Google is reportedly in talks with Asian suppliers to mass produce a smartwatch.

Nextdoor, the social network for neighbors, has just raised a whopping $60 million in fresh capital. (More below in New Fundings.)

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True Ventures’ Jon Callaghan on the Series B Crunch

Late last week, I visited Jon Callaghan, a cofounder of eight-year-old True Ventures, a firm that makes seed-stage investments in companies that it can afford to back for the long haul. The firm’s string of hits includes the book recommendation site Goodreads, which raised $2.75 million and sold to Amazon this year for $150 million; 3D printing company Makerbot Industries, which raised $10 million and sold to Stratasys this year for $403 million in stock; and Automattic, the still-private parent company of WordPress. At True’s San Francisco offices, surrounded by a sea of glass windows and polished wood floors, Callaghan shared his views on a number of things, from the firm’s operations to the democratization of startup capital. We’ll feature more of that interview in StrictlyVC this week; what follows is a part of our discussion that centered on the growing shortage of Series B funding for startups.

Years ago, you told me that True only does its own follow-on rounds, meaning in companies it has already backed. Has the firm reconsidered that stance, given that fewer and fewer firms are focused on Series B size investments? You’re investing a $200 million fund. Meanwhile, it seems like an underserved market.

It’s a really interesting part of the market. We’re not building a new product for that market. It’s not in front of us right now, though I personally think about how we can solve the needs of great entrepreneurs, and that’s a big, huge problem in the ecosystem right now.

What’s creating this bottleneck, in your view? 

There are definitely too many seed-funded companies. But I think it goes back to risk. I don’t think the normal venture capital model is designed to take extremely large product/market risks. What that means is when companies get through the A [round] to the B and they still have big unanswered questions around product/market, it’s really hard for the normal industry to fund that.

What would you do that’s not being done?

You make sure that [the size of] your investments are relative to your [overall] fund [size] and you embrace the idea of investment failure as part of the model.

Other VCs will accuse you of being patronizing. They’ll say that failure and risk are very much part of their models. What are you suggesting that’s different?

Well, we’re talking about a big gap in the market – B rounds – and the reason those rounds aren’t getting funded is [the startups don’t have] enough traction.

For the most part, the industry has gravitated toward strong, traction proof points because that’s a good business. Put $5 million or $20 million into a business that’s working and write it up? That’s a fantastic business. But it’s different than taking high risks on B rounds. So to your point, I think there’s a product to be built that’s structured around taking high risk in B rounds.

If True Ventures were to do it, what would it look like?

I think there’s probably a $3 million to $5 million B round product to be built that’s sort of in the $15 million to $20 million pre [valuation] range, and in order to do that you’d need a fund large enough to have follow-on capital for each of those. You can run the math. Thirty to 40 companies [in the portfolio] would be pretty optimal.

I think it’s a really interesting slice of the industry, and it’s not rational for Sand Hill Road to come down and do it because [those investors already] have a really good model. There are some funds out there that are really well-equipped to do this and do a phenomenal job, including Foundry Group and Spark Capital — they embrace really big product and market risks. But [most] VCs will fund B and C rounds for things that have product/market fit and traction.

Those are good companies, too. But there are an awful lot of companies that get through A rounds that don’t have all of those things and shouldn’t die or go away.

New Fundings

Cyphort, a 2.5-year-old San Jose, Calif.-based cyber security business that offers its customers advanced threat monitoring and mitigation services, has closed $15.5 million in Series B funding. The round was led by Trinity Ventures. Previous investors Foundation Capital and Matrix Capital participated. Cyphort has raised $23.7 million to date.

eRecycling Group, a four-year-old, Irving, Texas-based recycling company that refurbishes and resells smartphones and other mobile devices, has raised $105 million in Series C funding led by previous investor Kleiner Perkins Caufield & Byers. Kleiner was joined by new investor Silver Lake Kraftwerk, along with other previous investors in the company, including OpenAir Equity Partners, SJF Ventures, NGEN Partners, RRE Ventures and TAP Advisors.

Magisto, two-year-old company with offices in Tel Aviv and New York, has raised $13 million from Qualcomm and SanDisk Ventures. The company helps users create videos and slideshows that can then be easily shared on social networks. The company has raised $18.5 million to date, including from Magma Venture Partners and Horizons Ventures, which also participated in its new round.

Middle Peak Medical, a Palo Alto-based medical device company that’s focused on treating mitral valve disease, has raised a fresh $3 million in funding. The money comes from BioMedinvest and Edwards Lifesciences, along with previous investors Wellington Partners, Seventure Partners, and High-Tech Gruenderfonds. (The last three invested a separate, $8.5 million in the company just five months ago in a financing that appears to have been Middle Peak’s first institutional round.)

Nextdoor, a 3.5-year-old, San Francisco company that creates private social neighborhood nextworks to residents can keep each other up to date on the latest happenings, has landed a $60 million round of fresh funding led by Kleiner Perkins Caufield & Byers and Tiger Global Management. Comcast Ventures, a new investor, along with previous investors Benchmark Capital, Greylock Partners, and Shasta Ventures, also participated in the round, which brings Nextdoor’s total financing to approximately $100 million.

OpenBay, a young, Cambridge, Mass.-based online service and mobile app for booking automotive repairs, has raised an undisclosed amount of funding from Andreessen Horowitz and Google Ventures, reports Boston Business Journal. Others of OpenBay backers include Boston Seed Capital, Stage 1 Ventures, and numerous angel investors, including Andy Palmer, Jim Pallotta, and Jit Saxena.

Paxata, a 22-month-old, Redwood City, Calif.-based data analysis startup, has raised $8 million in Series B funding led by Accel Partners. Walden Riverwood — a new tech-focused venture capital fund that was cofounded by Walden international founder Lip Bu Tan  — has also backed Paxata.

PeopleMatter, a four-year-old, North Charleston, S.C.-based workforce management platform that’s focused on the service industry, has raised $16 million in Series E funding. The round was led by StarVest Partners, and included the company’s earlier investors C&B Capital, Harbert Venture Partners, Intersouth Partners, Morgenthaler Ventures, Noro-Moseley Partners and Scale Venture Partners. PeopleMatter has raised $63.4 million to date.

Q Factor Communications, a 20-month-old, Waltham, Mass.-based startup focused on seamlessly delivering media-rich content over wireless devices, has raised $6.5 million in Series A funding from Sigma Prime Ventures and Venrock.

Rumble Entertainment, a two-year-old, San Mateo, Calif.-based maker of free, multiplatform games, has raised $15 million led by the Korean gaming company Nexon. TriplePoint Capital, Khosla Ventures, and Google Ventures also participated in the round. Rumble was formed by veterans of games makers Playdom, Zynga, Activision Blizzard, and Electronic Arts and just released its first game in beta, called KingsRoad. The company has now raised just short of $40 million altogether.

Snapverse, a young, Boston-based company whose iPhone app songs allows users to create 20-second-long music videos to songs by popular artists, has raised more than $4 million, including from John Hannan, co-founder of New York-based private equity firm Apollo Global Management. Snapverse also announced in a release this morning that it has signed a deal to license music from Universal Music Group, Warner Brothers and Sony Music Entertainment.

Stratoscale, a Herzeliya, Israel-based company that’s building a new virtualization technology meant to improve the performance of data centers, has raised $10 million in Series A funding from Battery Ventures and Bessemer Venture Partners. VentureBeat profiled the company here.

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Fund News

Norwest Venture Partners appears to be crushing it in 2013. The WSJ’s Deborah Gage has more.

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IPOs

Tableau Software is gearing up for a secondary offering, according to this SEC filing. Tableau staged a very successful IPO in May. The shares opened at $47 (after being priced at $31); today, they are trading at $67.

Trading pre-IPO shares gets trickier.

Twitter‘s IPO is highly anticipated, but other billion-dollar IPOs this year should take a teeny bit of the pressure off, notes Dealbook.

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Exits

NextBio, a nine-year-old, Santa Clara, Calif.-based company whose software platform allows life science researchers to discover and share phenotypic and genomic across public and proprietary data, is being acquired by Illumina, a publicly traded manufacturer of DNA sequencing machines. Terms of the deal weren’t disclosed.

Virtela, a 13-year-old Denver-based cloud-computing company, is being acquired by Japan’s NTT Communications Corp. for approximately $525 million. NTT is buying Virtela at the same time that it’s spending $350 million for a 80 percent stake in 13-year-old, Sacramento, Calif.-based RagingWire Data Centers, which operates massive data centers in the Sacramento region and in Virginia. Norwest Venture Partners was the earliest and largest investor in Virtela; RagingWire had raised $230 million in debt funding just last month. Reuters reports that NTT is trying to ramp up its overseas networks through acquisitions.

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Happenings

Ad Age is hosting its first-ever Data Conference in New York City today. You can check out the agenda here.

VentureBeat‘s GamesBeat conference gets underway today in Redwood City, Calif., about 30 miles south of San Francisco. Click here to survey the agenda.

RSA is kicking of its Europe 2013 conference in Amsterdam today. Among its speakers: Amit Yoran, an RSA exec who was previously the CEO of NetWitness (which RSA acquired in 2011) and before that (briefly), the head of the CIA’s venture capital arm, In-Q-Tel. Here are the details.

TechCrunch Europe continues. You can find coverage here.

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People

Speaking of the TechCrunch Europe conference, during a panel discussion yesterday, venture capitalist Matt Cohler of Benchmark Capital called Berlin the world’s next great global startup hub, not for the first time. (Cohler also referred to himself and his Benchmark colleagues as “artisans.” StrictlyVC has since imagined Cohler sitting at his workbench, poring over business plans with a set of handmade tools.)

Skype executive Mark Gillett is off to head up “value creation” at Silver Lake, reports AllThingsD.

Thanks for a job well done? Tesla Motors CEO Elon Musk has hired his divorce lawyer as the company’s top attorney.

Performer Kanye West is apparently planning to sue YouTube cofounder Chad Hurley for uploading video of West’s recent engagement to Kim Kardashian at San Francisco’s AT&T Park, where Hurley was an invited guest. (Because Kanye West and Kim Kardashian are very private people. Obviously.)

Job Listings

Twitter is looking for a corporate development and strategy principal to help identify and evaluate targets of interest for the company. Candidates need at least 10 years of experience, including at least four years of experience at a tech company or in another role that required rigorous analysis and knowledge of the tech industry (like venture capital or corporate development). An engineering degree is preferred. Apply here.

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Essential Reads

Apple wants to bust your iPhone. It’s not your imagination.

Hundreds of executives from large companies in the U.S., Canada, and U.K. tell Forrester Research that Facebook ads create less value than any other digital marketing opportunity.

Redpoint’s Tomasz Tunguz writes about how to measure “dark social.” (Earlier this month, writer Alexis Madrigal had an even more comprehensive piece on the phenomenon. It’s definitely worth reading if you haven’t already.)

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Detours

It’s bad bosses, not workloads, that cause depression at work, according to a new study (and everyone’s life experience).

More and more, robots are beginning to look, act, and perform tasks like humans.

One year ago today, Superstorm Sandy slammed into New Jersey, becoming the second costliest hurricane in U.S. history. The Atlantic has posted some amazing photos of the damaged areas, along with images of the very slow progress being made. (Starting with photo no.12, the images are interactive and feature “before” and “after” scenes.)

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Retail Therapy

White and blue gingham shirts are always in style, but we like this red and blue checkered number for a change of pace.

Coming out November 12: Dogfight: How Apple and Google Went to War and Started a Revolution. (Author Fred Vogelstein is a superb writer; we’re pre-ordering this one.)

Talk about your bling: Someone has created 22-karat gold toilet paper. Finally, an easy way to literally throw money straight down the toilet.

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