put into the context of the agencies’ business models. They can only charge a certain percentage above the end media buy. Their customers have decent visibility into the markup that any give agency is charging. And there are numerous other providers who could claim to offer a similar other service (in other words, it is a very competitive space.) Where is the ability to charge the customer more for a technology purchase? Or, who within the agency has the power to cut the margin on a particular piece of business to buy technology? I’d imagine that there would need to be a solid mandate from the top…

When technology innovation fails to come from within an industry it is sometimes thrust upon an industry from outside. The Google example is over used to the point of being a cliche, but it is true that the company has really challenged the way advertising works. I’ve very excited to see where the next wave of change in the advertising world comes from. I’m not convinced it will be from the agencies…

The SaaS business model is becoming an increasingly important part of the New England technology landscape. It makes a lot of sense that New England technology companies would lean towards the Software as a Service model, since this area has historically been a strong enterprise software innovation center and SaaS is the new way to sell enterprise software. I’m starting a list of some of the SaaS companies HQ’d in New England, with a particular emphasis on ones serving the small and medium businesses market.

I’m sure I’ve left off quite a few - please email me or post comments below so I can try to get a better running list!!

acquia - Acquia is a commercial open source software company providing products, services, and technical support for the open source Drupal social publishing system. They should soon be releasing “Drupal Gardens,” a software-as-a-service version of Drupal that speeds the design and deployment of Drupal social publishing sites for new, non-technical users including small business owners and web designers. The company is funded by Northbridge and Sigma.

Cloudswitch - Some amazing technologists and executives have come together to help enterprises fully capture the power of cloud computing. (Disclaimer, my former employer Atlas Venture is an investor.) The exact business model hasn’t yet been publicly announced but it has the potential to be big…

Constant Contact - THE email marketing company, CTCT is one of the New England’s better known public software companies. CTCT increased revenues in Q1 2009 to $28.1 million, up 55% from Q1 the year before. Gail Goodman, the CEO, has been a local leader in promoting software innovation by offering her experiences and advice to a number of the up-and-coming younger companies.

Carbonite - Seriel entrepreneur David Friend’s online backup company launched in 2006 and has now backed up over 2.5 billion files. The company is a marketing machine. Carbonite is based in Boston and was originally backed by local angel group CommonAngels.

Gomez - A Lexington based company focused on providing SaaS solutions that help companies develop, manage and test their web sites before and after deployment. Customers include Best Buy, Starwood and Wacovia.

Grasshopper - The company formerly known as GotVMail has served over 70,000 SMB customers, providing voice and voicemail services - all without having raised venture capital. People in Boston need to talk about this company more. Read the rest of this entry »

Has your startup failed before? I don’t mean the exact company that you just founded, but the business idea that you are attacking. It’s not necessarily a bad thing to try to take on a problem that has already gotten the best of other entrepreneurs. Difficult problems can be the most rewarding and can offer great opportunities. But when I was a venture capitalist hearing one of these pitches, it was very frustrating when the founders didn’t realize that there have been other, failed companies in the same space.

If you are pitching something to VCs that has failed before, you need to be able to talk intelligently about what caused the previous failures and how your startup is different. Venture capitalists will want to know that you are aware of the risks in your space and that you are taking intelligent steps to overcome them. Not knowing about other startups that have failed is fine if you are starting a company on your own (I guess), but if you are approaching funding sources you better know if there have been big-time venture funded failures with a business plan similar to yours.

I was always a bit surprised when I knew more about companies that had failed in a space than an entrepreneur trying to pitch me. That really shouldn’t happen. You’d be surprised at how many entrepreneurs present business plans to venture capitalists that have flamed out spectacularly and don’t know it. A little internet research can go a long way, as can some networking in a space before putting together a business plan and starting the fund raising process.

A venture capitalist’s natural response, when hearing about a startup in a space where a number of other venture backed businesses have met an early demise, is to assume that there is something wrong with the particular industry. “It must be a bad market,” goes the typical thinking. Read the rest of this entry »

After having spent a couple of years as a junior VC, I think I’ve figured out the real problem facing the venture capital industry. It’s just too damn fun (and a bit too glamorous, in that geeky kind of way.) Too many people want to do it, particularly successful entrepreneurs. 

It’s funny. When I was a VC one of the questions I asked startup founders/entrepreneurs was what their long-term career goals were. Usually they responded something about growing and leading a large and successful company - the answer most VC’s want to hear. However, a not insignificant number of repeat, successful entrepreneurs often spoke of eventually selling their company and then, with a misty look in their eyes, “maybe getting into venture capital.” This happened regularly enough that I went through several stages of reaction to it during my time as a venture capitalist.

When I first started hearing this desire my initial reaction was, “hey, I want to grow up to be a VC, and you’re probably going to be better than I am at it, why don’t you stick to being an entrepreneur and not take my spot?!?” After hearing this response from a number of entrepreneurs I began thinking something different, “dang, if all these people get into venture capital there is going to be a glut of venture capitalists.” Of course, I recently noticed that there ALREADY is a glut of venture capitalists and not enough good CEO/founder-types (yes, I’m a bit on the slow side; it’s probably been like this since before I started my career.)

When pundits talk about the problems in the venture industry, they usually talk about how the incentive model for venture capital funds is messed up, and how venture capital fund managers can grow rich off of the management fees. This is true, but Read the rest of this entry »

I’m still putting together my thesis on why the technology IPO market is broken (see my post on the sorry state of VC exits & IPOs in Q1 2009). But I’ll give you a clue as to my initial thoughts: 1) the whole IPO market is busted, so as a side effect technology IPOs are broken; 2) the big buyers of small-cap technology IPOs have left the building - I’m not 100% sure why but I bet it has something to do with the fact that in the late 90’s a bunch of crap was sold to them; and 3) something about trading fees being too low to support research analyst coverage of $250 million market cap companies, thus making these small technology companies harder for mutual funds to actively follow.

To the last point, a healthy investment banking industry is critical to getting IPOs done. Michael Butler of Cascadia Capital (a well known boutique investment bank based in the Pacific Northwest - when I was at Summit Partner we did some work with them and they knew their stuff) has recently written a blog post on PEhub on the state of the investment banking market and why/how it is screwed up. One his points really caught my eye.

They (banks) began competing against their clients when it came to trading activities and traditional investment banking activities such as M&A 

The overall take-away: Fueled by public shareholder funding, investment banks essentially became hedge funds and PE/VC funds, and their core investment banking activities were relegated to secondary business lines. 

Michael is very correct. When I was a baby banker with H&Q, the sexiest group to be in was M&A. A major reason for this is that it was the most profitable group. Read the rest of this entry »

Android, Google’s new cell phone operation system, is starting to get some traction, according to AdMob’s new Metrics Report. According to AdMob, the G1 (the new G phone) is the number 4 smartphone in the US behind the iPhone and two Blackberry models. 

Phone app developers are going to have to start considering other operating systems. I really like the idea behind RIM’s new app store, and if the G phone get some traction then Apple could face challenges. Now, I’m not suggesting that Apple is about to fall off a cliff or anything like that, I’m just saying that they must keep from being complacent. 

Last September I postulated that Google’s Chrome was targeted more at Apple than Microsoft. I stand by that. More and more it is becoming clear that the next wars between the big web players is going to be 1) mobile and 2) cloud computing. I’m really starting to think that the next browser wars will be on the phone…  and we are in the opening moves of the OS battle. I wonder if Apple will continue to stick with its “own the device and the OS” philosophy - the same one that enabled Microsoft to steal away the PC market.

An article in today’s New York Times on the recent decline in real estate mobility in the US got me thinking on the importance of location, mobility and venture capital. The Times article has a number of realtors, movers and economists freaking out because the absolute number of Americans who have moved recently fell to the lowest level since 1962 - when the nation was something like 40% less populated.

What does real estate have to do with technology innovation?

Location matters.

Successful companies spawn other successful companies. Usually this happens in the same geographic area where the original company was based, for obvious reasons. Entire ecosystems of startups have come from DEC in the Boston area and a number of great companies in the SF Bay Area have been born out of previous winners like SGI. With critical mass these ecosystems become self-reinforcing and can continue to spark innovative companies for many, many years. 

Academic institutions matter and are location specific. The impact of MIT and the surrounding schools on the Boston area is immense! (The same is true for the Stanford ecosystem.) The students and professors at institution will continue to create commercializable technologies and having the right startup attitudes and resources in the area is very important to taking these technologies from the laboratory to the customer.

VCs like to be near their portfolio companies. Certain regions dominate venture capital and angel funding landscape, and startups in these areas have more venture firms to speak with and more options during their funding search. This tends to beget more opportunities for startups in a particular area.

Gummed up real estate market = bad for innovation

If up and coming technology executives can not afford to sell their homes (say they are underwater on their mortgage) and move to a technology eco-center to join great technology companies than the self-reinforcing cycle of successful startups spinning off new startups may slow down. Technologists and managers need to be able to physically move to the best areas if they are to eventually start a new company there based off of the learnings (and hopefully cash) they gained by working for awesome bigger/successful companies.

There is a limited supply of talented sales people and technology managers, and they need to be mobile enough to move to academically rich areas so that they can help commercialize technologies coming out of universities. While universities may be great at coming up with new technology ideas they often need help taking that technology and making it into a product that customers can understand and use.  There needs to be a deep pool of business talent in an area to cope with the massive amounts of amazing technologies created at a place like MIT, and that pool needs to be constantly refreshed with new talent from outside the area. Finally, students and professors need to be able to frictionlessly move to the institution that will support their research. If the real estate market is too gummed up how can this happen?

Since venture firms like to be near their startups, startup founders often move their businesses to be near their VCs. (I know, it sounds crazy but it’s true!) Venture funds do not want a large part of the proceeds to go to paying off moving expenses, including taking care of underwater mortgages, so the startup ecosystem needs mobility in the real estate market.

Basically, startup founders need to be ale to move to the best location for their startup. Certain areas have deep resources; resources that help people start companies. Support groups, recruiters, VCs/funding, experienced lawyers, landlords who understand it is ok to rent out their property to unknown startups, etc. A lack of mobility in the real estate market hurts founders’ ability to move to the best place for their business. Hopefully the real estate market will begin flowing again!

I’d love your comments and thoughts;

Thanks,

Healy Jones

There have been a ton of reports on the massive drop in venture capital funding deployed in Q1 2009, so there is no need for me to rehash the facts and figures in my blog. I did spend a bit of time cutting up the numbers, hopeful that the drop was concentrated in only one area. When I downloaded the funding report from the NVCA I was expecting later-stage cleantech deals to have been the hardest hit. My thesis was that tourist hedge funds were leaving the cleantech project finance world. I may have been sort of right; late stage and expansion stage deals dropped by almost $4 billion in volume vs the previous year and cleantech was off by almost $1 billion - but that still left a huge % decrease for all other sorts of early stage technology and non cleantech startups. So, it’s pretty grim across the board.

Below are a few observations for the startup founder trying to raise their first venture round in this climate.

1. Fund raising is taking longer than ever. Read the rest of this entry »
   

In a similar vein to my post from a couple of days ago about how poor Q1 2009 VC exits were, today there are reports that Q1 was also very poor for venture capital funds looking to RAISE capital to invest. While this isn’t a surprise, the actual dollar amount of the drop was pretty stunning: $2.4 billion raised vs. $6.7 raised in Q1 2008. That is very substantial 64% drop. Only 23 VC funds raised $, as compared to 57 in the first quarter of last year.

This is bad for entrepreneurs, because fewer venture firms and less money means it will be much harder to find firms with dry powered to invest in their startup. To make matters even worse (for the true startup seeking funding) the types of funds that invest in young companies dropped even more. Early stage and multi-stage (funds that do both early and late stage investing) dollars raised dropped by almost 70%.

There is a lot behind this drop. Some funds are not trying to raise money right now due to the economic climate. Many limited partners (those who invest in venture funds) are having liquidity problems and are not able to invest in anything, let alone a fund with a seven to ten year horizon. But there could be something more sinister here - the VC model has not created great returns for investors since the dot.com crash. Are investors starting to lose faith in the asset class of venture capital??