XconomyXchange: Consumers, the Cloud, and Beyond—New Rules for Innovation

Monday, Sep 27, 2011 GK

Have the rules for founding and investing in startups changed fundamentally? To shed light on such questions, Xconomy is convening three leading venture capitalists who have backed some of the hottest consumer, cloud, and Internet startups out there today for an intimate chat overlooking Boston Harbor. We hope you join us for this stellar evening.

(DP) David Patrick, CEO, Apperian (moderator):David has 25+ years of senior executive experience in the software industry and recently raised $9.5 million in financing led by North Bridge Venture Partners, Bessemer Venture Partners, and Kleiner Perkins Caufield & Byers. He previously served as CEO of xkoto, a database virtualization software company acquired by Teradata, and VP & General Manager at Novell, which he joined when it acquired Ximian, where he was also CEO.

(LB) Larry Bohn, Managing Director, General Catalyst: An investor in Hubspot, Visible Measures, and Black Duck Software, among many others. Larry previously served as chairman, president, and CEO of leading software and analytic solutions company NetGenesis, which he took public.

(JF) Jeff Fagnan, Partner, Atlas Venture: Jeff focuses on very early stage projects in enterprise and Internet infrastructure. He currently serves as a director of Abine, Bit9, DataXu, Grockit, Hopper, Keas, and Veracode, among others. Jeff is also a founder of TUGG (Technology Underwriting Greater Good), a non-profit foundation harnessing "crowd-sourced philanthropy" to catalyze social innovation in New England.

(RL) Rich Levandov, Managing Director, Avalon Ventures: An entrepreneur, operator, angel investor, and now VC, Rich co-founded Phoenix Technologies, a company that helped launch the PC revolution, and served as an early VP of America Online. He led Avalon's early investment in Zynga, as well AdSummos, Backupify, Cloudant, Cloudkick (acquired by Rackspace), Pictela (acquired by AOL), Simulmedia, and more.

(DP) What is at the top of your mind; what is currently hot?

  • (LB) Focus on early stage companies; runway of as long as eight years. Could be in the form of seed money of mini Series-A. Activities in Cloud Services and Social Networking as relates to commerce.
  • (JF) Atlas runs a “machine” willing to take risks to early startups; 25 seed projects including HTML5, Life Sciences, the “big data stack” (i.e. storage, cloud services, etc), hackers education, healthcare, etc. Atlas has given the authority to the partners to make their own decisions with minimal bureaucracy up to $1M. Using less strict evaluation criteria they are less exclusive of the breakthroughs; if early investors apply the usual criteria, Facebook will have never be funded…
  • (RL) Hot: Emerging Platforms and other technologies enabling new services; Cloud Computing (ala Amazon)

(DP) What is a typical amount you provide as seed?

  • (JF) Less than $1M; put the decision to the General Partner and take risks. Criteria: (a) the entrepreneur, (b) the market, (c) the product
  • (LB) Two General Partners have to agree – they do take bets. No follow-up for Round A – companies will have to seek next level of VC players.

(DP) Small seed money are covered; large amounts are also covered by the VC; what about the middle ground?

  • (RL) Avalon makes many 100’s of deals per year in the range of $100k to $250k. But for companies it is much more expensive to grow.
  • (LB) General Catalyst asks the question: does the market allows growth to $1B or not; is it $300M? if so, invest more. But any investment needs to return at least $500M.

(DP) What are the key things they look for the big investments? What is the score card?

  • (RL) Transformational Technology to change the market
  • Passion; growth rate; traction
  • People; market; idea
  • We are wrong in 70% of the cases
  • (JF) Market & competition; Team; Product; gut feeling about the company
  • (LB) Leading person – not only a serial entrepreneur.
  • (RL) Comment about the VCs: “Often wrong, never doubt”

(DP) Companies now can start with minimal capital, create a product, deploy and have real customers. As an example, his current company is totally virtual and does not have a phone – they use software from the free cloud services. What is VCs think about the could services?

  • (LB) Cloud services are good for startups but as the companies scale up it gets too expensive. Cloud only delays the point of needing the capital.
  • (RL) Cost of doing it internally can be as bad as using the cloud. Cloud can be unreliable, but inhouse IT has its own risks. Amazon will improve over time.

(DP) What are your thoughts with respect to the East Coast vs. West Coast of investors? Is raising capital in the East Coast harder?

  • (JF) Spends 40% of his time in the West Coast; Boston area is coming back in terms of investments. Lots of companies now are moving to Boston. Main issues with the West Coast: engineers are more expensive; the pool of the 1% talent is smaller; people are less loyal. East vs. West is a dead issue.
  • (LB) Series A in Boston; Series B in the West Coast; less of geographical divide now than before.

Q&A from the Audience

Your opinion about Virtual Teams?

  • (RL) Sometimes works, sometimes does not
  • (JF) Team needs to be together at some point to create a culture, especially when it builds a critical mass

Is the Cloud reliable?

  • (LB) The real issue is if the internal IT is more reliable than the cloud; if you concern a lot, you might want to consider a hybrid model.

What are the reasons to consider moving the operations inwards and not using the Cloud?

  • (LB) Control freaks – but they might be wrong. Get better probing and instrumentation into the software. But the cloud will become better over time as well
  • (RL) Hybrid model is an alternative; VMWare made announcements to this degree.

So, what is the difference between Angel vs. VC Groups today?

  • (RL) Might be the same; VC could react faster; micro-caps provide flexibility. Another consideration is of how quickly you need the money
  • (JF) Blurring; it is all about the individual you are dealing with not their companies
  • (LB) Go to someone who has the experience to help you! They might also influence the later stage funding.

Startup Company Presentations

OfficeDrop

Digital filing and sharing. Using apps not browsers; $2M revenues

Their customers send receipts by email or scanning; provides workflow; extensive security and permission management; applications use their own APIs so it can reside in the Cloud or not.

Hopper

Travel search and discovery. Hosted in the cloud but they also build their own machines. Only hiring the top 1% of the engineers.

CustomMade

Mass customization of anything i.e. jewelry, etc. Connects producers to consumers; 350 jewlers; consumers receive bids from the makers. Openings for sysadmins. To his opinion there exist an East vs. West Coast problem.

Yottaa

Website performance optimization.Monitoring product. Speed optimizer product. 1 year old company. 60,000 sites already have an account.

XconomySponsors

  1. Advanced Technology Partners
  2. ARCH Venture Partners
  3. Atlas Ventures
  4. Avalon Ventures
  5. Bain Capital Ventures
  6. Boston Millenia Partners (I have met Frank Silva and Rowan Frankel)
  7. Flagship Ventures
  8. LaunchCap
  9. Northbridge Venture Partners
  10. Polaris Venture Partners

Contacts

  • Bob Buderi. Founder and Editor in Chief, Xconomy, Chatted with him before the meeting. Full time job organizing events; sponsor focus.
  • Keith Spiro, Kendal Press , (617) 354-2584, Talked with him at XSITE 2011 in Babson June 2011. Met him again – very friendly
  • Sales of Xconomy
  • Gregory Huang, Editor of Xconomy Boston, , (617) 252.7323, (617).331.1134m. I talked to him before the meeting. Provides blogs and editorial help
  • Co-center (in transition)
  • Dan Greenburg – met him during breakfast meeting, April 4rth. Now got a contract from? To build an operation in the USA
  • Mark Eisenberg, Solution Specialists, Windows Azure, Microsoft, (557) 453-6356. Met him on the way to the restroom; he said if we need help with Silverlight or Azure he can help.
  • Gregory Dale, President of Catalyst, (508) 808-1183, . Very nice gentleman – I met him at the elevator; did some work for Xconomy; primarily markting and some bz dev. I explained to him the netBlazr story; introduced him to Spiro.
  • Coach Wei, CEO of Yottaa, coach@yottaa, (+86) 1520 159-1015. I handshake with him
  • Jeffrey Dziama, JP Morgan, (617) 310-0304, (781) 771-2463m, . I talked to him before the meetings – tall guy; focuses on personal financials and wealth management