EarlyStageVC

BBC & Mashups - What Would Karl Do?

About two weeks before my last post on Teqlo, I got an email from a producer at the BBC.  They wanted to talk about Teqlo.  (Actually they wanted to talk about Radar Networks, but stealth companies don't make for compelling telly, as they say across "the pond.") Josh Dilworth at Porter Novelli PR (Radar's firm) was kind enough to suggest they talk to me about Teqlo. The Porter Novelli team did an amazing job of getting feature stories on Radar in Business 2.0 and BusinessWeek.

Quandry... Can't talk about the new Teqlo positioning, gotta stay with the "mashups are cool and we do 'em" positioning. What to do? No time to consult the leading ethicist of our time - Karl Rove. Had to make the call on my own.

As a mentor of mine once said. "the Plan doesn't change until the Plan changes."  Notwithstanding the last post, we have not officially announced a new direction; so we are still officially going the same old direction until we go in a new direction.

The result?  BBC Video Link Love.

Here's a pointer to the web page for the show Click that was about Twitter, Teqlo, and other cool stuff.  Here's a pointer to the full 22 minutes of video (Teqlo is at about 10:00 minutes in).

And here's five minutes of me talking about the emotional range of fear, greed, love and loathing that make early stage investing so much fun.

Recruiting at the Edge of the Web

If you are a frequent reader of this blog, then you probably know that my investments tend toward a theme that I think of as ‘the recombinant web.’  All my recent investments have something to do with structuring or mining information and services on the web in service of the idea of “web as platform.”

Two of the most interesting companies have not yet announced themselves to the world.  They remain quiet, not to escape attention, but to avoid getting wrapped up in a hype cycle.  You can call this stealth if you want.  I prefer to think of this purely as gestation.

Remaining quiet also makes it difficult to find the very best people.  The first few members of the team have the greatest influence on the success, culture, and direction of any company.  This is part of the attraction of a startup and a special kind of person is seeks this kind of empowerment.  Unfortunately the process tends to be haphazard, as great people aren’t usually actively looking for a new challenge and great opportunities are often not easily found.

Two such great “under the radar” companies in my portfolio are Abgenial and Radar Networks.    Neither has really described themselves to the outside world, but both are looking for a few great developers.  By sheer accident these two companies share some important parallels. 

• The founders of both companies have successfully founded prior companies that went IPO,
• The companies are attacking the “recombinant” web from complementary angles (data and applications),
• Both companies have been in development for 3-4 years by the core technologists prior to VC,
• Both companies are on at least the third version of the core technology development,
• Consequently both companies have very rich intellectual property portfolios

Radar Networks
Radar is what is described as a Semantic Web company.  Semantic Web generally refers to a set of technologies for organizing content/information to make it more re-usable and navigable. The founder/CEO is Nova Spivack, well-known thought leader in the Semantic Web community. 

Some Semantic Web companies are enablers, developing specific tools for ontology design and editing,  RDF triplestores, extraction tools and other things.  Radar has developed some of these technologies in-house and is using some 3rd party technologies, too.  The real focus of Radar is a consumer Semantic Web application, not tools.  Since the Series A funding in April, the core team has been heads-down building out the internal tools and prototypes.  Radar has been quietly generating some attention among some VCs and Internet execs who are privy to their plans.  Expect some news shortly.  If you are a software developer who fits this description, Radar is a terrific place to immerse yourself in using state-of-the-art technologies to change the way people find and use information on the web.

Abgenial Systems
Abgenial is solving a complementary problem.  If Radar is about how to make web content interoperable and consumable,  Abgenial is about how to make web applications interoperable and consumable.  The earliest form of this activity today is called mashups.  But mashups have some real technological limitations.

Abgenial has developed a very general and patented technology to allow everyone to create web applications out of components on the web (or behind the firewall).  It is too early to declare the market focus of Abgenial in a forum such as this.   However, suffice it to say that everyone can benefit from combining web servicesinto a more peronalized experience. it ranges from the consumer who wants to have a place where all her “digital me” data all come together (from Myspace, Flickr, Google Calendar,  Digg, etc.)  to enterprise IT who want to create composite applications from web services. If you fit this profile and are interested in seeing how concepts like web services, microformats, and user-created applications can turn the web into a true platform, you should consider joining us.  The Company is still very small, but the opportunity is very big. The CEO is a pretty marginal, but he will be replaced soon enough.

Graduation Day at Outerbay

Sometimes a good exit is like a college graduation - a time to celebrate, but a time to reflect on the relationships you've developed and the ones you'll miss. Today is one such day.

Hewlett-Packard announced today that they are acquiring Outerbay Technologies, one of our companies from our first fund. This is our second exit of the year. It is especially gratifying because we made our initial investment in Outerbay in 2001 in the Series A round.

If you know anything about the Enterprise Software market, you know the last five years have not been kind to enterprise software startup companies. Despite the torrid downdraft, Outerbay has emerged as the leading provider of archiving solutions for structured data in the enterprise. The management team at Outerbay successfully built a franchise business in its niche, with nice, monotonically improving revenues, earnings, market share, and share prices all along the way. Few software companies from funded in 2001 achieved anywhere close to this level of performance. As they executed they built a power set of distribution alliance paertners, including HP, EMC, NEC, Sybase, and others. Today HP decided that the Outerbay solution was broad and strategic enough that it fit well as the lynchpin in their data storage strategy. This is textbook case of enterprise software market development - stake out a valuable niche, own it, and the right partners will come to you with the right partnerships.

I’d like to say we saw this all along. It would be more accurate to say we sensed it rather than saw it. Outerbay began as a consulting firm, solving data growth problems in Oracle Financials for Cisco, Sun, and Applied Materials. We believed the data growth problem was broader than Oracle Financials, but a platform opportunity in-between the relational data bases and the applications was more a hunch than a thesis. When you do Series A deals, you have to play the hunches. By the time you have real data, it’s too late.

Along the way we got to work with some great investors who came in later and shared the hunch as it took shape – Allen Beasley from Redpoint, Yogen Dalal from Mayfield, and Steve Bird from Focus Ventures. Our strategy at Leapfrog is to feed the food chain. These guys are among the best in the business. Mark Leslie also joined the Board along the way, and added immense value.

On a personal level I have to say one the best parts of this experience has been working with Rory O’Driscoll of BA Ventures. Rory was our co-investor in the Series A. The founders had been talking to Rory for a while when we gave our first term sheet. As often happens, they soon had a second term sheet from Rory and we ultimately decided to work together on the deal.

In my ignorance, I assumed Rory was part of a corporate VC operation and BA Venture Partners (as in BankAmerica) was dumb money we’d be dragging along. Man was I wrong! BA Ventures is a firm with some very sharp investors (Sharon Weinbar is another terrific partner there). The name BA Venture Partners is an artifact of where they get their capital, but their agenda is as broad and deep as any VC in the Valley.

Rory has consistently been a thoughtful, direct, insightful board member. He has immense respect from the investors and management alike at Outerbay. Rory has a sagacity about examining goals, incentives, and execution issues that is rare among Silicon Valley VCs. He’s about building a Business, not the next great transaction or product feature. That’s a discipline most VCs espouse, but few focus on that forest without getting caught up in the trees.

Being a co-investor in the A round, we have been joined at the hip for five years. Now that HP is acquiring Outerbay I will have fewer reasons to call Rory and listen to his Irish brogue rattling at light speed about ‘our little situation,’ complete with embedded self-commentary and "colorful adjectival enhancement."

We’re in a competitive business. A lot of being a VC is about self-promotion to create a halo for your companies - reflected reputation and all that. Rory doesn’t do this. He’s the real deal. He's about "at the end of the day did you have more money than when you started out?" Today is one day when all of us associated with Outerbay can say "Yes". I hope to work with him again, very soon.

The Power of Venture Myth

Some time ago when Skype-Hype was all the rage I made a flippant remark in this blog about Skype and Paris Hilton.  I couldn’t really understand why the blogosphere was all atwitter – since nearly no one was really affected by the outcome, except a few employees (too few it turns out) and some VCs.

Recently one of our companies, Riya.com, has had it’s turn in the barrel of speculation.  For several days multiple “authoritative" blogs repeated a rumor that Google was buying Riya.com.

Rarely does one get a chance to sit back and watch the media frenzy for the ‘scoop’ with absolute knowledge about the truth of every single report. Every report was factually incorrect at the time it was printed.  I did not see one accurate characterization of any discussions Riya.com may or may not have had. 

We were in the middle of a financing.  Plain and simple.  And Riya had multiple attractive options.  None of us commented because you don't talk about stuff until it's done. The CEO did discuss  some of the people he'd met in the process, without discussing specifics. The Company has now selected its path and it will announce it path once it is completed, probably early January. Regardless of the path, the service will continue to grow and expand, executing the same vision, only bigger.

I think the fascination with Riya, Skype, Del.icio.us, and every other potential tech acquisition is  really driven by the Myth of Silicon Valley.  The Myth of Silicon Valley is the myth of Lottery – Meets Horatio Alger – Meets Revenge of the Nerds.   The Myth usually has two protagonist hero inventors – Dave and Bill (HP),  Steve and Steve (Apple), Bill and Paul (Microsoft), Jerry and David (Yahoo), Sandy and Len (Cisco) and Bill and Andy (Sun).  Most recently Larry and Sergey (Google).

There are often two other, less heroic, but fundamental players in the mix --  a charismatic (or at least entretaining business person (often CEO) and a lead VC.    Ballmer, Markkula, Koogle, McNealy, Chambers, Schmidt on the business side. And a VC cast as the savvy invisible hand. Rock, Doerr, Valentine, and Moritz are among the most notable VCs.

The glitter of the rumor of instant tech wealth is the affirmation we all seek for devoting ourselves to the irrational pursuit of the Myth.  The Myth of the Hero Hackers, who, with a computer and some Red Bull, can create Being from Nothingness.  The Myth of the Hero Executive who can join a wobbly little start-up and ride off into the sunset with personal wealth and fame.  The Myth of the Hero VC who can take credit for finding (and claiming to have “built”) the next Big Important company, thereby confirming how much smarter s/he is to have been luckier than all the other VCs.  Business journalists know we all have the hunger and feed our appetite for the Myth.

And the Myth is powerful.  The Myth is the basis for the Entrepreneur Bubble.  It is the basis of every investment bubble.  And it is structurally part of the venture capital industry, The median venture capital investment loses 36%. This is a hits business, and the rates of return are positive in aggregate because the hits are so big as to swamp the losers.  But if VCs lose 36% on the median investment, it means that the Preferred Stock loses money.  If the Preferred loses money, the Common sees nothing.   The Myth is built on Survivor Bias, not base rates.

So the median outcome is a loser for everyone. But so is the state lottery.  So is every casino.  But venture capital investing and starting small companies is more like a casino than a lottery.  The lottery is a blind pool.  It's a game called midnight rain-out baseball in poker. All random.  In a casino you have a choice of games, and some games have better odds than others.  Some games have odds that actually can be influenced if you are smart enough to know how.  The casinos call it counting cards and will throw you out.  The VCs call it risk minimization and will reward you for it. The current built-to-flip chatter is the ultimate pursuit of pure Myth.  As most any VC will tell you, built-to-flip doesn't work because you can't reliably time someone else's agenda. You can't time the Myth. Myth happens.

So the next time you see a frenzy about a rumored payday for someone else, pay attention to your attention. Pay attention to why this is so meaningful to you and what you can do to change the odds of the game in your favor.  And your mother was right.  You have to love what you do, because the rest is probably Myth.

Our Opinion about Epinions

The Epinions/VC lawsuit has been settled.  The terms are confidential and I have no idea what the outcome was.  But I am glad that this is over for one very special reason.  Naval Ravikant was one of the principal shareholder plaintiffs suing the VCs, and even as that was unfolding, we made a decision to back him in his next venture. 

Making a decision to sue a former partner is always tough.  Regardless of the situation, when mud starts getting thrown, everyone gets sullied.  We met Naval just after the mud started.  The stakes are always high when you make an investment decision.  They are that much higher when your potential new partner is in a fight with his old partners.

We didn't look at the merits of the case. We weren't in a position to evaluate it, not did we want to. We looked at Naval, how he defined "fairness", "honesty", and "trust" to understand if we shared his values.  We talked to others he had worked with to see if our assessment synced with others.

What we saw and heard consistently was that here was a guy of high integrity, unbelievable creativity and intellect, and boundless energy.  Regardless of what caused the breakage at Epinions between investors and shareholders, suing VCs was "not his new business model," as one reference put it.

The Internet bubble and its implosion was a up/down cycle with which few of us, if any, had prior experience.  There was extreme behavior in every quarter -- entrepreneurs, VCs, bankers, buyers, etc.  The big lesson for me from that period is that every outcome -- good and bad -- should be highly discounted.  Most new billionaires were smart people with happy accidents.  Most big investment successes were the same.  Many failures had great people who got a big education about business, values, and life.   The Epinions/VC lawsuit seems to me to be one more historical accident to be discounted.  I see no enduring reputation value for either side.  The fact that it's settled says to me that all parties acknowledged that all parties had point of view with at least some merit.

As I said, we backed Naval in May with Omni.  They are about to launch albeit under a new name - Vast.com (more on this soon, very soon).  We are in the "perceived risk" business.  Back a year ago when all this was headlines, most of our brethren would have said "what were you guys thinking?"  Now I can tell you. We were thinking, "this guy's a winner."

BTW, we got a two-fer.  One of Naval's partners at Epinions and in the suit, Kevin Laws, joined this new venture just after we funded the Series A.  Kevin is COO and equally gifted as a perfect complement to Naval.  I love it when a plan comes together.

Wily+Timestock=Customer Transaction Quality

Last week Wily Technology acquired one of our companies – Timestock. This acquisition should be a textbook example of a great fit.

When we met Timestock, a year and a half ago, we saw enormous potential in what they were doing to 'close the loop' between business objectives and IT execution. Over time, we pushed the Company to re-position themselves around the concept of Customer Transaction Quality, pulling measurement and remediation out of IT Operations and into the line of business where it really matters. The result was a strong enterprise value proposition and higher average selling prices than most other application performance management products.

Wily is a solid, growing, profitable enterprise software company selling a great J2EE management tool. Their customer list is as impressive as their management team.

This is great fit both financially and strategically. Timestock was very capital efficient. In fact, the Company only raised a small Series A investment (Leapfrog was the only investor). But on that investment they managed to build a terrific product and get some major reference customers. In this market, customers like e*Trade, Cingular, GE, Network Appliance, and Xerox don’t generally buy from tiny companies, unless the companies have great products. Timestock did.

Wily now has a really compelling product line story, being able to follow the transaction from the customer all the way down into the deep enterprise infrastructure. The synergies are enormous. Timestock could instrument the customer transactions (e.g. stock purchases for e*Trade) and tell which ones were failing, who is affected, and the cost. Wily’s products can take that defect and isolate the root cause in the infrastructure. The points of integration are obvious and really valuable.

Financially, this made sense, too. Often startups raise too much money early on. Raising too much money actually limits your early exit options by raising the bar that has to be crossed. (The Timestock team actually had another offer to raise more cash at a higher valuation in their series A, but they understood the cost of overfunding – lower ownership, higher bar. So they took our offer.) Timestock was raising a Series B investment when they met Wily. The use of the Series B was to begin to build out the sales channel, management team, and scale the Company.

There is always serious execution risk in building out the enterprise past the first few customers. It’s a risk worth taking if two conditions hold. First, if there enough core skills in the Company to reasonably execute that growth. Second, if you can reasonably expect you are building enterprise value that would be captured in an exit-by-acquisition.

But often the capital spent to build a channel is of limited value to most acquirers. The acquirer usually already has a channel. So if you are building a channel of your own in the enterprise software business, you are committing to an exit by IPO – a very tough proposition these days. (However, you may need to build enough of a channel to get an acquirer’s attention.)

Most small companies raise the A to build the product and a B round to get the first few customers. So they face this build the channel or sell question after considerably more money has been invested – read ‘dilution’. But this one was special. Timestock was efficient and effective in building a great product. The product team was just awesome. They build an unbelieveably scaleable, robust, and easy-to-install product.

Wily should see a very quickly integration of the team and accelerate growth by presenting the product to the installed base. The added plus is that the elegant end-to-end story should help drive a new wave of customers to adopt Wily over IBM, Mercury, and others.

Congratulations to the whole team.

Omni-Explorer->?

I had lunch with another newly Leapfrog-funded CEO today -- Naval Ravikant. Naval is CEO of a company we are (for now) calling Omni-Explorer. Matt Marshall semi-outted them a few weeks ago. All he'll let me say is that Omni is a Web 2.0 search deal. Yeah search. Am I a lemming? I don’t think so. When I saw the tech, I got it immediately, because I have a fair amount of the search business in my background, too. But, without Naval, I wouldn’t have done this deal. Naval is brilliant – he is the synthesis of strategy and tech. Omni isn’t a bet on an algorithm. That would be VC lemming behavior. It is bet on Naval’s ability to build a great business leveraging great (and special) Web 2.0 search technologies. Naval, too, is a young man with a lot to prove (his fight with a couple of venture firms about Shopping.com was big headlines in the venture community when we did this deal), and it's good he has something to prove. Because when he wins, I’ll win.