Wild Apricot is a young technology company out of Toronto, Canada. We provide Software-as-as-Service for associations, clubs, and non-profit organizations. This is our story of an investment round that fell through due to economic conditions.

Originally financed by our founders, the company wanted to grow faster and in December 2007 decided to seek additional financing from outside investors. Things progressed quickly, and by February 2008 we shook hands on a deal with a new investor: a very entrepreneurial investment company out of UK. Closing was planned for April 2008.

Of course, things never go as planned (and this is one of the lessons many startups learn the painful way). First, due diligence protracted much longer than expected. This was partially due to the fact that our Canadian-based company has a subsidiary office in Moscow, Russia, where the bulk of software development work takes place. The investor was keen to ensure that the intellectual property was properly protected, and it required changes to the legal setup of the Russian subsidiary, new employment contracts for all employees, and a bunch of other changes.

Then the MBAs and lawyers got their hands on the deal, and it quickly deteriorated from a relatively simple original term sheet to a thick stack of very complicated contracts.

This was to be the first Canadian deal for the investment company, and the deal stalled for a while as the investor's lawyers struggled to reconcile the terms sheet with their standard templates and the wording of UK contractual law with the Canadian legal system and its way of doing things. (That's another lesson for start-ups: making a deal outside of your home base frequently takes much more time and energy.)

The shareholder agreement, articles of association, board by-laws, and all the other fun documents multiplied in versions like rabbits.

Everybody got exhausted, and the deal almost derailed a few times and was only saved thanks to the open dialog between our company and the majority shareholder of the investment company.

Dmitry Buterin, the Chief Apricot (aka President of Wild Apricot), got the final documents on the morning of October 9th, 2008. He was visiting the Moscow office at the time and went to work having the documents signed and faxed between Moscow and Toronto.

Alas, it was not to be. At 4:00 pm, he got a call from the investor. "We are not going to close the deal after all. Our shareholders are panicking and withdrawing their money. We cannot do any new deals now." The financial crisis finally hit home.

After seven months of due diligence, many thousands of dollars spent on accountants and lawyers, and countless hours invested by the management team, Wild Apricot had to write it all off.

It was even more disappointing because our company was delivering on its promises. Back in January 2008, we provided a detailed financial projection, and at the last check-in with the investor team we were proud to show the September and year-to-date numbers were right on the projections.

As the saying goes, in every crisis there is opportunity. So, the Wild Apricot team went searching hard for those opportunities.

The story is still being written because the crisis is still unfolding, but here is what we have achieved so far:

1. We asked nicely, and the investor agreed to reimburse part of Wild Apricot's legal expenses, even though there was no legal obligation on the investor's part.
2. We contacted local media right away to capitalize on all of the hoopla about the crisis and ended up on Canada's CBC television.
3. The founders put together another round of their own money, and while they had to scale back some growth ambitions, we feel comfortable about riding out the current storm and bridging this and the next investment round. (we knew that any deal had a risk of falling through, so we had backup financing arranged in advance, and it came in very handy.)

Wal-Mart has been reporting record growth as of late and McDonalds is stealing market share from Starbucks. So we think Wild Apricot might do even better in these tough times. Non-profits are hurting and have to trim their budgets (just search Google News).

To tell you more about our software: the basic premise is that for a simple, flat monthly fee of $25 to $200, Wild Apricot replaces up to seven separate pieces of software: the content management system for your website, a members database, a secure private website for members and the board, an event registration system, online payments processing, software to send bulk emails and newsletters, and online community facilities, such as blogs and discussion forums. Technical support and updates are free.

For a small association or club, this set-up saves thousands of dollars in software, countless hours of volunteer time usually wasted on copying and pasting and reconciling the data between a dozen Excel files, and paying through the nose for IT services.

Wild Apricot delivers a custom-built website project that would cost the equivalent of $20,000 or more (not to mention hefty ongoing maintenance and support fees).

October 2008 has been our best month in terms of absolute financial growth (meaning our monthly revenue has increased by the biggest amount ever). Percentage-wise, our revenue grew by 11.3% in a single month! And November so far is shaping up to be an even better month for us.

We we are very confident in our ability to keep growing by staying agile on our feet!

And here is the silver lining:

The US dollar is shooting up against most other currencies. Wild Apricot software is priced in US dollars, while its expenditures are largely in Canadian dollars and Russian rubles. This adds a healthy boost to its bottom line.

What are your war stories? How are you navigating these waters, and what new opportunities are opening up for other technology startups?

If you're curious to know more about this 'gritty startup', please click through to Wild Apricot's website and support a RWW sponsor!

This investment from Bezos comes just a few months after SGN raised a $15 million Series A round led by Greylock Partners and the Founders Fund.

SGN is monetizing its games mostly through advertising, but also through subscriptions and sales of virtual goods. The company's properties have about 1 million daily users, enough to make it attractive for large advertisers.

Overall, users have installed SGN games over 50 million times and handed out over 70 million gifts. It is, of course, questionable how many of these 50 million apps are still active, but with 1 million daily users, SGN is definitely one of the larger players in the casual gaming market.

Casual gaming is clearly turning into a major platform for advertisers. While both Kongregate and SGN are mostly focused on the web, the large range of casual games already available on the iPhone and other mobile devices shows that there is a very large market for them.

At the same time, though, it seems quite a few users are also very willing to actually pay for these games - as long as the prices are reasonable. As more and more investors are looking for companies that are not fully dependent on advertising for their revenue, the casual gaming market is probably going to see more investments like Bezos' in the near future.

Question: Talk about your investments in the space? Who did you fund and how much did you put in?

Amanda Reed (Palomar): In 2003 Palomar Ventures funded Attensity, a text analytics startup that provides insights based on unstructured feedback from customers. The platform is able to leverage emails, web pages, documents of different types, etc. and then automatically infers connections between people, places, companies, events, and more to deliver business insights that otherwise would be buried in unmanageable amounts of text.

The second investment we made was in Silver Creek Systems, which offers information transformation, data extraction and cleansing services. The platform is able to consume and normalize large volumes of unstructured enterprise data and is currently used in eTailing and financial services markets. Both companies received funding in $4-7M range from Palomar and $10-15M range overall.

Eghosa Omoigui (Intel): Intel Capital is the investment arm of the Intel Corporation, and it has $3 billion under management. 93 invest professionals are working with 422 companies on deals ranging in size from seed stage investments to hundreds of millions of dollars. The most recent investment was in Endeca, which specializes in content aggregation and management for enterprises. We have a lot of interest in the semantic space and have been following it for over five years. There are several deals that are currently pending that I can't name. One is doing dynamic, large-scale ontologies - taking content and overlaying dynamic ontologies. The company is based out of Asia and will be announced soon.

Stephen Hall (Vulcan): Vulcan Capital started looking into this space in 2004-05. In addition to several investments in the space, the firm has internal R&D efforts. We're excited about the sector and look at it quite broadly. In 2005 Vulcan invested in ZoomInfo - a company that focuses on extracting information about people and companies from unstructured text. ZoomInfo offers an application which is both in vertical search and recruiting/sales intelligence.

Another big investment by Vulcan was a seed round in Radar Networks which recently unveiled its first product, a collaborative semantic knowledge sharing space called Twine. [ReadWriteWeb's review -- Ed.] I'm excited about Twine, and believe that the company is paving the way toward a new type of data organization - one that is social. We also invest in a stealth startup called Evri, which is going to launch next week at the Wall Street Journal conference.

Evri will automatically index the web, connect people, places and other entities and offer a way to shortcut search. The bigger promise of semantics is not to improve search, but to avoid it all together, because once context is known, relevant information can be inferred. We believe that Evri will deliver a new and disruptive way of bringing us information.

Lastly, Vulcan funded a company in the email space, which is still in stealth mode. It aims to apply semantic technologies to mining information buried in emails.

Question: During this conference an executive from Oracle claimed that semantic technologies are not going to reach the mainstream on their own. Instead they will be absorbed by large enterprise products, such as Oracle's. Can you comment on that?

Stephen Hall (Vulcan): That's not so. There are tremendous opportunities in the space. If we did not believe that, we would not have made all the investments that we have. The the amount of unstructured information out there is huge and rapidly growing, creating more and more need for automatic/semantic technologies to cope with the information explosion. This need is what drives the opportunities both in the consumer and enterprise space.

Question: Nova Spivack said that most VCs are looking for only 1 play in the Semantic Web space, is that true? Also, someone else commented that VCs would rather invest in applications instead of platforms. Is that so?

Amanda Reed (Palomar): VCs do not think about this as a single market. Those venture capitalists who really understand the power of semantic technologies do not fund companies because they use the technologies, they fund companies for which there is market need and opportunity. VCs want to put money into companies that are solving real problems and have clear user benefits. Having semantic technologies as infrastructure is certainly interesting and impressive, but by no means is it a deciding factor.

It is true that VCs like apps over platforms. Platforms have traditionally had a challenge with pricing. In all of the investments that Palomar has made in this space, a big focus has been on pushing companies to build applications on top of platforms. Another important observation to make is that once a platform is turned into an application and it reaches customers, the word semantic disappears from the marketing. Enterprise customers, like consumers, simply do not need to know what is inside as long as it works and solves the problem.

Eghosa Omoigui (Intel): One of the strategies that is interesting in the semantic space is the stack of solutions based on a theme. There is a great diversity in semantic web technologies and problems, so by adopting this as a theme, VCs can build a portfolio of companies that collectively offer solutions along the entire stack. One needs to look for the best company in each niche, with a clear proposition and superior technology. And so with that, if someone says we only invest in 1 company in the space, run, because that means they don't get the space.

Question: Give us examples of particular market areas where you see opportunities now.

Amanda Reed (Palomar): Enterprise infrastructure investments. Product transformation, data quality, cleaning data. There is big pressure to reuse data in different applications and services. People tend to shy away from the enterprise because of the lengthy sales cycles and costs to scale the sales, but there is a lot of money to be made.

Stephen Hall (Vulcan): There are a lot of light-weight services that are beginning to tap and re-wire the existing web. As an early example, SmartLinks from AdaptiveBlue leverages existing URLs as semantic markers. These type of top-down contextual / semantic technologies that are leveraging existing bits of the web are just in their infancy and we will see much more in the space. Another variety of consumer technologies that have a lot of promise are things like Trippit. Taking unstructured information from email, recognizing it, cleaning it, and inserting it automatically into iCalendar is an example of applying semantic technologies to consumer task automation. There are lots of opportunities like this in the consumer space.

Amanda Reed (Palomar): Speaking of Trippit, the space is not semantics, the space is really travel. Semantics is really the means to an end, but not the main point. We are excited about the companies that put semantic technologies to good use in verticals and solve real, specific problems.

Question: How do you expect to make money on the Semantic Web? What are the monetization strategies that you are seeing?

Stephen Hall (Vulcan): It really depends on the company and the business model. Twine will be partially monetized via advertising, but there will be other components. In general, Vulcan quite likes the advertising space, which will be doubling to $40B with room still for growth. Semantic technologies that are impacting ad quality is another interesting area. There are companies in that space, for example Dapper, that are leveraging semantics to deliver more targeted, more contextual advertising.

Amanda Reed (Palomar): There are several business models that we are seeing out there. Most often, it is a web service or service offering. There are licenses in the enterprises as well, of course. In addition, we are seeing new models where services are packaged into boxes and bundled with software. This is a hybrid model that seems to be interesting to many enterprises because of the finer control. It is important for startups to figure out how to match the value proposition to the business model.

Question: How are today's funding models different from, say, 5 years ago? How much capital do startups need these days typically in series A, series B?

Amanda Reed (Palomar): Cloud computing has changed the startup game in a very significant way. The cost to get to market is substantially lower as more startups are now able to buy critical infrastructure from companies like Amazon.

Stephen Hall (Vulcan): There is really no formula for how to fund a company. Deciding on a capital needs depends on many factors. Some companies need $10M, some need $50M and there is a comparable upside. Some of the opportunities today simply could not have existed yesterday because we did not have the scalable and readily available grid infrastructure.

Eghosa Omoigui (Intel): Intel has launched amazing products for deploying cutting edge tech. This drives the value for every dollar. Another big difference is outsourcing, which has had a dramatic impact. These days you can hire a stellar development team in Eastern Europe at a fraction of the cost of one in the US or even Asia.

In general, there is a big difference between launching a software and a hardware business. Chip businesses can require hundreds of millions of dollars to get going, but software is on the order of magnitude cheaper to build. Everything is dependent on the target market.

Amanda Reed (Palomar): Another important thing to keep in mind is that VCs are looking for entrepreneurs who know how VC firms work. For example, the size of the investment is driven by the size of the fund. A billion dollar fund does not have capacity to put $1M into the company. A partner can only focus on 5-7 companies and to make it worthwhile for the fund, each investment needs to be much more substantial. A lot of entrepreneurs do not understand that and apply to funds that are unable to fund them.

Question: What are the proof points that you look for for series A and B funding?

Stephen Hall (Vulcan): Series A, pre-product pre-revenue, you need to have comfort that the team understands technologies and can manage issues around scale. Particularly in the web space, scale is critical. Also, looking for passionate people with past success. The biggest thing, which is often missing, is a go-to-market strategy. VCs will help refine the path, but you need to have clarity to have success.

Eghosa Omoigui (Intel): Too many use cases is always something that plagues this industry. When there are many use cases, there is a lack of focus. Go and figure out where the need is. It is most important not to get it right, but to articulate the problem and to know what you are after.

Question: How early are you getting into companies and what is the mininimum you are putting in?

Eghosa Omoigui (Intel): Depends on the opportunity. We do everything from $300K seed funding to $300M rounds.

Amanda Reed (Palomar): We like early stage. We will do a $250K seed deal if we know that series A is coming. We tend to top out in high $20M pre-money valuations.

Stephen Hall (Vulcan): Depends on the deal but we prefer early, series A. Can do less than $1M and seek to put in $10M over the lifetime of the company.

Disclosure: Alex Iskold is Founder/CEO of AdaptiveBlue.

Super-sleuth Dan Primack over at PE Hub dug up the early news about the investment and Chris Morrison at Venture Beat says Velocity Interactive Group and a number of other investors are putting in money in the $15 to $20 million range.

For a look at the breadth of Twine coverage across blogs specializing in semantic web technology, check out this search across our Semantic Web custom search engine, part of the RWW Toolkit for the Top Issues of 2008. See also Bernard Lunn's post here this week titled, 11 Things to Know About the Semantic Web.

The following is Robert Scoble's 10 minute highlight tape of an interview he did with Twine founder Nova Spivack in December.