Where are the fundings?

Eric Wiesen

An interesting chart of where VC fundings took place in Q3 2009.

It comes as no surprise that Silicon Valley (359 deals) leads the pack, but I’m unsurprisingly interested in New York’s performance. The chart lists NYC as responsible for 113 investments, roughly 1/3 as many. Yet in the “lies, damn lies and statistics” vein, I’m curious to note that “Midwest”, “Southeast” and “Northwest” are all single entities on this chart, yet even Upstate New York gets separated out from NYC. I think if Portland and Seattle can be rolled together, there’s an argument that New York City, Upstate New York and Philadelphia represent a “region” as well, much like “New England” presumably includes the large Boston community as well as smaller ones in surrounding cities.

If you permit me this amalgamation, the “New York/Philly Nexus” would now account for 158 investments, close to half (44% for those counting) of the Silicon Valley number. Of course, there are far fewer VCs and venture firms here. I point this out not out of some competitive spite, to to merely address the persistent view I consistently hear that “East Coast” investors are excessively cautious and unwilling to make investments during this tough climate. I think the numbers argue otherwise.

An iPhone Mea Culpa

Eric Wiesen

When the iPhone was released a couple of years ago, people lined up for a day or more to be the first one on their block to buy one. I wasn’t one of them.

When the first of my friends started walking around with them, I tried the device out and liked elements of the interface, but was generally unimpressed with the speed, the typing experience and the battery life. I remember remarking to a couple of people that I’d be ready to buy one of these when the third-generation of hardware was released. I stuck with my Blackberry, which worked, pulled down my email without any headaches, had a tactile keyboard and a good battery life.

About a month ago I decided to make the switch. My trusty Blackberry Bold (a comment on the velocity of device development that something I’d owned for less than a year could be considered “trusty”) had a big crack in the screen, so I needed to get a new phone. I was seeing so many company pitches that either revolved around or contained an iPhone application as a core component that it started to feel like a professional hindrance to be without one. So I picked up an iPhone 3GS and braced myself for frustrating episodes of tapping out the letters of every email and text.

A month later, I’m inclined to say that the iPhone is the first device I’ve owned since my Gen-1 TiVo back in 2001 that simply has to be owned to be totally understood. The way that I interact with data, with the web and with location-based services is qualitatively different with this device than it has been with any of the smartphones I’ve owned since I picked up my first Treo in 2003. The typing experience, despite my skepticism, genuinely does improve with a few weeks of experience and a little faith in the auto-correct.

And so at this point I am quite and totally sold. There are none so righteous as the newly converted, and so two years late to the party I find myself evangelizing for a device that half the people I know already have. But the truth is, there is something discontinuous about the iPhone that I simply hadn’t perceived when I was simply borrowing someone else’s device. Native apps that take advantage of location and richer data sources are so dramatically superior in interactivity and transaction capabilities that I find my use of services with this device to be better in an increment similar to the one I saw when I went from a feature phone to a smart phone in the first place.

I should point out that some people I know who’ve been on this train since the beginning have told me I’m getting to the party at exactly the right time – that my instinct that the third-generation device would be the first one that really “just works” was correct. And perhaps this is the case – it is only recently that the iPhone began to play nicely with Microsoft Exchange, which we use at RRE. When I set my iPhone up, it immediately sync’ed with my email and calendar, something I understand was deeply frustrating with earlier revisions. The battery life is tolerable, the network speed is fine (could clearly be better, but I don’t find that it hinders my use) and the app store is at scale. None of these would have been true had I bought a gen-1 device in 2007.

Ultimately, I was an iPhone skeptic for quite some time. Now that I’m officially converted, this serves as my mea culpa.

RRE Office Hours

William Peng

While I am relatively new to the New York Tech Community, I have been blown away by its quality and vibrance. The Shake Shack event, NYC Demo Day, the NextNY community, the New York Tech Meetup, Hatchery, and many other meetups are evidence that the land of fast walkers and 15-minute lunch breaks is as strong as ever. As many have mentioned before, I believe we are in a tech renaissance here in New York City.

Here at RRE Ventures, we have been and continue to be firmly committed to supporting New York City as an innovation and technology center. Although the economy is still struggling, we believe there is a tremendous momentum in our local tech community. We consider it a responsibility of the investment community to help inspire successful startups through engagement, community building, and strategic support. We have made many investments in New York companies over the past 15 years, and think that the quality of company formation here in New York has never been better.

This is why we are excited to introduce our first RRE Office Hours. We’d love for you to join us at our offices for informal 15 minute chats on whatever topic you think will be helpful to you. Jim Robinson IV, Stuart Ellman, Will Porteous, and Eric Wiesen will be on hand to discuss anything you’d like related to your startup. The only requirements are passion for innovation and thirst for ideas. You bring your ideas, we’ll supply the coffee and conversation.

Here are the details:

Monday, November 9, 2009

10 AM – 12 PM, 15 minute slots

130 E 59th St., 17th floor

New York, NY 10022

[Note: I have removed the sign-up link. Office hours are full. We’ll be emailing times to those who signed up. Thanks!]

SIGN UP HERE

We would like to accommodate everyone who could use some help, but there are only so many slots in the day. If there is great demand for this type of activity and entrepreneurs get a lot of value from it, we’ll look to make this a regular event.

Solvate

Eric Wiesen

Many of the interesting and value-creating developments of the past 25 years of information technology can broadly be categorized as either decreasing overhead or increasing granularity of either computation or information interaction. Put in plainer English, much of what computers and the web have done is enable ever-smaller and more personal activities involving sophisticated equipment and technology.

To wit, the early days of computing were dominated by mainframe computers, huge beasts only found in the largest of organizations. Within those organizations individuals signed up for small slices of time and the rest was a dead zone. As computing moved from mainframes to mini’s and mini’s to micro’s and finally to PCs, the overhead was cut by an order of magnitude each time, ultimately resulting in individual home use of spreadsheets, publishing and, of course, games, all of which would have been unavailable to such users even a decade earlier.

We saw the same thing with software – for much of the art of enterprise IT’s development, software was sold as a monolithic piece of code, requiring months of consultant time to customize it to a given organization’s needs. Only large organizations could afford CRM systems, supply chain management, etc… Enterprise software was for the big guys, until Salesforce.com and others came along with Software-as-a-Service, cutting down the overhead by employing a hosted, multi-tenant model to deliver software. Quickly, if not overnight, small and medium-sized businesses gained access to enterprise capabilities, and now this is the primary method by which software is delivered.

We’re seeing the same phenomenon with computing infrastructure. In the first few innings of the internet, web companies made significant investments in infrastructure. Now, cloud computing enables ever-smaller organizations (down to individuals) to deploy web services, as people pay as they go.

People have gotten used to pay-as-you-go services. We buy cheap netbooks that run hosted software that’s run in the cloud. It’s against this backdrop that I’m pleased to announce RRE’s investment in Solvate, a company building a technology-enabled platform to deploy “Staffing-as-a-Service”. This concept, which could also be called Work-as-a-service (my term, not the company’s) means that people can pay as they go for a variety of different types of work, from administrative assistance to lightweight IT work to travel planning. I think of it as a hosted service to do the kind of stuff that sits on my to-do list endlessly waiting for a free weekend that never comes.

Solvate enables people to easily onboard (and then wind down) an extra pair of  skilled hands and aim them at whatever tasks you need done. Solvate’s Timesmiths (the folks doing the work) are vetted by the company and are US-based. Solvate’s team and technology provide the front-end and match work with Timesmiths that are capable and available. We think this solves a lot of little problems, and adds up to a big vision for changing the way people deal with work. We’re delighted to join Mike, Julie and the Solvate team.

The Price is Right

Stuart Ellman

VC’s have trouble figuring out price. You cannot base it on a multiple of anything because there usually isn’t much of a company, at least in the early stage. Public comparables are also relatively useless because comparables are much later stage companies. You cannot discount cash flows because the cash flow numbers depend entirely on your revenue and earning assumptions. You can look at private comparables (at what price have similar venture deals taken place) but you have no idea if those companies will be successes or failures. So, you look at basic parameters for stage and quality of management. But, what do you do if a company seems great but you know the price is high. Do you chase it, or wait for a “bargain”.

VC’s don’t want to be seen as just chasing high priced deals because if the deals don’t work out the VC looks foolish. Back in the last bubble, VC’s who paid eight and nine figure prices for Kozmo.com, Webvan, Idealab and many others certainly took heat from their limited partners for making such “crazy” investments. But here is the issue: If you are a bargain hunter and only pay single digit valuations for companies, you still lose 100% of your money if those deals fail. On the upside, if you get one of those occurrences where a very low priced deal turns out to be a big win, it seems like you have won the lottery. Those are few and far between.

These are the issues I struggle with every day. A great startup comes in the door. Great team, a superb market and early traction. All companies like this have the attention of many VC’s. Management wouldn’t be that great if they can’t generate significant VC interest. But instead of a normal early startup valuation in the single digits, this company wants (and will be able) to command significantly higher. It is tempting to say, “Oh, just let it go. There are many deals which are almost as good that I can get at far more reasonable valuations”.

Then I remember Priceline, CommerceOne and WebMD. All three deals came into RRE. Priceline at $400mm, WebMD at $200mm and CommerceOne at $85mm. We scoffed, so did most of the venture community. “Way overpriced” was heard from the rafters. I am sure we put that money into other much cheaper deals that probably didn’t work nearly as well as if we had done those three high priced deals.

Some investors, particularly a good friend up in Boston, go by what I call the “pay any price” theory. He believes that 90% of the money made in a fund are from 10% of the deals. So, if it costs twice as much as other deals, it is worth it if it works. It is called taking the big swing. I have to say, I agree. I do not believe you should chase mediocre or even good deals to high valuations. But, if you believe this deal is the moonshot, take the swing. Babe Ruth was not only the home run champion in the 1920’s, he also led the league in being struck out. If you really believe, take the swing. But also be prepared to take the heat if it doesn’t work.

Social Media Overlap

Eric Wiesen

It’s probably a sign of both the times and the work that I do at I’m now involved in a good handful of “social media” outlets (despite not being hyper-social in real life. I once joked to a friend that I had 400 friends on Facebook but about 10 actual friends). And as I both produce and consume media in these outlets, it has occurred to me that people are increasingly cross-posting their content from one venue to others, and that I don’t care for it.

I write this blog, and if you are here, presumably you read it. And if you are here reading it (whether you got here from search, because you bookmarked the site, via RSS or through a shortened link), my guess is that you are here to read a specific type of content – in this case longer-form posts largely about technology, venture capital or the other thoughts Stuart and I have on related topics.

If you are one of my roughly 400 friends on Facebook, you are looking for a different type of interaction with me. I view Facebook as the venue for sharing shorter-form, more personal content, and in a greater variety of formats (photo, video, etc…).

If you follow me on Twitter, my perception is that I’m one of a significant number of people in your stream, and that my job is to add interesting (and short, obviously) thoughts, observations and links, that hopefully contribute to an ongoing river of content to which you’ve opted in. I assume if you are following me on Twitter, that we don’t necessarily know each other, and that you’re opted into my content because you get value from it, and that I should try to live up to that (although I’m sure I don’t always do so).

Similarly, if you follow me on tumblr, I’m part of a larger community, and it’s less about reading my content in a linear way (and if you go to my tumblelog you’ll agree that wouldn’t be useful), but rather see me as someone who can add value as you go about trying to curate the internet. I use tumblr primarily for posting interesting things I find on the web, typically quotations from articles that I think those who are like-minded enough to follow me will either enjoy or find edifying.

All of which is a fairly lengthy way of saying – if we’re friends on Facebook, I probably don’t need to see your tweets there. The @replies, check-ins, and other twitter detritus don’t add value to me in the Facebook context. Chances are if we’re friends on Facebook I follow you on Twitter anyway. If you are a tumblr user who is piping out all of your tumblr posts to Twitter, you are probably subtracting value as well. What I get is a garbled few words of some reblog you did followed by shortened URL. While there is a weak user discovery argument to be made, mostly you’re just cluttering up my twitter stream.

I think the only real exception to this observation is putting short pointers to long-form blog content into other networks. And this largely escapes condemnation because the frequency is by nature going to be very low. I recognize that not every person who follows me on Twitter will subscribe to this blog, but the contents of my authoring (and the audiences thereof) are analogous enough that I think the tradeoff in signal/noise is worthwhile for those who might choose to follow the link to the one blog post every few days that I put up. But with this exception aside, I think people do their social graphs a disservice by spraying content across all of their networks. As I interact with the four social networking services in which I regularly participate (Facebook, Twitter, WordPress, tumblr), I have a distinct purpose for each and a distinctive graph within each service. They aren’t fungible alternatives to one another, and people who cross-post everywhere are subtracting value and ultimately good will. Which is kind of the point of all of this.

Twitter/RSS

Eric Wiesen

Like a lot of people I know, I’ve been enjoying and getting great value from Chris Dixon’s blog since he started his recent prolific phase a few months back. Generally if I want to respond to something another blogger writes, I’ll do so in the comments section there, but two of Chris’ recent posts inadvertently touched on a theme I’ve spent a bunch of time thinking about over the last couple of years.

Chris asks (and answers) the question, “Is Twitter replacing RSS as a primary means of consuming serialized content?”. For his usage, the answer is yes, as Twitter’s unending stream of shortened links replaces Google Reader. He then moves on to whether or not this is a good thing and concludes that, from an internet infrastructure point of view, it is not, as Twitter is a private, for-profit (yeah yeah) company that now acts as a single point of failure for everyone who chooses to consume content in this way. Historically Twitter isn’t the most reliable of services, so Chris opines that, “the internet is less open, less reliable and less secure” in a future world where Twitter has become the primary method of information consumption.

Oddly enough, I back up to Chris’ first question (although I agree entirely with his answer to the second question). When I first became active on Twitter – call that spring of 2008 although I’d been a registered user since spring of 2007 – I also noticed that my usage of my carefully-constructed RSS environment (I prefer Netvibes over Google Reader) declined significantly as I would see links coming across on Twitter from people whose curation I trust, and would spend my time reading them over the more systematic consumption of content to which I’d opted in via RSS.

Yet unlike Chris what I’ve found over the past six months or so is that I’ve gradually shifted back from Twitter to Netvibes when I’m actually looking to spend a chunk of time reading interesting material. I think there are a few reasons for that.

1. The feeds to which I subscribe represent content that I generally want to see, even if I don’t read each article or post.
2. If I’m at my machine when a tweet rolls by from the author of that content I may or may not see it or have the immediate inclination to click on it then and there.
3. Virtually all links on Twitter are shortened, which means half the time I don’t know what I’m about to open. That’s friction I don’t enjoy.

Going from an RSS console to Twitter for consuming news and interesting content actually feels like moving back from Tivo to linear TV. It’s less structured, temporally reliant and has a huge proportion of noise. I think Twitter is a great form for content discovery, and I still often open links put out by the 350 or so interesting people I follow on Twitter. But if I really think the content is valuable my reaction these days is often what it was in 2006 – grab the feed and follow it for a while to see if it delivers consistent value. I find my consumption of content to be more enjoyable and less hit or miss this way.

Hyperbole

Eric Wiesen

There’s an ongoing and usually good natured ribbing that gets passed between the East Coast tech community and the larger one in Silicon Valley. With the caveat that this is a wholesale generalization, it usually consists of our West Coast brethren accusing people here in New York or Boston of being too focused on business models, revenue, and other “details” while the East Coast contingent lobbies back the notion that there is altogether too much Kool-aid being consumed out there in the Bay Area. All in good fun.

Which is why I was amused to read a comment in a recent article about the evolution of Mark Zuckerberg the manager that read, “I thought Mark was one in a million. Now I think Mark is maybe one in a trillion.”

The population of the world is approximately 6.8 billion today. If you make a deeply simplistic assumption that the population of the world turns over once every 25 years and don’t bother to account for population growth, a trillion people is about 147 “turns” of world population (of course if you actually did account for growth it’s actually quite a bit more than that, but I’m lazy today). 147 turns times 25 years is 3,675 years.

So basically this claim is that Mark Zuckerberg is the greatest entrepreneur (or manager, or leader) since 1,665 BC. Julius Caesar, Jesus, Alexander the Great (to say nothing of Bill Gates, Steve Jobs, Andy Grove or Jack Welch) clearly have nothing on Zuck. This is some hyperbole I think we can all get behind!

Thoughts on Jury Selection

Eric Wiesen

I spent the last two days at “jury duty”, meaning I was part of the pool of potential jurors used to select juries for civil cases in New York state court. While it did nothing to improve my estimation of our civil justice system, it did foment a few thoughts along the way.

First off, as an attorney you’d have to be basically insane to pick me as a juror. As most of the readers of this blog know, I used to be a lawyer, but that by itself isn’t sufficient these days to ensure that you aren’t selected to serve on a jury. In fact, many of my friends from law school and practice have served as jurors, and some even enjoyed it. No, what most of you probably don’t know is that for two years in college, prior to starting my first company, I worked at a trial consulting firm whose business was figuring out how to game juries.That (of course) isn’t how they market themselves – I think their language is “formulating, testing, refining, and implementing effective trial strategies and themes”. But the business is picking winning juries for their clients and figuring out how to present to those juries in a way likely to win them over.

It bears mentioning that I told the attorneys all of this as soon as they began to question me. Part of the reason I loathe going to jury service is the knowledge that no sane attorney would want a guy like me in the deliberations. Juries have a tendency to play “follow the leader” and you put a person with my background in there, it’s inevitable (even if it’s not necessarily sensible) that other jurors would look to the “expert” for guidance on how to interpret the law (never mind that juries are primarily fact finders, most jurors don’t understand the distinction). These attorneys, however, didn’t seem to understand this.

And that’s ultimately what I found a little bit interesting as I went through this process. Once you get past the waiting around phase of jury duty and are put in the pool for a particular case, most of your time consists of listening to the attorneys conduct void dire, the questioning of potential jurors. Some of this will be you answering questions, but mathematically the larges majority will be you listening. So I listened to these attorneys (who were exactly the type of lawyers you’d expect to see trying a personal injury case at the state trial court level) try to pick a jury by asking questions, I started to think about how picking a jury is somewhat analogous to assembling a venture portfolio (cut me some slack, I was bored and the defense attorney gave me very dirty looks every time I tried to sneak my Kindle up onto my note pad).

As early stage investors, no matter how much diligence we do, we only know a little bit about a company in which we invest. Hopefully we know we’re backing a great founder and team, solving a real problem in a big market and with an innovative product. But at the early stages of any of these businesses there are far more unknowns than knowns. That’s why we’re in the risk capital business. We do our best to understand the capabilities and attitude of entrepreneurs, to develop a thesis around the market in which they’ll play and the likely fit of their product(s) to that market. But it’s certainly art as well as science.

Picking a jury isn’t so different. As we try to assemble a portfolio that will, in aggregate, produce returns, trial attorneys try to pick 6 or 12 jurors (depending on the trial format) who will, in aggregate, produce a favorable judgment for their client. They get a few hours to question the randomly-selected potential jurors and then they have to make their choices and live with the results.

As I wrote about last month, asking great questions is a big part of being a great early-stage investor, particularly on the deal selection piece of early stage investing. Similarly, trial attorneys will live and die by the questions they ask. In fact, much of the work we did when I was a trial consultant was coaching and construction of questions to best help attorneys understand how to elicit likely trial bias one way or the other. And I assure you, simple common sense/stereotyping is NOT a reliable way to do this. The nice old lady in the corner can be the staunchest defense juror you ever saw and the guy in the suit can be the plaintiff’s best friend. You just don’t know unless you ask questions that tease their biases out of them, quickly, an without them knowing.

Which brings me to the questions asked by the attorneys in this case, who had clearly never had the benefit of working with my old firm or another like it. The plaintiff’s attorney asked every single juror, “Do you think people have a right to sue?” and “Are you comfortable awarding large money damages?” and “Are you biased against plaintiffs? Am I starting out at a disadvantage with you?”

These are the wrong questions. This (presumably inexperienced) attorney was asking for output, but jurors almost never know their own biases and can’t accurately provide that output. It would be like if we asked potential portfolio companies, “Are you going to have a lot of customers? Will they pay you a lot? Will your business be defensible via expanding network effects or other barriers to entry?” Those are the questions we ultimately need answered, but asking them directly is a waste of everybody’s time. In our world, every company is going to say yes to every questions, and in the jury world virtually every juror, when asked directly, “Can you be an objective and impartial juror in this case?” is going to find a way to say no, because very few people want to serve on juries.

Ultimately, the trial attorney and the venture capitalist are procedurally analogous. We ask questions do perform diligence not because we think the answers lie therein, but because we’re hoping to stack the deck in favor of our portfolio and our LPs. By investing in Ron Gonen, Sam Lessin or Ted Morgan, we think we get a built-in advantage over those who invest in competitors to these businesses. By choosing large and growing markets with fluctuating competitive dynamics we think we improve our chances of earning a return by investing in startups. Attorneys get a few questions per juror to try to figure out if, at the end of the trial, this juror is someone that’s likely to side with their client (because let’s be honest – no one is looking for objective, impartial jurors. Plaintiff’s counsel is looking for plaintiff jurors and defense counsel is looking for defense jurors). They hope to assemble a jury that returns a positive outcome for their client.

Watching these attorneys ask terrible questions certainly got me thinking about whether I’m asking the right questions when I meet new companies. And if that’s what I got from my two days at 71 Thomas St., I’ll count myself lucky.