• Joya Raises $5 Million to Make Messaging More Fun

    JoyaThree years ago, Michal and Vlada Bortnik, former Microsoft employees who met on a soccer field in Seattle, had a host of problems every time they gathered up their two young daughters and tried communicating online with far-flung family members.

    The couple decided to do something about it, founding Joya, a mobile video communications company whose two newest messaging apps allow users to record playful messages of up to 30 seconds in length. One app, FlipLip, allows users to play with their voice and insert their face in a variety of county-fair-like cut-outs, including a princess, ninja and bear; the other, Cleo, invites people to make video selfies using filters designed to make them appear more attractive.

    Whether the apps take off remains to be seen, but Facebook certainly thinks they’re promising. The couple was among 39 other developers to work with the company in advance of the rollout last month of its Messenger Platform, for which it hopes developers will build apps that integrate with Facebook Messenger.

    Facebook’s apparent endorsement could prove especially meaningful as it attempts to turn Messenger into its own ecosystem. (Yesterday, as you likely read, Facebook launched a standalone Messenger app for the web with the hope that people will use Messenger both inside and outside of the social network.)

    Certainly, Joya’s traction caught the attention of Battery Ventures and Altos Ventures, which have just provided the now seven-person company with $5 million in Series A funding.

    As for what’s next, the pair — now based in Palo Alto, Ca. — say to expect more apps this year that will continue their focus on making quick, online messaging easier and more enjoyable.

    They add that for now, they plan to make their existing (free) apps better and more tightly integrated with Messenger.

    “It’s very rare that platforms like this come out with such large audience,” says Michal Bortnik, noting that according to Facebook, Facebook Messenger now has more than 600 million monthly active users.

    “We’ve developed many concepts that never saw the light of day,” he says, “but we now have a clear product and a clear story: How can we make communications more personal and fun . . . We have something that’s growing.”

    Connie

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  • Nakul Mandan on His New Role at Lightspeed, and What He Was Recruited to Do

    Nakul MandanBy Semil Shah

    Nakul Mandan has spent most of the last five years as a VP at Battery Ventures. Earlier this summer, though, he quietly joined Lightspeed Venture Partners, where he’s focusing on early- and growth-stage software-as-a-service investments as a “principal partner.” We asked him about some of the considerations involved in switching from one powerful venture firm to another, and what he was recruited to do.

    You recently moved from Battery Ventures to Lightspeed. What’s it like to switch firms on Sand Hill?

    In a way, it’s more of the same in terms of the daily routine – figure out thesis areas you like, invest in teams attacking those areas, and then support them in every way possible. But each firm has its own DNA in terms of how they think of risk-reward, the nature of risks they’re comfortable taking, and how the investment team works together pre- and post-investment. Understanding that DNA and finding alignment is key.

    The other aspect of the switch is to ensure a smooth transition for the entrepreneurs you’re working with, within the portfolio and outside. This is extremely important. You want to make sure that there is somebody to take over an ongoing relationship — board role, or otherwise — and represent the firm in the same way as you would have.

    You were recruited to Lightspeed to help build the firm’s SaaS practice. Is SaaS still hot after the public SaaS companies were hurt in public markets in March? What has the industry learned from that slight correction?

    I’m not sure I’d make a good investor if I invested in early-stage startups based on the current public market reaction to a particular category. Just a year or so ago, consumer was supposed to be out of vogue because the long-awaited Facebook IPO didn’t do well initially. But now Facebook, Twitter, Uber, and Airbnb are all kicking ass and so consumer is back.

    I’m sure SaaS, or for that matter any other category, will see similar ups and downs. But if the business is fundamentally creating value for its customers, and customers are willing to pay a price for that value that eventually leads to strong profitability, then the business can see through those ups and downs in valuations.

    What do you see as the key differences between web-based versus mobile-only SaaS opportunities today?

    Similar to the consumer world, in mobile, less is more. For mobile apps to be useable, they need to be extremely easy to navigate and focused on a couple of core features that they’re great for. Sometimes that requires trimming the functionality down. For instance, collaboration software on mobile will look closer to Whatsapp than Facebook. For companies trying to redefine existing workflows like CRM or sales productivity or collaboration on mobile, that’s something to keep in mind.

    The challenge is how do you deliver enough value while keeping it simple to use on mobile. To that extent, I think there’s more opportunity for mobile-first rather than mobile-only SaaS startups. A lot of enterprise use cases can benefit from the ease of use of a mobile app focused on one or two core features but also need a more comprehensive workflow that is better delivered via a web app to support the end-to-end needs of the business user.

    We always hear about seed deals for consumer startups. How do you see the seed ecosystem working for enterprise-focused founders?

    I think it’s a pretty robust ecosystem. There are lots of good angels and seed funds that are focused on enterprise startups. There’s also a lot of good talent coming out of all the recently acquired enterprise companies, like Eloqua, Yammer, ExactTarget, Successfactors, etc.

    My sense is that enterprise will never be the area that gets written about the most in tech blogs, but it continues to be the area where most of the early-stage investment dollars go, and where a lot of innovation is happening.

    What’s the biggest change you’ve seen in your five years on Sand Hill Road? And, why is this important for both investors and founders to understand?

    The biggest change for me is how much more mature startups are, and are expected to be, by the time they pitch their Series A. With the cost of building a product going down, and a greater influx of seed-stage capital, I’m regularly seeing startups raise seed rounds that give them two-plus years of runway. This gives them more time to tweak their initial product, and get more feedback from customers before they hit the road for a Series A. Founders need to keep that in mind as they think about the timing of their Series A. And investors need to accordingly adjust their expectations on valuations and round size, given that startups are coming to them with more proven out.

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    Connie

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  • Battery Ventures and Venrock Back 6Sense with $12 Million

    Amanda Kahlow. photoA lot of bets are being made these days on the thesis that most enterprise products don’t make users’ lives easier or help them do their jobs better. “I doubt you could find a single sales rep who really enjoys using Salesforce,” says Roger Lee, a general partner of Battery Ventures. “What a [customer-relationship management] product should do is tell you which leads are likely to close this quarter, what products they’ll buy, how much they’ll spend, and whether they’re candidates for upsell opportunities.”

    Lee — who likens Salesforce’s offering to “basically a filing cabinet” — is putting his money where his mouth is with 6Sense, a year-old, 15-person company that helps enterprise customers like Cisco and Pure Storage to determine an account’s overall propensity to buy, help them predict where their prospects are in the buying cycle, and surface new prospects. In fact, this morning, 6Sense is announcing a $12 million Series A round led by Battery and Venrock. I talked with its CEO and cofounder, Amanda Kahlow, late last week to learn more.

    You say you figured out the market fit for 6Sense at your last company – a Web analytics consultancy – but had to figure out the technology piece.

    A lot of really smart technical founders build [a technology] in search of a business case. We were the opposite. We were a business case looking for a platform. Thankfully, at one meeting with a venture firm, a firm’s CTO [pointed me to] GrepData, a [big data analytics startup that went through the Y Combinator incubator program in late 2012], and when we came together, it was a match made in heaven. I couldn’t be blessed with a better technical cofounder [than GrepData cofounder Premal Shah].

    You have lots of competition. How do you differentiate 6Sense from the many other startups doing predictive analytics?

    We live in a world where people leave behind a digital footprint, and in the consumer world, that helps companies like Amazon know what you want, likely before you know you want it. But in the [business-to-business] world, [no one has yet] solved the problem because of the complexity and irregularity of the data coming in. What everyone else is doing right now is asking: Is this the profile of the right buyer? But they aren’t asking: Is she going to buy now? Our magic is in taking time-sensitive data [and combining it with unstructured data, like activity on thousands of B2B publishers sites] along with [structured] behavioral data to create a behavioral catalogue to make sense of data across the Web.

    Why isn’t Salesforce doing what you do?

    The focus of companies like Salesforce has been around the efficiencies of workflow. Which email should you send next? How do you manage the buyer’s process? I do think Salesforce will want to do [what we’re doing], but it’s not trivial. It isn’t something a smart engineer can do tomorrow.

    This is your second company. You started your first about a dozen years ago, soon after you’d graduated from college. Why not work for someone else?

    I come from a family of entrepreneurs. My dad has been a lifelong entrepreneur, trying to make a go of different software technologies. One of my brothers runs an [e-learning company]; another brother runs a company in the B2B marketing space. [I credit] our dad’s entrepreneurial spirit. We also have a mom who told all of us — almost ad nauseam [laughs] — that we could be anything we wanted to be.

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    Connie

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  • Roger Lee of Battery Ventures: This Ain’t No Bubble

    Roger LeeRoger Lee has some specific ideas about what’s going on in the market these days. For example, the longtime general partner at Battery Ventures thinks the “entire enterprise stack is getting rewritten right now” and that there’s “a trillion dollars up for grabs.” One major driver of the trend, he notes, is the “consumerization of IT. Part of the success of Box and Dropbox and Zendesk is their embrace of consumer design. I’d guess that from day one, they had designers on their founding team, whereas if you looked at an enterprise software company ten years ago, a designer was, like, your 55th employee.”

    Battery — which is currently investing a $900 million fund and writing checks that range from $500,000 to $60 million – also believes in doubling down when the opportunity calls for it. For example, Battery made big bets on both on Angie’s List, the site for local service providers, and Groupon, the daily deals phenomenon, that paid of “very, very well,” for the firm, says Lee. (Battery invested $50 million in Angie’s List and $60 million in Groupon, both of which are now publicly traded.)

    Maybe it’s no wonder then that Lee thinks the recent string of outsize bets by firms like T. Rowe Price and Tiger Global Management – bets that have everyone from reporters to hedge fund manager David Einhorn fretting about a second tech bubble – are “actually pretty rational.” We talked about it last week over coffee in San Francisco’s SoMa neighborhood.

    Battery has a long history of investing in growth-stage companies. What do you make of the flood of mutual fund and other late-stage money pouring into the industry? Good? Bad?

    I’m not sure if it’s good or bad, but I’m not surprised. The markets are so much bigger now, and the opportunity to create multibillion dollar companies much more present today than historically.

    When you’ve seen these huge funding rounds in the past, people have laughed at them. Think of Yuri Milner’s investment in Facebook six or seven years ago at a $10 billion valuation. People thought he was crazy. When we did the Groupon investment, people thought it was crazy. Well, lo and behold, both turned out to be great investments.

    Another good example: When T. Rowe Price [first] invested in Twitter [in 2009], that was probably a relatively risky investment for it to make because Twitter was still a relatively immature company. But if you look at where Twitter is today, it’s probably a 25 or 30x return [for T. Rowe] and makes [its New Horizons’s fund manager] Henry Ellenbogen look incredibly smart that he was so early.

    It’s important for people to recognize that the opportunities in these markets dwarf what has historically been available to investors. So it makes sense for pubic market investors– be it Tiger Global or someone else – to try and cherry pick which companies in an era 10 years ago would probably already be public and that, once they are [public], [will] have a chance to become multibillion dollar companies because they’re selling into markets measured in the billions.

    What do you make of these shorter periods between fundings? Eventbrite, for example, raised two enormous rounds less than a year apart from the same investors.

    Investors’ job is to allocate capital, and when they see a chance to allocate capital to a winner – to double down because they think the risk-adjusted return is better than their alternatives — it’s a very rational decision. So that’s what they do. They’re always looking at their portfolio and looking at the alternatives and saying, “We’ve got X amount of money to put to work. Where do we think we can generate the biggest return?” Sometimes they put a dollar in, they watch it for six or nine months, see that a company is doing great, then decide they want even more exposure to it. It’s the same way they operate in the public markets.

    You have no concerns about the market?

    I really focus on each company at a time. Is any one company overvalued relative to where it should be? That’s a very company specific discussion. In terms of the broader market, I could argue both sides frankly. With certain companies, the opportunities are so large that we’re underinvesting in them.

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    Connie

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  • StrictlyVC: March 18, 2014

    Good morning, and happy Tuesday!

    A quick, enormous thank you to the thousands of you now reading StrictlyVC, which I’m realizing is six months old this week! (Thanks especially to those of who signed up before it launched.) If you enjoy it, feel free to spread the word about what we’re doing here. StrictlyVC’s strong suit isn’t promoting StrictlyVC. It’s giving you the news you need to start your day. And dancing to the edge of insanity. And tacos.

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    Top News in the A.M.

    The parent company of Institutional Shareholder Services, agreed this morning to sell the business to the private equity firm Vestar Capital Partners for $364 million. Dealbook has the story.

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    Early-Stage Infrastructure Valuations “Up 30 Percent” in Last Year, Says Amplify Founder

    In 2011, Sunil Dhaliwal was named to the Forbes Midas List. In 2012, he left Battery Ventures to start his own venture firm, Amplify Partners.

    It hasn’t been a walk in the park, says Dhaliwal, who joined Battery in Boston almost straight out of college at Georgetown University and ultimately stayed 15 years, backing companies like Netezza, acquired by IBM, and CipherTrust, acquired by Secure Computing.

    Yet today, after 18 months of on-again, off-again fundraising – Amplify has just closed its new micro fund with $49.1 million — Dhaliwal has a new home base in the Bay Area, where he moved his family in the summer of 2012. He has a strong partner in David Beyer, a cofounder of Chartio who joined as a principal in January. And Dhaliwal has lots of insights about nascent infrastructure startups, a world he has immersed himself in completely at Amplify, backing 11 startups so far, including Continuuity andKeen.io.

    To learn more about what Dhaliwal is seeing in his particular niche of the market, StrictlyVC recently sat down with him at one of San Francisco’s many newer hipster hangouts, Sightglass Coffee, in SOMA. Our chat has been edited for length.

    Why Amplify, why now?

    If you look at Cisco, HP, IBM, Microsoft, Oracle, SAP, Dell – that universe of companies in and of itself is a trillion dollars of market cap. If you trace what that market cap looked like before the bubble of 2000, go back to 1998, it was still a trillion dollars. So these guys have basically failed to grow… and I feel like they’ll be more pressured to reinvent themselves.

    Meanwhile, for [Battery’s ninth fund], I think I made five investments over two-and-a-half years, and the largest one was $2.8 million. The others were $1.1 million, $700,000, $300,000 [in that range]. What I learned is that you can get meaningful results from infrastructure startups with small checks.

    Why are the startups you want to back –distributed computing and developer-centric and data analytics companies — so much cheaper to launch?

    In enterprise IT and in software, the transition is actually happening in stages. There’s the cost that it takes to develop, there’s the cost that it takes to acquire initial customers, then there’s the cost that it takes to scale enterprise buyers. The first and second stage have come down dramatically; our ability to get alpha and beta produced, reduce technical risk, and get basic validation of product-market fit off initial dollars has gone up a lot (to the point where it can be done for $1 million to $2 million). More, a lot of today’s tools allow technical buyers to discover things of interest to them, validate that they work with them, then begin using them without your sitting on top of them with an enterprise sales guy who makes $300,000 a year.

    But it does cost money to ramp up.

    When you want to go out and grow deal sizes, dramatically ramp up sales and expand your business, that takes more capital. In enterprise infrastructure, you’re still basically acquiring customers one at a time. But they don’t consume $10 million or $15 million or $25 million to get there. We have a lot of companies that have consumed less than $5 million that are thinking about how they go do the big scale-up round.

    For us, as early investors, we find we suffer dramatically less dilution as result. And the value of the companies we’re able to develop, when we walk into the B round, C round, or expansion-stage financing, is markedly higher, not because it’s frothy or bubbly — though there’s some of that, too — but these companies are so much further ahead than companies were five or six years ago.

    You raise a good point. When you conceived of Amplify in 2012, not a lot of people were focused on infrastructure deals. Now they are. How has that impacted your work?

    It’s a big issue. I’ve seen safely 30 percent inflation on early-stage deals in the last year. And we continually ask ourselves, “How big can this get?” And for a lot of things that don’t seem like they can get that big, it’s not a rational conversation to have with the entrepreneur to say, “We think you’re worth less,” when someone else thinks [he or she is] worth more.

    It’s not only uncomfortable for us, but I fear for what some entrepreneurs are going to have to deal with when they set really high expectations for their seed or A round and have to go back and deliver, in theory, some sort of appreciation to their early investors. There’s no way around that ending badly.

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    New Fundings

    AltSchool, a year-old, San Francisco-based company that’s creating a brand-new network of schools, has raised $33 million in Series A financing led by Founders Fund and Andreessen Horowitz, with follow-on investment from First Round Capital and Harrison Metal. Other investors in the company, which has now raised $36 million altogether, include John Doerr, Jonathan Sackler, Learn Capital, and Omidyar Network. TechCrunch has much more on what has drawn widespread interest to the company, which plans to operate as a B Corp.

    AbilTo, a five-year-old, New York-based provider of behavioral health programs designed to help adults overcome mild and moderate depression associated with major medical events, has raised $6 million in new funding from undisclosed investors. Last May, the company raised a $3 million Series A led by .406 Ventures.

    Ataxion, a year-old, Cambridge, Ma.-based discovery-stage biopharmaceutical company that’s developing therapies for rare neurologic diseases, has raised $17 million in Series A financing from Atlas Venture and Biogen Idec.

    Bluestone, a three-year-old, Bangalore-based e-commerce company that produces and sells jewelry, has raised $10 million from the India-focused fund Kalaari Capital. The Times of India has more here.

    Boxfish, a four-year-old, Palo Alto, Ca.-based video discovery startup, has raised $7 million in new funding led by the Dublin, Ireland-based firm Atlantic Bridge Ventures. Other investors in the round include T-Ventures, Naya Ventures, and Samsung. The latest financing brings the total capital raised by the company to $10 million.

    C3 Jian, an 8.5-year-old, L.A.-based, clinical-stage biotech company that’s developing drugs focused on improving oral healthcare, has raised $60.5 million in Series D funding led by Renaissance Holding Company, a national dental insurance holding company. The latest financing brings the company’s total capital raised to roughly $105 million, shows Crunchbase.

    Cloudera, a 5.5-year-old, Palo Alto, Ca.-based maker of open source database software, is raising at least $200 million at a valuation of $2 billion, say Bloomberg sources. The funding is reportedly coming from Intel, among others. Cloudera has raised roughly $140 million from investors to date, including Accel Partners, Greylock Partners and Ignition Partners. Its last round closed in December 2012.

    FunPlus, a 3.5-year-old, San Francisco-based mobile social games company, has raised a whopping $74 million in Series B funding from Orchid Asia Group, GSR Ventures, and Steamboat Ventures. Among the company’s hits to date are the Facebook games “Family Farm” and “Royal Story” and “Family Farm Seaside” on iOS, Google and Amazon. FunPlus previously closed a $13 million Series A round in 2012.

    Isto Technologies, a 17-year-old, St. Louis, Mo.-based orthobiologics company whose products regenerate and restore function to damaged cartilage and bone, has raised $8 million in debt and options, according to a new SEC filing. The funding appears to bring the company’s total capital raised to $28 million. Its investors include Ascension Ventures, Alafi Capital, Life Sciences Partners, and Mid-American Transplant Services.

    LiveMinutes, a three-year-old, San Francisco-based collaboration platform, has raised $1.8 million in a partial close, shows an SEC filing. The company has raised roughly $3.1 million altogether, shows Crunchbase, including from Great Oaks Venture Capital, Pritzker Group Venture Capital, and entrepreneur and Match.com CEO Sam Yagan.

    Personal Genome Diagnostics, a three-year-old, Baltimore, Md.-based company that engages in patient-specific analyses of cancer genome using digital characterization and monitoring technologies, has raised $2 million in funding, as part of a round that’s targeting $3.5 million, shows an SEC filing. The company had previously raised $100,000 in seed funding.

    Qualtré, a six-year-old, Marlborough, Ma.-based maker of next generation silicon MEMS inertial sensors, has raised $8 million in Series C funding from a new, unnamed strategic investor and earlier investors Matrix Partners and Pilot House Ventures. The company has raised around $38 million to date, shows Crunchbase.

    Wise.io, a two-year-old, Berkeley, Ca.-based machine learning startup, has raised $2.5 million in Series A funding led by Voyager Capital. GigaOm has more on the company here.

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    New Funds

    The California Public Employees’ Retirement System yesterday announced that it will allocate an additional $200 million to its emerging manager program and that it will use a new fund-of-funds to deploy the capital. The new allocation comes on the heels of a $100 million commitment made in 2012. CalPERS’ investment staff will select a manager to lead the new fund of funds later this year, says the pension giant, which has more than $280 billion in assets under management.

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    IPOs

    Agile Therapeutics, a 17-year-old Princeton, N.J.based specialty pharmaceutical company focused on the development and commercialization of new prescription contraceptive products, filed to go public yesterday. Its biggest shareholders include ProQuest Investments, which owns 30.4 percent of the company; Care Capital Investments, which owns 26.6 percent; Investor Growth Capital, which owns 26.6 percent; and Aisling Capital, which owns 8.9 percent.

    Akebia Therapeutics, a 6.5-year-old, Cambridge, Ma.-based biopharmaceutical company focused on the development of proprietary therapeutics based on HIF biology, is expected to begin trading publicly on Thursday. Its biggest shareholders include Novartis Bioventures, which owns 23.9 percent of the company going into the offering; Venture Investors Early Stage Fund, which owns 11.0, percent; Kearny Venture Partners, which owns 9.9 percent; Novo A/S, which owns 9.9 percent; and Triathlon Medical Ventures, which owns 8.3 percent.

    Paylocity, a 17-year-old, Arlington Heights, Il.-based provider of cloud-based payroll and human capital management software for medium-size organizations, is expected to go public tomorrow. Adams Street Partnersis among the company’s biggest outside shareholders.

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    Exits

    KitLocate, a three-year-old, Israel-based maker of low-power mobile geolocation technology. has been acquired by the Russian search giantYandex for “several million euros,” reports TechCrunch. KitLocate offers an SDK for iOS and Android developers to make their apps location aware; Yande will use it to improve its mobile search app.

    Zulip, an 18-month-old, Cambridge, Ma.-based company that’s been quietly working on workplace chat applications, both desktop and mobile, has been acquired by the growing file-sharing giant Dropbox, reports TechCrunch. Terms of the deal weren’t disclosed.

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    People

    Aneesh Chopra, the country’s first chief technology officer, is now an advisor to the cloud storage company Box. As the Washington Post notes, Box announced last year that its service is HIPAA compliant, paving the way to help doctors and other medical professionals to access their records in the cloud. Chopra is part of that effort as is Glen Tullman, the former CEO of electronic health record company Allscripts, who was also just brought in to advise the company.

    Richard Hall has left his role as head of the $14 billion Teacher Retirement System of Texas to become the head of Harvard Management Co., which manages the university’s $32.7 billion endowment. Hall succeeds Lane MacDonald, who left after just four months on the job to oversee the family fortune of the Johnsons, who runFidelity Investments. The Boston Globe has much more here.

    Bryan Roberts of Venrock is healthcare venture capital’s “billion-dollar man, ” with six(!) billion-dollar outcomes, including Castlight Health, which went public on Friday and is currently valued at $4 billion. Fortune asks him what his secret is.

    D.E. Shaw is apparently bringing the Hamptons to Hudson Valley. According to the New York Times, the computer-scientist-turned-hedge-fund mogul and his wife are building a “contemporary structure and accompanying pool house [that] together measure more than 30,000 square feet” in Westchester County, N.Y. (Naturally, a guesthouse is also in the plans. And a garage measuring 3,572 square feet.)

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    Job Listings

    New Leaf Venture Partners, a New York-based healthcare-focused venture firm, is looking for an analyst.

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    Data

    U.S. venture capitalists completed 31 fundraising deals for consumer-electronics makers in 2013 — including Jawbone, Roku, and Lytro — beating the previous high of 29 in 1999, according to DJX VentureSource. Collectively, they pumped $848 million into hardware startups, nearly twice the prior record of $442 million set in 2012. The WSJ has much more here.

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    Essential Reads

    YouTube is going younger, says The Information, reporting that the online video destination is now developing a version of the site for kids under age 10 that would “wall off racier videos and comments and be deemed a safe place by parents.”

    According to the WSJ, Amazon will begin shipping its long-awaited video-streaming device early next month, thrusting Amazon into an intensely competitive market in set-top boxes, which include the Roku device, Apple TV and Google’s Chromecast. TechCrunch sources say the gadget will be a stick or dongle as opposed to something bigger like the Apple TV.

    In a decision that cities around the country are undoubtedly watching, Seattle’s city council voted yesterday to enforce a cap on the number of cars that app-based transportation companies — including UberX, Lyft, and Sidecar — can have in use at any one time. The new legislation limits each service to 150 cars on the road at any one time, the outcome, said the city council, of the services requiring more regulatory oversight.

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    Detours

    Wes Anderson’s films are even more perfectly symmetrical than you realized.

    Nate Silver is back.

    Gwyneth Paltrow singing “Happy.”

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    Retail Therapy

    Clever tea infusers.

    Cheap, over-the-ear headphones for the budding DJ in your family.

    Cloak, a new, free iOS app, arms you with the location data of Foursquare and Instagram users so that you can avoid all human contact with people you actually know.

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    Corrections

    Yesterday, we reported that Meican, a 3.5-year-old, China-based online food ordering site, had raised $10 billion in Series B funding, but that would be “million” with an “m.” We regret the error.

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    Connie

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  • VCs Want to Know: What Else Have You Got?

    whatchou gotIt’s getting tough out there for entrepreneurs. No longer is it enough to create a sustainable, profitable, fast-growing product that’s beloved by customers.  These days, top VCs are placing a bigger premium on what’s next.

    Andreessen Horowitz is “generally willing to take more risk on a product that hasn’t yet been built,” Marc Andreessen told me last month.

    “We want to be in the most extreme propositions — the sort of thing where it’s either a moonshot or a smoking crater in the ground,” he explained. Toward that end, he’d said, “We’re willing to impute value into [what’s coming next out of a startup] if we’re highly confident that the team can build it and that the market is really going to want it.”

    Ranjith Kumaran has seen this focus on the future vision first-hand. Kumaran, who cofounded the file sharing and online data storage company YouSendIt (renamed Hightail last July), is CEO of PunchTab, a nearly three-year-old loyalty and engagement platform that helps customers like Arby’s Restaurant Group create instant loyalty programs.

    PunchTab’s trajectory has been impressive. In addition to growing revenue five times over last year, it has expanded its enterprise customer base from 10 to more than 40. Nevertheless, Kumaran finds that the VCs with whom he meets care most about Punchtab’s “next-horizon solutions”; they want entrepreneurs to paint a picture.

    “I believe that wasn’t the case before,” he observes. “Series B was about how fast you’re growing and how you get to next revenue [milestones].”

    If VCs are no longer enamored of velocity alone, the shift likely owes to a number of factors, beginning with the fact that fewer venture firms have come to control greater amounts of capital and need bigger returns than ever to justify such pools.

    “It’s a very different dynamic today,” says Brian O’Malley, a general partner at Battery Ventures. “The market has gone from venture people sitting in their office, waiting for whatever company to come and pitch them, to chasing the companies that everyone else wants to invest in. If you’re part of that inner crowd, life is very good and there’s lots of money being thrown at you.”

    But you need some imagination to get there.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Related articles

    Connie

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  • Battery Ventures on CPG: It’s Simple, Great Product Wins

    mainimage_consumerpackagedgoodsLast week, I met up with Battery Ventures’ Brian O’Malley, who invests in a range of things but has been particularly successful leading some of the firm’s e-commerce investments. Among the related companies that O’Malley has championed at Battery are Skullcandy, the now public earphone maker; the fast-growing grooming products startup Dollar Shave Club; and high-end home furnishings company Serena & Lily.

    While e-commerce has been falling in and out of fashion on an almost yearly basis, O’Malley suggests that making smart retail bets, including on consumer packaged goods companies, isn’t that complicated. He starts with knowing what not to do, like focusing on the “things that are already done versus the things that are yet to come.” He elaborated during our sit-down. Our chat has been edited for length.

    You seem to be a big fan of consumer packaged goods companies. But they have a spotty track record. What’s the appeal?

    The good thing about CPG is high-frequency purchase rates. Take Dollar Shave Club. Guys shave every day, and once you get that staple, you [then sell] the toothpaste and hair gel and aftershave. There’s a whole list of products that you can add on afterwards. With CPG, you can very quickly get to hundreds of dollars of spend per customer.

    Is the trick to avoid low-margin businesses?

    Low margins are part of the challenge. CPG companies are also logistically complicated, they take a lot of money and time to scale, and there’s a big change [required] in behavior. So if I’m a Gillette customer, I might not like the idea of spending $20 for razor blades, but I don’t go to Google and type in “razor blades.” So companies typically have to spend a fair amount of money to gain visibility and change consumer thinking.

    Is there a model way to invest in these types of companies then?

    Well, if you need to raise big money to scale them over time — $25 million to $50 million rounds – you’re at the whim of what’s exciting to big money at that time. That’s the issue. So the types of things we’ve invested in on the consumer side have very quick payback periods on the unit economics. So you’re either paying back your advertising in three to four months because the advertising is cheap and the margins are good, or there’s more of this shared-risk model where you’re paying either a sales rep or an affiliate based on what’s actually sold. That way you’re always kind of marginally profitable.

    You make it sound so easy. Where do you think some of the bigger-known names, like Beachmint and ShoeDazzle and Fab, have gone wrong?

    Each one is different, but at the end of the day, the old adage that retail is detail is very true. It comes down to running a really tight ship. So you need to be very proficient at logistics, and with marketing and so forth. But when a lot of money was flowing at these companies, many of them became professional fundraisers as opposed to professional operators.

    People grew enamored with the idea of changing a business model or selling online, when at the end of the day, great product wins. If you have a great product, it doesn’t matter if you have a flashy business model. People will tell other people to come back and buy it.

    Does it matter what the product is?

    I don’t really care what the product is. I’ve got companies that sell everything from custom men’s shirts to baby bedding to wine devices. The question is: how big is the opportunity, what’s the pain point, how do you tell people about what you’re doing, and then what’s the buying behavior from there. Is it viral? Will users tell more people about it?

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  • Brian O’Malley of Battery Ventures: “Investors Are Fundamentally Lazy”

    brian-omalley-bigYesterday afternoon, I sat down with Brian O’Malley of Battery Ventures in the gleaming marble lobby of San Francisco’s Four Seasons Hotel. 

    Despite having a cold, O’Malley – who has led Battery’s deals in a long line of solid companies, including Bazaarvoice, which helps e-commerce companies manage customer reviews; SkullCandy, which makes headphones and earbuds; and the hotel booking service HotelTonight — spoke animatedly on a wide variety of topics. We chatted at length about the consumer packaged goods space, for example. I’ll share that part of our interview next week. In the meantime, here’s a quick excerpt from our discussion of the ever-evolving dynamics of post-Series A investing.

    Money for anything past the Series A round seems to have tightened up this past summer. What are you seeing?

    It really depends on the company. The way the market is working today, growth-oriented investors are much more interested in getting into the right company in the right space, versus taking a risk on something that’s unknown. They’ll pay five times the price to get in the Series B of some hot company rather than do something that maybe has some question marks around it.

    Do you subscribe to the winner-take-all theory? Do you think there are only a small number of breakout companies worth chasing?

    Investors are fundamentally lazy, so a lot of the time, they aren’t going to figure [out a business’s potential] on their own unless they’re super savvy about a particular space.

    On the flip side, most VCs now recognize that the winner in any given space does get 90 percent of the economics, while the second-place company gets 8 percent, and everyone else [shares] 2 percent. So by Series B, people are already starting to see how the market is evolving; they’re already starting to see how repeatable your business is, and they’re spending much more time chasing the one or two dozen companies that everyone wants to get into.

    And you think that makes sense?

    I think it’s a function of larger funds needing bigger exits to make their math work.

    As the funds get larger, what you need from a success gets larger as well. For funds for which it’s incredibly easy to raise money, their limiting factor is their time. And companies take longer to exit [these days], and so [the VCs] have less capacity for new investments. And when you have less capacity, you need each of your investments to return more money. That’s one of the big challenges.

    What’s another?

    What’s interesting, and what has surprised me, is how much people are influenced in terms of which companies they think will break out based on which companies are having success today.

    There’s a lot of emphasis right now on these more enterprise-focused businesses, which has a lot to do with enterprise-focused businesses doing incredibly well on the public market. But the reality of my doing a Series B investment is that I’m not going to be selling for three to five years, and the market might be very different by then. Even still, people are willing to back much less mature companies in the space du jour rather than invest in something that has some scale in a space that’s out of favor.

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