Azure Capital

StrictlyVC: October 30, 2014

GIANTS. GIANTS. GIANTS.

(Web visitors, here’s an easier-to-read version of today’s email.)

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Top News in the A.M.

Apple CEO Tim Cook has publicly acknowledged that he is gay, saying in a powerful BusinessWeek op-ed this morning that, “I don’t consider myself an activist, but I realize how much I’ve benefited from the sacrifice of others. So if hearing that the CEO of Apple is gay can help someone struggling to come to terms with who he or she is, or bring comfort to anyone who feels alone, or inspire people to insist on their equality, then it’s worth the trade-off with my own privacy.”

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Yik Yak: The Startup in Twitter’s Rearview Mirror

Yik Yak, an app that acts like a local bulletin board, allowing users within a 1.5-mile range to post to it anonymously, hasn’t received nearly as much press as other anonymous apps, including Whisper and Secret. It’s seeing much more user pick-up, though. As of last night, Yik Yak was the 27th most downloaded free app in the U.S., right behind Twitter, according to app analytics company App Annie. It was also the sixth most downloaded social media app. Twitter was ranked fifth.

The year-old, Atlanta-based company is almost exclusively a college-based phenomenon for now – and very much by design. Indeed, in August, Yik Yak hired 140 campus “representatives” to plaster universities with its marketing materials, a campaign that appears to have been very effective, though Yik Yak doesn’t disclose user numbers.

The question is whether the app makes sense beyond college campuses. Yesterday, StrictlyVC talked with Cameron Lester of Azure Capital, one of the company’s backers, about it. Our conversation has been edited for length.

You found Yik Yak early on. How?

We found it through outbound research. Anyone who spends time with millennials can see their growing lack of interest in the traditional Facebook experience and gravitation to mobile social; as we were forming a thesis around [what’s next], Yik Yak appeared on our radar. We reached out to one of the company’s seed investors who we know and we ended up participating in its [$1.5 million] seed round. When the company was raising a more formal amount — its $10 million Series A, which came together quickly — DCM led the round and we participated in it, investing well above our pro rata.

Yik Yak is taking off on college campuses. Why is that, and can it grow beyond universities, or is that a big enough market?

The advantages to [a college body] are numerous. Yik Yak isn’t offensive relative to some other social media apps that include photos, because from an anonymity perspective, photos create a big problem. The fact that it’s location based, bringing together users in a 1.5-mile radius, also provides a lot of contextual value, particularly if you have a demographic in that range that has a lot of affinity like college students. Yik Yak also [plays into] a big backlash against this concept of [a trackable] online identity. People want the same level of privacy online that they enjoy offline.

In the meantime, we’re already starting to see Yik Yak bleed out into other places. This summer, for example, when people got off campus, networks sprung up on Wall Street, with Goldman Sachs interns bantering with Merrill Lynch interns. The same thing happened on Capitol Hill, with Democratic and Republican interns. And in summer, the user base was a fraction of what it is today.

Yik Yak recently made it possible to peek into other Yik Yak feeds anywhere in the world. That would seem to have a lot of really interesting applications, including for journalists who right now rely heavily on Twitter for breaking news.

Yes, you can now place a pointer on a map of the world and go to Moscow, Hong Kong, Dubai or elsewhere to see what’s going on. It’s pretty crazy. You can’t participate but you can see what’s happening. Basically, American college kids are [introducing it everywhere]. The company’s next phase of growth is urban areas around the globe.

How will the company make money?

Step one is to get to critical mass. But Yik Yak is uniquely positioned to monetize around local affinity. We’re living in sharing economy and all kinds of local services would love access to this kind of user base. You can also imagine sponsorships, local advertising through a model like Sponsored Tweets . . . That the audience is especially local and can be segmented provides unique revenue opportunities.

Yik Yak has already been involved in cases of bullying. To keep the app out of the hands of high school students, who began using it to abuse one another earlier this year, the company had to draw a geofence around nearly every high school and middle school in the country. Do you worry about the liabilities or risk to your brand?

Back in the spring, I had two middle school students – one just went to high school – and all that [bullying] stuff [in high schools] was going down and my reaction was: No way. Then my son came home and said, “They told us about this app that we shouldn’t use.” Then I was really thinking: No. But these founders are white hat guys; they’ve wanted to build something big and useful and benign from the beginning, and they’ve been very proactive about getting bullying and any kind of comments that shouldn’t be there off the system. I think if anything, we’re on the back side of this. I feel like if there was a risk, that’s already been largely alleviated and what we have to do is more of the same.

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New Fundings

AdPushup, a 1.5-year-old, New Delhi, India-based company whose A/B testing platform built for web publishers enables them to create and test different ad placements to optimize their ad revenue, has raised $632,000 in seed funding from Kima Ventures and a long list of angel investors, including SlideShare cofounder Amit Ranjan.

Affinivax, a new, Cambridge, Ma.-based biotechnology company dedicated to developing vaccines, including for Streptococcus pneumoniae (pneumococcus), has launched with $4 million in funding from the Bill & Melinda Gates Foundation, a commitment that includes additional investments based on the achievement of future milestones.

Aileron Therapeutics, a nine-year-old, Hardwick, Ma.-based company that develops a class of drugs called stapled peptides, has added $33 million to its Series E round, bringing total funding for the round to $48 million. The new infusion was co-led by AJU IB Investment Co. and two undisclosed private investment groups, and it included participation from earlier investors Apple Tree Partners, Excel Venture Management, Lilly Ventures, Novartis Venture Funds, Roche Venture Fund and SR One.

Avisa Pharma, a four-year-old, Albuquerque, New Mexico-based company that’s developing a breathalyzer that can quickly detect the presence of serious lung pathogens, has raised $3.7 million in equity, according to a new SEC filing. The company had previously raised $5 million. MedCity News has more here.

Bitstrips, a seven-year-old, Ontario-based company that makes a personalized comic strip app, has raised $8 million in Series B funding from Kleiner Perkins Caufield & Byers and earlier investor Horizons Ventures. The company has now raised $11 million to date, shows Crunchbase.

Capriza, a 3.5-year-old, Palo Alto, Ca.-based company whose technology enables non-technical users to abstract portions of complex applications and make them work on mobile devices, has raised $27 million in Series C funding from earlier investors Andreessen Horowitz and CRV and new investors Tenaya Capital, Harmony Partners and Allen & Co. The company has now raised just north of $50 million. Venture Capital Dispatch has the story here.

Clarify, a four-month-old, Austin, Tx.-based company that’s building search and analytics software for audio and video files, has raised $1 million in seed funding from Projector Ventures and Silverton Partners, as well as early, unnamed Facebook employees. The company also raised $315,000 in debt this summer, shows Crunchbase.

DeNovo Sciences, a four-year-old, Plymouth, Mi.-based company with a system that detects primarily breast and colon cancer from blood samples, has closed on a Series A round of $2 million from undisclosed sources. The company had won $500,000 in the 2012 Accelerate Michigan Innovation Competition.

Keen Home, a 1.5-year-old, New York-based company that’s making connected vent covers that allow users to you control what rooms get heat or cooling based on their needs, has raised $1.52 million in seed funding. The round was led by RMR Capital, with participation from R/GA Ventures, Bullet Time Ventures, NYU Innovation Venture Fund,Rugged Ventures, Galvanize Ventures, Brand Foundry Ventures,American Family Ventures and Comporium. GigaOm has more here.

Krimmeni Technologies, a seven-year-old, Austin, Tx.-based company that’s developing secure communication technologies for cloud-based data centers and the Internet of Things market, has raised $11.7 million in Series A funding from Pelion Venture Partners and Third Point Ventures. The company has now raised $13.9 million to date, shows Crunchbase.

LiquidSpace, a four-year-old, Palo Alto, Ca.-based online marketplace that helps individuals find and reserve available office and meeting spaces, has raised $14 million in Series C funding led by Roth Capital. Other participants in the round include Black Diamond Ventures, Lucas Venture Group, Shasta Ventures, Avison Young, GPT Group and Steelcase.

Peraso Technologies, a six-year-old, Toronto-based semiconductor company that specializes in wireless chip sets, has raised $20 million in new funding led by Roadmap Capital, with participation from earlier investors Celtic House Venture Partners, Ontario Emerging Technologies Fund, and VentureLink Funds. The company has raised $37.2 million to date, shows Crunchbase.

Personal Capital, a five-year-old, Redwood City, Ca.-based digital wealth management firm, has raised 50 million in Series D funding led by the private equity group Corsair Capital. BBVA Ventures and USAA also participated in the round, alongside earlier investors Crosslink Capital,Institutional Venture Partners and Venrock. The company has now raised $104.3 million altogether, shows Crunchbase.

ProspectWise, an 11-month-old, Santa Monica, Ca.-based crowdsourcing platform that enables smartphone users to survey brick and mortar businesses and collect information about their point-of-sale systems and more, has raised an undisclosed amount of funding from CrossCut Ventures and Launchpad LA, with participation from unnamed angel investors.

Respicardia, an eight-year-old, Minnetonka, Minn.-based maker of an implantable sleep apnea device, has raised $20 million in funding from the Italian medical-device company Sorin Group, which also obtained European distribution rights as part of the deal. Respicardia has now raised $32 million altogether, shows Crunchbase.

User Replay, a two-year-old, London-based startup that offers software akin to a black-box recorder to help e-commerce sites track user behavior, has raised $3.2 million in Series A funding led by Episode 1, with participation from earlier investors EC1 Capital, FSE Group, and unnamed angel investors. The company has now raised $5.9 million altogether. TechCrunch has more here.

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New Funds

Autodesk has just announced that it plans to invest up to $100 million in what it deems to be the most promising 3D printer companies. GigaOm has more here.

North Bridge Venture Partners, the 20-year-old venture firm with offices in Palo Alto, Ca., and Waltham, Ma., is looking to raise $200 million for its eighth fund, shows an SEC filing that states the first sale has yet to occur. The target is far smaller than the firm’s last, $530 million fund, closed in 2008, which may be a reflection of what’s expected to be a smaller team moving forward. Back in March, Fortune reported that firm founders Ed Anderson and Rich D’Amore would not be general partners in this eighth fund, and neither would Jeff McCarthy, who has been a partner with the firm since 1998.

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People

At a WSJ conference in Laguna Beach earlier this week, Whisper CEO Michael Heyward talked extensively about allegations by the Guardian that Whisper has been violating users’ trust. Here’s a bit of that sit-down.

Not everyone at Google is thrilled to have Sundar Pichai as Larry’s Page’s second banana, reports Business Insider, writing: “Sundar rose very fast within Google, and the egos of several members of Google’s SVP team who have been around a long time are bruised. ‘Most of Google remembers him in a much more junior role,’ one source says. ‘For some of the old-timers, reporting to the guy that used to be four levels below you is a challenging thing.'”

Luke Wood, president of Beats Electronics, has purchased an $8.55 million historic home in Los Angeles’ Silver Lake neighborhood that was originally listed for $7.5 million. Curbed has the details, and photos, here.

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Job Listings

HP is hiring a corporate development associate in Palo Alto, Ca.

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Data

Mobile is eating the world. (It’s worth a look at this new slideshow byBenedict Evans if you’ve missed it.)

CircleUp, the San Francisco-based online marketplace for private investing in consumer companies, has just released a public tool that lets anyone see average valuations, growth rates, and other data for thousands of private consumer companies across 15 categories that have sought to raise capital on CircleUp over the past two years. The link is here.

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Essential Reads

Introducing Microsoft Health.

How Facebook could end up controlling everything you watch and read online.

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Detours

Wow. This is insanity.

Last-minute tech tips for making your Halloween nice and creepy.

OK Go’s amazing new video, created with Japanese director Morihiro Harano.

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Retail Therapy

The Windrunner, for the coming months. We’ll take one in black.

Yik Yak: The Startup in Twitter’s Rearview Mirror

You found Yik Yak early on. How?

Yik Yak is taking off on college campuses. Why is that, and can it grow beyond universities, or is that a big enough market?

How will the company make money?

The Analyst: Talking with Azure Capital’s Mike Kwatinetz

Mike Kwatinetz is old school. The cofounder of Azure Capital in San Francisco isn’t likely to call himself a “an artisan” or “venture assistant.” He’s no great fan of networking. And Kwatinetz co-manages the firm with three people he has worked alongside for 20 years, a rarity in the venture world. (The firm’s GPs all spun out together from Credit Suisse First Boston.)

Azure emerged on the scene in 2000, just as the market was going into Internet Bubble free fall. Bolstered by early wins like VMWare, which EMC acquired for $675 million in 2003; and BillMeLater, which eBay purchased in 2008 for $945 million, Azure survived, but it had to significantly reconstitute itself in the process. Although Azure raised $540 million in its 2000 debut fund, its second fund (vintage year 2006) was only $127 million, and Kwatinetz says the firm’s third fund, closed in 2011 is “smaller,” on the scale of its immediate predecessor.

Today Azure focuses on post-seed-stage investments. The other day, StrictlyVC caught up with Kwatinetz, an amiable straight-talker with a PhD in mathematical modeling, to talk about that shift — and what’s next. Our chat has been shortened for length.

Azure’s team is like a band. How would its four GPs characterize one other? Who plays drums?

Hah. I’m probably the most analytic, though Paul Weinstein is pretty similar. Cameron [Lester] is probably the best one at networking. And Paul Ferris has some very deep relationships with real superstars in his area. He’s also probably the nicest of the four of us.

Azure had some big exits in the aughts. What are some of your most recent exits?

Cyan, [a computer network gear company] went public last year. We also had a relatively fast exit with [travel app] TripIt [acquired by the expense and travel management company Concur for $120 million in 2011].

We completed our distribution of stock last year of Concur, which was an unusual deal but worked out well. When Concur came to the table, it was offering much less. We said no, so Concur wound up guaranteeing us its stock would be worth a certain amount two-and-a-half years later. We had to hold on to the stock [for the duration] but it made it possible for them to give us a lot less stock, while we locked in the price we wanted.

I’ve read about these ratchet provisions, which sound incredibly risky. Are you seeing more of them?

Not first-hand, though I’ve heard other instances of them. This was a pretty big payday for key members of the TripIt team, though, and taking cash right away [versus agreeing to this stock deal] would have significantly reduced their payday.

Where’s your investment sweet spot right now?

We tend to come in at around a $10 million [pre-money valuation], so we call ourselves post-seed — that’s how we think of ourselves. We’re aiming to have three-quarters of our startups in that category and one or two earlier and one or two later.

It seems like that stage is getting crowded all of a sudden.

Post seed is still the least crowded. About 40 percent of seed-funded companies can’t get to their next round, so we have a tremendous volume of opportunity, though, again, we’ll make exceptions and go even earlier. We’ve already invested in the new company of TripIt’s founders,Chairish, an online consignment marketplace for furniture. It’s now reaching that post-seed stage and they’ll have to decide if they raise another round; from our view, I’d be happy if we could lead it.

Having experienced the late ’90s dot com bubble, how are you feeling about the market right now?

It’s wide open but the requirements are much higher than they were in the mid ‘90s, even pre-bubble. What’s interesting to us: the Toronto Stock Exchange and the London Stock Exchange are trying to fill the gap that Nasdaq has created by moving up market, so we’re looking at them. We want as many options as possible for our companies.

What are the advantages and disadvantages of going abroad?

There are lots of pros and cons to Toronto. The pros: you need a minimum of $10 million in [annual] revenue, not $100 million. Of course, you don’t want the to be orphaned afterward, where there’s no constituency of buyers and your company becomes a penny stock. So we’re trying to understand all of that better before we do anything in that arena.

We’ve been studying London longer. The [revenue] threshold is higher, but there are restrictions about how you can exit that make it trickier.

Do you think the U.S. is anti- small companies?

I think startups that get acquired before going public cut off job creation and that the government should pay attention to that.