Written by John Antonchick, NCN Associates (June 30, 2011)

Moderator: Stuart Sikes, Parks

Panelists:
- Stephen Blum, Tellus Venture Associates
- Richard Irving, Pond Venture Partners
- Len Rand, Granite Ventures
- Dean Takahashi, VentureBeat
- Fred Wang, Trinity Ventures

Stuart noted that these panelists have been participating in this event for several years. Steve Blum introduced his company which is a management and business consultancy (not a VC per se). Richard mentioned they do European as well as US investment in connected home and semiconductors. Len’s background was with Hambrecht and Quist and became a separate entity about 12 years ago. They have invested in social media, connected home, etc. Dean is the lead writer for GameBeat, etc. and has been writing about tech and gaming for many years. They put on their own conferences, e.g. DEMO, MobileBeat and GamesBeat conferences. Fred said Trinity is an early-stage VC investing in consumer-facing businesses. They have invested in social, ecommerce, etc. which has been about half of their investments. The other half of their investments has been in tech companies.

Dean commented that VCs invested $7 Billion in the first half of 2011 and there are 80 tech companies ready to go public, e.g. Zynga may go public, so the VC environment is “back”. Steve suggested that there are a lot of “boot-strap” operations not financed by the typical early-stage investment. An example is a company that was purchased by AOL recently for about $100 million that was financed by their founders. Steve thinks there is optimism and individual entrepreneurial drive perhaps similar to the early 90s; partly enabled by distribution channels that don’t require partners. Stu asked if we have forgotten that profits are important (again)? Steve said absolutely not and that people are using app stores to confirm real revenue. Richard also said that four of the five companies he listed last year which touched the home space have been sold, e.g. 4Home. However, he believes there is a “frenzy” in social media. Richard said they don’t invest in consumer sale businesses because they feel they don’t understand those businesses. He suggested that many of the valuations for early-stage companies seem too large. Len suggested that many new companies are working with new standards related to “social” media with assumptions like “privacy is dead”. His point is that picking investments in this environment is challenging. He also feels that the cost(s) to set up some of these social sites is relatively small and enables startups with friends-and-family investments. However, he noted that the issue becomes how to scale these businesses (if they can be scaled). Fred commented that this seems to be a golden age for entrepreneurs at least in many categories noting that startups today can often be successful with less than $ one million that would previously have needed $ 5 million. Examples included social/shopping “deal” as well as a gaming company. Dean noted that an issue is how to get your company noticed when there is enormous competition. Another issue is getting to the “right” customers, KaBam being an example. KaBam targeted games to hard-core gamers and is selling virtual dollars and fees for a substantial fee.

Discussing what’s “hot”, Richard said there are segments in Green Tech and energy that are interesting. Web-infrastructure is also an area where there are problems, e.g. video and advertising. They have a company called LightRail in this category that is doing well. Fred said they have been focused on the cloud during the last two years and seeing rapid uptake by small/medium as well as large enterprises with the delivery of could services. Another area for them is video where they have invested in several companies providing infrastructure over the last 10 years. Dean noted that “security” is still an unsolved space, e.g. with the SONY problems recently serving as an example. Steve thinks there are many opportunities for tools and “basic plumbing”. He also suggested that the release of the Barnes & Noble color ereader emphasized playing a popular game rather than reading a colored magazine; his point being that the tools to enable this type of game were needed. Steve also noted that there is no universal app supplier and that developing apps is generally not a successful effort for most developers. Dean noted that Zynga has more revenue today because it is doing well on Facebook but believes that the larger opportunity in the future is with smart phones and portable devices. Example: Angry Birds has sold several million units but at about $ 3 per sale. Len commented that younger users expect anything on their PCs should also be available on their mobile phones indicating that this will be a major market opportunity. Mobile payment also appears to be a large opportunity with many suppliers trying to enable mobile phones, etc. but there are issues like security for this type of app. Fred indicated that they think that all apps need to be mobile.
Richard noted that an issue for them is that hardware startups typically require much larger investments than software companies, citing 4Home which took about $ 10 million vs. Control4 and iControl which have had to take much larger amounts. Dean noted that Vizio is integrating online services on their TVs that do not require any further investment in the hardware.

Stuart asked if Verizon’s business model charging $9.99 a month while offering bundled hardware packages changes the connected home environment. Richard’s response was that service providers have challenges to launch a new service to a broad market. However, he thinks that service providers are better partners than utilities because service providers have more experience selling to consumers. Len noted that many service providers do not want to be dependent on proprietary solutions so open standards, which are coming but moving slowly, are an inhibitor.

Dean noted that some international companies, e.g. from China, have come to the US, purchased companies (for too much) and are trying to use those as springboards to become international services. Looking the other way, Fred suggested that China and other countries are good potential markets but that many venture companies are re-focusing on opportunities in the US. Richard said that they like Europe and Israel because they have not been a focus of VCs and provide many opportunities.

Questions:
1) Many types of hardware here don’t seem to be supported by investment; why and what do you think? Dean commented that there have been many investments and interesting companies emerge here recently, e.g. cmicro using INTEL’s Atom processor has raised a large investment. He noted that the stories about those types of companies don’t get as much readership. Richard noted that there has been a large amount of investing in clean tech during the last few years but less in the typical “IT” space. Fred suggested that the typical investor looks at risk/reward profiles and that semiconductor and similar companies don’t have the profile that indicates adequate return compared to other opportunities. Fred also noted that even if this has been a prolonged period of reduced investment, things can change - if the “formula” changes, i.e. development cost is less and/or revenues increase.
2) What are the new rules of the road and terminology/issues that startups need to grow their company? Revenue! Was Steve’s answer and others seemed to agree. Richard indicated that revenue is proof of potential success. Dean suggested that finding the concept that takes off demonstrates potential. Fred suggested that you should be able to demonstrate momentum and adoption. The “team” is also a key issue. Len suggested that entrepreneurs must “understand their business” and market opportunities.
3) What are the implications of Google and Microsoft backing away from their PowerMeter and HOHM initiatives? Richard suggested that these specific companies might need better focus but that other companies like Verizon may be able to show the potential. Likewise, Fred indicated that it is possible to “beat” Microsoft and Dean suggested that there are new opportunities with Android at home.
4) Are VC investments tied to the global economy or not? Richard said that the European debt problems are of concern but that the venture business is a long-term, 10 year business. Fred suggested that earlier stage companies are typically faced with growing their initial investment but that at later stages, e.g. when they might go public, the overall economy may be a bigger issue.