Question: How would you describe the current state of early-stage VC in general?

Clavier: Early-stage technology investments have traditionally been made by a mix of business angels, which invest their own money, and venture capital firms, which invest from funds they raise. Over the past four years, a few seed-stage firms have become prominent players in early-stage investing: First Round Capital, Maples Investments, Baseline Ventures, True Ventures, Alsop Louie, KPG Ventures, and my firm, SoftTech VC. In the current environment, all of these firms are actively investing and so are "professional" business angels. More casual angels have disappeared from the market since October 2008, when the public markets started unraveling.

Hornik: I think it is a very tough time for venture capital in general. The public markets are closed up tight as a drum. But more importantly, the financing environment is very tough. It is particularly hard to assume that a company you finance today will be able to remain financed in the future. So venture capitalists are being very careful about what companies they fund, with a particularly careful eye on capital efficiency.

Question: What would you say about the state of VC investing specifically in the digital content or digital content technology space? Do VCs look on this space favorably right now?

Clavier: VCs continue to invest broadly in digital content, technology, services, etc. The bar has just gone much higher on what companies have to demonstrate to show themselves worthy of an investment: traction, revenues, market potential, etc.

Hornik: There is no question a number of exciting companies in the digital media space will have no problem getting financed. But many others will not be able to find backers. There is a general sense that online advertising is slowing down. Because a large number of the digital media opportunities are monetized with advertising, many of the companies coming up for funding will face a fairly skeptical venture community and have a tough time getting funded.

Question: What have been your most notable deals in this space since you started investing?

Clavier: I started investing in the consumer Internet space five years ago, at the very beginning of Web 2.0, and since then have closed more than 50 deals. Five of them got acquired: Truveo, Userplane, MyBlogLog, Kaboodle, and Maya's Mom. In my angel portfolio, I have companies like Mint, Kongregate, and Buzznet. More recently, I invested in Tapulous, maker of the #1 game on the iPhone, as well as Circle of Moms, GetSatisfaction, and SocialMedia. All of these companies have millions of users, but it is still the beginning for them.

Hornik: The partners at August Capital were the earliest investors in such companies as Microsoft, Sun, Compaq, Intuit, Symantec, Seagate, Skype, and many others. I have had the good fortune to invest in such exciting digital media companies as Evite, Tickle, Six Apart, VideoEgg, etc.

Question: Have you done any digital content deals in the past six months?

Clavier: I typically don't talk about recent deals. Funding announcements are most often done when companies launch. In the past six months, I have invested in Outright, Foodzie, and TextDigger, and I am also about to close two deals in digital content infrastructure.

Hornik: We have invested in a couple but, unfortunately, we aren't talking about either publicly. Stay tuned.

Question: Is now a good time to be a VC investor?

Clavier: I personally consider the current environment a great time for investing. Opportunities I see tend to be stronger; there are stronger talent pools around companies; and the general focus is on building sustainable businesses, with revenues being part of the short-term plan, as opposed to an afterthought.

Hornik: I think it is a great time to be a VC at August Capital. We have had the good fortune to invest successfully in a number of really interesting companies in past down economies. We believe that great entrepreneurs are undaunted by the challenging economy. And a number of things make it easy to build a company in these difficult times: plentiful talent, cheaper rents, less competition, etc.

Question: What is the mindset of your investing partners right now, including other VC firms you often invest with? What percentage of them are positive?

Clavier: We are all busy looking at deals and investing right now. It is, however, fair to say that the pace has slowed down a little bit compared to last year.

Hornik: I certainly think that plenty of venture investors feel quite daunted by the market conditions. Not only is it harder to raise money for their portfolio companies, it is harder for them to raise money for their own firms. But plenty of folks out there have seen these up-and-down cycles before and remain enthusiastic about venture investing. I personally remain quite optimistic about the future of venture investing; so long as there is technical innovation, there will be great opportunities in venture capital.

Question: Is VC investing more difficult in the current environment?

Clavier: I would not say it is more or less difficult than it was in the past. The big question for us is, what type of companies are likely to be successful in these challenging times. There is a flight to quality in terms of management teams and a bigger focus on short-term revenue. But otherwise, it is pretty much the same.

Hornik: It is definitely more difficult. If capital is the lubricant of markets, then we are facing some pretty serious challenges. But there will be opportunity to succeed despite the markets. And those firms that have a long history of success will be able to weather the storm far more easily.

Question: What types of digital content solutions or tools are you interested in funding? What's on your wish list?

Clavier: I don't maintain a wish-list of tools or companies, to be honest. My investment strategy is sector-based, within the realm of consumer Internet. That includes social media, gaming, search and discovery, monetization and ad networks, and consumer and cloud infrastructure. I am currently looking at mobile deals as well, on new platforms like the iPhone and Android.

Hornik: I don't really have a wish list. I'm always looking for smart, talented entrepreneurs who can tell me what is interesting. The entrepreneurs know way more than the venture community, so I have always followed their lead.

Question: Has deal flow slowed down for first-round financing? And can we assume that requests for follow-on financings are way up? On which are you spending most of your time these days?

Clavier: Deal flow has slowed down a little bit, but I find what comes my way is of higher quality. I have closed six follow-on rounds in the portfolio in the last six months: companies I had seed-funded that received capital from new investors in a subsequent round, and I see that as very positive. It was a lot of hard work; it took more time than in the past; and valuations were in line with market realities. But these deals got done. I have allocated 75% of my time to my existing portfolio, and 25% to looking at new deals.

Question: Any further thoughts on the subject?

Clavier: We're in the most challenging economic and financing environment of the last decade. I have been an investor for nine years, but I'm certain that we'll see fantastic companies emerge from these difficult times. And I am excited to be involved in the early-stage community that will help build them.

Hornik: I joined the venture business in June of 2000, which was a challenging time in its own right. But I found some very interesting companies to invest in then. And I'm sure I will find some interesting companies to invest in over the next couple of years as well. I'm looking forward to it.

Graeme Thickins is an independent writer, consultant, and blogger based in Minneapolis, MN, and San Clemente, CA. His main blog is www.Tech-Surf-Blog.com, where he recently posted some 23 interviews he conducted at the DEMO '09 conference in early March.

The coolest new tech company I found there was from the Netherlands: Adjustables. They were showing, for the first time in the U.S., a patent-pending technology for placing non-intrusive ads within video streams - instead of those annoying pre-rolls or banners surrounding the player.

The company's Windows-based "AdDesigner" is a tool that lets you create adverts for your online video streams, in any of four different types. AdDesigner automatically saves your Adjustables to the AdServer. You also need the company's "AdScheduler," which places the Adjustables you created within your videos. Software for both products can be downloaded from the company's site for free.

Adjustable's ads are clickable, so the viewer can interact with the video at just the right moment. The default is that, when clicked, the video pauses while the viewer goes to the advertiser's site. The intregration of the ad with the streaming video happens on the viewer's computer. Ads can be targeted by geography or behavior. I was impressed with the look and minimalism of the ads. Not too distracting and about as tasteful as ads can be in this medium.

"Is anyone else doing this?" I asked cofounder and VP marketing, Menno Biesiot. He said that YouTube and Metacafe are working on something similar, but his firm sees this as validation and hopefully it will lead to standard-setting in this area of much-needed innovation.

Adustables is a recently VC-funded startup based in the Netherlands (with a new office in SF). They announced their technology at the ad:tech conference in Hamburg in May. The software is available now for download at the company's site, and a demo is available there.

Graeme Thickins is a blogger and tech marketing consultant based in Minneapolis. For more coverage of ad:tech Chicago, check out his blog Tech-Surf-Blog.com.