AGILEVC My idle thoughts on tech startups

Al Gore's 2012 Induction to the Internet Hall of Fame

In the wake of the undue frenzy leading up to and now ex post recriminations about Facebook’s IPO, the mainstream media and normal folks keep wondering if the non-existent “bubble” for internet companies has now popped.  Silly stuff like this.  Turns out commerce and advertising are kinda different businesses actually.  But a lot of people who don’t live & breathe internet innovation on a daily basis the way I do just lump everything together, and whether out of ignorance or envy or some other bias all this internet stuff seems like black magic.

I’m not sure whether it’s 10 years from now or 50 years from now, but at some point in the medium to long term future we’ll cease talking about “internet” companies in any meaningful sense.  I believe with unshakable conviction that the internet has been and will continue to be the most distruptive innovative force of of my lifetime.  It’s easily on par with broad waves of innovation of decades and centuries past… railroads, electricity, the automobile, the integrated circuit.

A little over a hundred years ago, when electricity was still fairly novel, people used “electricity” to describe companies in many of the same ways we talk about “internet” companies today.  The corporation Thomas Edison formed to commercialize the lightbulb was literally called “Edison’s Electric Light Company” to distinguish it from the old ways of generating light like candles, whale oil, and such.  Today we don’t say that GE (of which Edison Electric Light was a precursor) is in the “electric light” business as that’s basically obvious and redundant… nobody generates light with anything except electricity anymore.  Similarly there were “electric pump” companies and “electric elevator” companies and such since previously these tasks were accomplished with mechanical energy via humans or draft animals.  Once electricity became part of the fabric of our existence, and really the only means used to power anything, society stopped using the “electric” qualifier for all this stuff.

We now only think about “electricity” companies in the narrowest of senses… the small number of businesses (relative to the overall impact of electricity in the economy) that are actually in the business of generating and distributing electrical current.  Similarly when integrated circuits were new there were “computer calculator” companies and the like because one had to distinguish between calculators which did their tabluation with a chip rather than mechanical means.  There were transistor radio companies and transistor watch companies.  Now we only think of chip companies in the narrow sense of semiconductor manufacturers like Intel.  We don’t think of Apple as a “chip” company even though literally every product they make only exists because it’s chock full of semiconductors.

We still talk about “internet” companies because the internet is still relatively new for society… just over 15 years or so.  It’s been less than a decade that most Americans had broadband in their homes.  And it’s very recent that meaningful chunks of society have an internet-connected device in their pocket at all times.  So it’s only natural to still think about businesses for whom the internet is a key part of their existence as a distinct group.  This is particularly true for new businesses that didn’t exist pre-internet.  That’s why we talk about Amazon as an internet company but we don’t refer to LL Bean as an internet company.  E-commerce accounts for the vast majority of LL Bean’s revenue today (it crossed 50% in 2010 though was as low as 15% in 2000), but because LL Bean is over a hundred years old and started as catalog & physical store retailer we typically don’t refer to it as an internet company.

As a VC I’m thankful for the fact we still talk about “internet” companies.  It means that for quite a while (e.g. within the extent of my professional lifetime) there’s a great opportunity for newly formed startups to disrupt vast swathes of the economy with internet-enabled innovation.  The internet has already had meaningful impact on industries ranging from commerce to media to software.  The transformation of those sectors is still very much underway and other areas of the economy from education to physical engineering will be impacted in the future.

Someone I used to work with insisted on capitalizing the word “Internet” whenever typing or printing it.  It wasn’t that this person was dumb or didn’t believe in the transformative power of the internet, but it was considered a proper noun in years past rather than a common noun (and many spell-checkers treated it as such).  We capitalize “Internet” a lot less these days but still use it as a qualifier for a wide range of businesses.  But I look forward to the day when society stops thinking of internet businesses as some distinct part of the economy.  It means the benefits of internet innovation will be truly pervasive in our world.

For the last 5-7 years the universe of potential acquirers web-based businesses has been fairly concentrated.  On the consumer facing side, the number of companies doing multiple acquisitions of $100M+ was extremely short… Google, eBay/PayPal, Amazon, and Microsoft are at the top of the list.  IAC and Yahoo! were fairly active a few years ago though neither is as active today and big media conglomerates like Disney are fairly sporadic as they embrace web-based media.

On the B2B SaaS side or enabling services (e.g. ad-tech, analytics, development platforms, etc) the list is slightly different.  Included are some of the large companies above like Google and Microsoft but also active on the B2B/enabling side have been acquirers like Salesforce.com (Radian6, Heroku notably) and Apple (Quattro Wireless, Siri).  Oracle and IBM have made some acquisitions of SaaS businesses though many of their deals are more old school enterprise software businesses that have matured.

So no matter how you look at it, the universe of buyers has been fairly small and the really active buyers come down to just 4-5 companies.  That’s all starting to change slowly as a cohort of newly-public, but very large companies joins the fray.  Facebook, LinkedIn, Zynga, and Groupon have all been doing smaller (e.g. <$100M) acquisitions for several years now, but they’ve mainly been acquihires.  Here in 2012 you’ve already seen the first $100M+ acquisitions for LinkedIn (Slideshare), Zynga (OMGPop, Draw Something), and Facebook (Instagram) and it’s probably only a matter of time before Groupon does one.  There’s also a meaningful cohort of newly public companies that now have valuations of $1B+ who could seriously contemplate an acquisition of $100M+ for stock or cash… Yelp, Zillow, Tripadvisor, Jive Software, Splunk, and others.

The expanding universe of potential buyers is a great thing for founders.  And it’s not just because there will be more transactions and more competition for exciting startups.  We’ll see how long they remain exciting, innovative places to work but at least for now I think most founders who contemplate an acquisition would be open to having their company and team be part of a Facebook, LinkedIn, or Zynga.  The same can’t always be said of some of the more established companies.

VC investors take different approaches to finding new investments.  I tend to think of it as a continuum with purely thematic investing at one end and a purely opportunistic approach at the other.

Thematic investing is where VCs research a macro trend or specific market, form a thesis around why this trend/market will serve as a good basis for building great startups, and then pursue as many exceptional investments in this theme as appropriate for the VC’s strategy.  IMO Bessemer is perhaps the most emblematic firm of thematic investing… all the investment professionals in the firm from senior partners to more junior staff team up in small groups to construct “roadmaps” of the themes in which they intend to pursue investments, which are then articulated more broadly within the firm.  While these roadmaps are used as guides rather than bright line rules, my experience suggests Bessemer tends to be fairly disciplined about this process and will pass on opportunities that might be compelling but are clearly outside the roadmaps they’ve constructed.  Other notable examples of highly thematic investors include Foundry (current themes here) and IA Ventures‘ overall focus on big data.

Opportunistic VC investors focus less on developing very specific theses and more on cultivating a deep, rich network around the entire firm.  Sometimes “opportunism” is used pejoratively but that’s not the case here… it’s not that these investors don’t have a clearly articulated strategy or will simply invest in any company that walks in the door. Rather these firms know that there are countless bright, hard-working entrepreneurs out there thinking 24/7 about the next big thing and so they remain open to these innovative ideas even if the firm hasn’t previously formed a specific investment thesis about that space.  Also really great opportunistic VCs are highly intentional about how they build their sourcing network and brand.  Two firms I respect in this regard are Greylock and Andreesen Horowitz.

It’s my experience there are relatively few absolute truths in venture investing… there are incredibly successful investors that pursue a purely opportunistic approach as well as ones that are thematic in nature.  There’s also plenty of examples of both who’ve been wildly unsuccessful.  So there’s no right answer about which approach is better.

At NextView we’ve intentionally taken an approach which combines both thematic and opportunistic investing for a couple reasons:

1) Our Overall Strategy is Highly Focused - We’re a dedicated seed VC fund, so we invest in startups exclusively at the seed stage.  We also invest only in software & internet enabled businesses.  And we invest in US-based startups,  primarily on the US east coast though we’ll consider other parts of country on a selective basis (roughly 15-20% of our portfolio is in the SF Bay area).  So NextView’s strategy already excludes large portions of the VC landscape in terms of stage, sector (no cleanteach, life sciences, IT hardware or semiconductors, etc), and to some extent geography.  This enables us to be opportunistic within the confines of a fairly narrow strategy, yet still meet very high quality startups within this smaller sphere.

2) Vast Human Capital Outside Our Walls - Rob, David, and I all try to draw on our experience as founders, operators, and investors in software & internet companies both in looking at new startups and forming investment themes.  But at the end of the day there are thousands of entrepreneurs out there who have deeper knowledge about exciting markets than we will ever have.  There are also new vectors of innovation (wholly independent of any industry sector) that are constantly emerging.  I have no doubt there will be exceptional entrepreneurs working on startups that fit clearly in NextView’s strategy, but might be outside themes we’re currently pursuing or who’ve come up with incredible innovations that can disrupt an area we previously dismissed.  We want to make sure we’re open to thinking about these opportunities with a blank canvas.

3) Great Opportunities Help Draw Us into Some Themes - While we are opportunistic in some regards, we also think specific themes can be very important.  Sometimes we develop themes on our own and then pursue investments based on that thesis.  A good example of that has been the thesis my partner Rob built around online education which actually began even before we formed NextView.  It led us explore a large number of potential opportunities, including our ultimate investment in Boundless.

But other times the entrepreneurs we meet opportunistically end up catalyzing new investment theses we ultimately pursue more thematically.   A good example of that is our theme around the consumerization of business software.  Back in 2010 we were observing more and more new B2B startups emulating the product and customer acquisition strategies of existing consumer web companies which my partners & I have long been familiar with.  We ended up making two investments in these sorts of B2B SaaS companies in 2010 (InsightSquared and SalesCrunch) and as they say two points forms a line.  In 2011 we developed this into a more comprehensive theme which helped form the basis of our investments in GrabCAD and Objective Logistics.  We VCs like to pride ourselves on pattern matching, and in this case a pattern emerged from our opportunistic approach which directly led to a more specific theme.

So we’ll continue to blend both thematic and opportunistic investing here at NextView.  It suits our team and investing style, and it least for us we find the two approaches to be highly complementary.

Farmeron announced the closing of its $1.4M seed round today.  NextView is thrilled to have co-led this round along with our friends at SoftTech VC and Farmeron’s existing investors 500 Startups, Seedcamp, and TAG.

I first met Matija Kopic, Farmeron’s co-founder & CEO, a few months ago.  It was one of those first meetings where you’re instantly impressed by an entrepreneur and the ambitious vision they’re pursuing.  We’ve invested in quite a few SaaS businesses though I have to admit this is the first time we’ve invested in one that’s not priced by software seats or flat annual subscription but rather $/animal/month.  So it  took me a minute to describe to my partners why SaaS for cows is incredibly exciting…

Farmeron is a SaaS company focused on the data management challenges facing the agriculture sector.  When you think of web-enabled startups, farms don’t instantly spring to mind.  Yet agriculture is a massive global industry and one that is increasingly reliant on data for a range of needs – improving production, benchmarking across farms,  even regulatory and financial reporting.  Trained as a computer scientist and coming from a family whose background is in large-scale corporate farming, Matija saw a clear opportunity to solve many of these data challenges with easy to use web-based software.

Initially focused on dairy & livestock operations, Farmeron’s system takes in data from a myriad of sources from farm production systems (e.g. automated milking machines that spit out data) to veterinary data (e.g. age, weight, immunization, breeding status, etc) to inventory management info (e.g. feedstocks).  Some of this data remains in “siloed” offline computers (pun intended) or even requires manual input.  But increasingly even centuries old industries like agriculture are becoming highly automated, in both developed and emerging economies, with more internet connected systems and data nodes generating raw information.  In time Farmeron will likely expand into crops farms (e.g. wheat, corn, etc) but livestock alone represents a massive market opportunity for the company.

More broadly, the business Farmeron is building is an example of an overall wave of an “Internet of Things”.  There are now more internet connected devices and sensors than people accessing the internet, as Cisco highlighted in 2011.  The white paper they wrote about it is here and there’s also a useful infographic.  In fact Cisco highlighted a company making wireless sensors for tracking cows and other livestock.  As the number of systems and sensors connected to the internet continues to proliferate, we strongly believe this will create opportunities for both B2B and consumer-facing startups to help build this infrastructure, enable applications on top of it, and derive insight from the data they generate.

We’re incredibly excited and privileged to work with Matija and the rest of the Farmeron team to build a great company.

As many of you may know, we have a section on the NextView website called “Ethos” where we describe five key principles to how we operate.  My partners and I have blogged about some of these including Invited Guest, Golazo, Authentic, and Tribe.  The last is Blank Canvas which I wanted to touch upon today.

To us the notion of painting with a blank canvas has both inward and outward facing components.  We love meeting entrepreneurs who take this blank canvas approach when thinking about disrupting markets.  Just because it hasn’t been done before or hasn’t been done in a particular way doesn’t mean it can’t be done… in fact many of the greatest businesses have been built by doing just that.  This is how new markets get created.

Sometimes even what seem like incremental innovations can have radical impact, if talented and creative people start with that blank canvas and envision the future as it should be not as a derivative of how it’s been.  Apple’s not a startup but thanks in large part to the spirit Steve Jobs infused in the company, they do an incredible job of imagining a product from scratch as it should be.  This is true not just for entirely new product categories like tablets, but even existing ones… smartphones had been around for 5+ years before the first gen iPhone launched in 2007 (remember Palm Treos and the original Blackberry phones?).  On the startup side, Square’s done a particularly good job of this in payments.

My partner David recently wrote about how investors tend to bring their own inherent biases (both good and bad) into pitch meetings with entrepreneurs.  We try hard to bring our own blank canvas into these meetings so that we can better conceive and appreciate the vision of founders we meet with.  It’s not easy to check our preexisting biases at the door and sometimes we leave meetings as true believers and sometimes as skeptics.  But it’s something we strive to do and I believe serves us well.

Similarly Rob, David, and I try to think with a blank canvas, both in starting NextView in 2010 and on a continuous reevaluation of how we invest and how we might better help entrepreneurs build great companies.  I wouldn’t say we’re radically reinventing venture capital and there are many firms we respect who have been innovating recently in connecting a portfolio of startups into a network, taking a different approach to how to staff a VC firm, and even the pace of VC investing.  But whether it be how we collaborate or seeking new/different ways to help our portfolio with technical recruiting, we aspire to constantly rethink how we might improve… each time starting with our own blank canvas.