At the same time, though, the latest data from Hitwise shows that visits to Twitter's main domain have slowed down markedly over the last few weeks. This number doesn't take users into account who access the site from third-party applications, but it does show that a smaller number of users are going to the main site, which indicates a slowdown in new user adoption. Hitwise's Bill Tancer also found that fewer users are searching for Twitter on search engines. Hitwise's Clickstream report also shows a drop-off in new users that are coming to Twitter since April.

In April, of course, Oprah famously joined Twitter and the hype cycle around the service was in full swing. It looks like normality might be setting in now and growth is indeed slowing.

The question, of course, is if this is just a temporary slowdown or part of a larger trend. Maybe everybody who was going to join Twitter has already joined and the rest of the potential users are simply happy to use Facebook instead?

For now, we want to congratulate Twitter on closing this round, which will give it a chance to improve its technology and grow its team. At the same time, though, we also hope that Twitter will finally release some details about how it plans to make money in the long run and validate this valuation.

This kind of valuation is going to give Twitter a long runway before it actually has to make money, but at the same time, it also makes it unlikely that anybody is going to acquire Twitter in the near future.

We will obviously keep an eye on this developing story and will update it once we get more information.

Image used courtesy of Flickr user tao zhyn

For the quarter ending this past June, we compared the findings of three research firms that reported on the money invested in Q2:

• July 21, MoneyTree (PricewaterhouseCoopers, with data from the National Venture Capital Association and Thomson Reuters): $3.7 billion, with 612 deals,
• July 18, VentureSource (DowJones): $5.27 billion, with 595 deals,
• July 14, ChubbyBrain (a New York City-based startup partnering with ReadWriteWeb): $5.329 billion, with 613 deals.

VentureSource and ChubbyBrain seem to agree on the top line number. But MoneyTree's number is what most people report, and that is about $1.5 billion different.

As the old saying goes, "A billion here, a billion there. Sooner or later it adds up."

Disclosure: Our VC Funding Report

ReadWriteWeb has an interest in this. We sell a report for $299 that has details on the 240 deals done this quarter in the Internet, mobile, and SaaS space (not clean tech or bio tech), and this is powered by data from ChubbyBrain. So we are biased. But it also means that we are engaged and have been looking at this fairly deeply.

Who Cares?

We also think that accuracy matters, and we are trying to figure whom accuracy matters to. We see three main types of participants in the industry:

1. VCs. They need accurate data for their own fund-raising. They have to be able to benchmark their own funds relative to the broader market.
2. Entrepreneurs. Data on what funding deals are being made, and why, helps them figure out how much to raise, when, and from which VC.
3. The startup "community." This is a catch-all for everyone else, who tend to align to either VCs or entrepreneurs. Journalists, the non-aligned fourth estate, want reliable data to key off interesting stories.

Why does this matter? The startup community matters to the health of the overall economy. As the National Venture Capital Association (NVCA, the trade association of VCs) likes to point out:

"Originally, venture-backed companies have created companies that accounted for 10.4 million jobs and over $2.3 trillion in revenue (based on 2006 data)."

So a headline like "VC Investments Falling Off Cliff in the US" really impacts a lot of people. That is the kind of headline that most journalists/bloggers wrote in April 2009, based on data reported by those trusted sources.

We wrote a really boring headline:

"VC Investment in Internet Deals Did Not Fall Off a Cliff."

That's a lousy headline for generating page views. It's a story about "the dog that did not bark."

The point is that headlines drive business behavior to wild excesses on both the down-cycle bust and the up-cycle boom.

Just good reliable data would help.

Innovation Is Global, But It Keys Off US Data

At ReadWriteWeb, we love to track innovation from far-flung corners of the world, and we see the globalization of innovation as a critical trend.

So we want to be able to report on financing trends for early-stage Web technology startups across Europe and Asia, in addition to the US. And we expect any research process to be able to scale to that challenge.

But the reality today is that, globally, entrepreneurs and VCs key off US data. If they were to key off bad data, that would matter to everyone.

Why This Matters

Driving with one's eyes in the rear-view mirror is dangerous. We take action based on what authoritative sources tell us is happening today, and we base our assumptions on what that means will happen next and plan accordingly.

In reality, these sources tell us what has happened in the past, and they may not even tell us that accurately.

When we at ReadWriteWeb look at the macro picture, we favor a contrarian view simply because the reality we see today is often not what the headlines trumpet. When the markets were in the late stage of a boom, we were sounding the warning signals.

When the markets were melting, we began to see surprising signs of life in the early-stage Web technology world we live in.

Whether you are an entrepreneur or an investor, knowing what the crowd is thinking -- and what the headlines are trumpeting -- is valuable. Even more valuable are the underlying facts and trends that may be missing from those headlines. In the disconnect between the two often lies a lot of opportunity.

We hope to ignite a debate that leads to greater accuracy and transparency of these numbers.

Notes

Why 2.5? Because we are in transition. The old is still with us, and the new is emerging but has not yet arrived. This was also true when "Web 2.0" was coined: only later did orthodoxy emerge.

2.5 is named "Get real" because we all have to do that. The punch bowl was taken away.

3.0 is named "Main Street" because the web is maturing... for everybody.

Social Media: Closed social-network sites cannot survive in their current form, and yet they are so dominant today. So the transition to open and pervasive will be a big and messy fight... which will be great fun for journalists to cover!

Advertising: Advertisers will adopt a barbell approach: CPM for branding, and CPA for direct-revenue generation (as soon as publishers figure out how to make money selling CPA). CPC will still be dominated by Google but will become less dominant as CPA gains traction. Google will play in CPA and CPM but won't dominate as it does in CPC. Publishers will sideline CPA because nobody will be able to compete with the CPC price set by Google. Ventures that bridge the gap between publishers wanting to sell CPM and advertisers wanting to buy CPA will do well.

Revenue: Primary revenue will come from subscriptions and transactions, with advertising as one driver of those revenue lines. Today, we are in transition and in recession, so any revenue is good.

Content: UGC reduced the cost of content but created too much junk. Curation (adding human editors to automated UGC content) will be aided by semantic technologies that aim to do what humans currently do well.

Start-Up Hero: Today, it's "Nobody" because we are all in a hangover funk. In the near future, entrepreneurs really will hold the best cards; financiers will be secondary.

Funding: The "Big VC" model is broken but will carry on for ages ("Zombie VC"). Angels and small VCs are in the cat-and-bird seat today. But they need a revived public market or something other, which we'll call "private + transparent."

Prime Market: This is a century-long shift, like the one from Europe to America. Asia is not ready yet, America is in turmoil, and Europe is conservative, so this is another transitional phase.

"Venture capital investment plummets in Q1 2009 to 12-year low"

Now, you may read a lot of doom-and-gloom headlines. Our headline is more like, "The dog did not bark". Yes, we know that does not sell newspapers! Read on, though, if you want to go beneath the headlines and see what is happening in web technology investing.

We have been interviewing investors every week for the last 2 months, and been tracking Series A deals since October 2008 ("meltdown month"). On both scores, we are seeing signs to be at least cautiously optimistic. The data we get is mostly anecdotal, so we wanted to see how this compared to the rigorously compiled data from MoneyTree.

Neither Boom nor Bust

That is the headline. Boring, huh?

The MoneyTree data is all about VC investment in America. That is, only in America. It does not record deals done in Europe or Asia. But it does record deals in all fields -- biotech, clean tech, etc. -- and all stages, from early to late.

What interests us at ReadWriteWeb is the small subset that is (a) seed- and early-stage, and (b) Internet-specific. So we drilled into those numbers. Q1 2009 saw 34 deals, with a total of $138 million invested. Is that good or bad? Well, 34 companies getting their first investment round is one helluva celebration for 34 entrepreneurs, their teams, and their investors. Every one of those has high and reasonable hopes of becoming a big and successful company. So take a moment to celebrate with them.

But those numbers are down from 55 deals worth $196 million in Q4 2008 (presumably, the deals closed before the financial meltdown but were executed and recorded afterward). In Q3 2008, there were 80 deals worth $286 million. So, the trend is down. But you did not need me to tell you that, right?

Remembering Booms and Busts in Cold Numbers

When you look at the charts, you see the insane spikes in 1999 and Q1 2000. How about 486 deals worth $4,533 million in Q1 2000? Yes, that is 486 ventures that got their first round funding in those 3 months!

Obviously, we will never see that again. Nor should we want to. There was a horrible destruction of capital, and those who worked through it called it the technology nuclear winter because of the loss of confidence it bred for years. How about 15 deals worth $76 million in Q2 2003? That was actually the lowest in the 53 quarters tracked by MoneyTree.

If you want to be positive, then, our position now is twice as good as it was in Q2 2003. So here is an alternative headline:

"VC investment in Internet startups is up 100% from last downturn".

Sounds good, but only goes to prove that headlines are just... headlines. What will really happen next quarter and the rest of the year? That is, have we reached the bottom?

Have We Reached the Bottom?

That is the question investors always ask in the stock market. But how about in the web technology innovation business that we report on for ReadWriteWeb: have we hit bottom? The investors we speak to are bullish and give good reasons for their bullishness. But if we are going to repeat the trend lines of the last cycle, we should be worried. Here is why...

The dot-com bubble noticeably burst in March 2000. Anybody paying attention could see that "it was over." That was like October 2008, clearly a transition. But it took another 12 quarters before early-stage Internet financing hit rock bottom, in Q3 2003. If we follow that trajectory, we are in for a world of pain. But investors have been giving us all kinds of reasons why we will not follow that trajectory. The most obvious reason is that the boom period in Internet deals in this cycle is way, way lower than it was in the last cycle:

• Q1 2000 - $4,533 million
• Q4 2007 - $434 million

That's right. This boom cycle at its peak is 90% lower than it was in the last cycle. So we don't have as far to fall. Phew!

At least we'll know next quarter. But then, analysts always say that, don't they? "Wait and see."

Here We Are in Q4 2004

How was business for you in Q4 2004? Because that was the last time we had comparable amounts of money invested in early-stage Internet ventures:

• Q1 2009 - $138 million
• Q4 2004 - $141 million

So What Did Fall Off A Cliff?

Clean tech fell off. Total clean tech dollars invested:

• Q4 2008 - $1,141 million
• Q1 2009 - $154 million

(That includes all stages, not just early-stage.)

Yep, that is right. The clean-tech revolution that you've read about? Ouch! Just about $1 billion less invested in this quarter. Hm, did crashing oil prices have anything to do with that, and have we seen this movie before? But we digress...

What Are Investors Telling You?

Investors have been telling us what they think. We have been tracking Series A deals to get a sense of what is actually happening. What are you seeing? Have investors gotten slower or more cautious?

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.

1. The average deal size is increasing. The average went from $2.12 million in November to $4.11 million in December to $6.06 million in January.
2. California still rules, but global investment is happening. In the US, venture capital is still dominated by Silicon Valley, but we are seeing a few more global deals, specifically in the UK, Canada, and English-speaking India.
3. Total diversity was apparent, without any market-segment bias. This is a good sign that ventures are being evaluated on the fundamentals rather than on what's hot.

Which Ventures Received Money?

December:

• NetShelter
• dotblu
• InnerRewards
• KZOInnovations
• smartfundit
• Appcelerator
• Wordstream

January:

• HubDub
• Sittercity
• Appnomic
• CloudSwitch
• GoInternetMedia

Which VCs Wired the Money?

December:

• Rho Canada
• GrowthWorks Canadian Fund
• JLA Ventures.
• DE Shaw, Maple Investments
• Valhalla Partners
• Baytech Venture Capital
• Storm Ventures
• Sigma Partners

January:

• Pentech Ventures
• Apex Venture Partners
• Norwest Venture Partners
• Atlas Ventures
• Matrix Partners
• Kennet Partners

Like an increasing number of private companies, Blurb is starting to report its financial results publicly, almost as if it were a public company. This presumably serves the purpose of both reassuring customers that the business is healthy and attracting potential acquirers.

Allow us to quote shamelessly from Blurb's press release (at least it prevents errors):

"Blurb, the creative publishing platform, today reported a year of record growth in 2008 with revenues approaching $30 million. The company reached profitability and achieved nearly 200% year-over-year revenue growth in 2008."

Quiz: which would you prefer: a company with $200 million in advertising revenue that is burning cash, or a business with $30 million in subscription revenue that is profitable? The first describes Facebook, the second describes Blurb. Yes, it is almost absurd to make the comparison. But the point is that old business maxim: revenue is vanity, and profit is sanity.

What Does this Tell Us About the Economy?

On the face of it, not much. Blurb's business is partly seasonal; people buy more during the holiday season. We asked Eileen Gittins, the company's CEO. She sounded almost surprised, not at all triumphant, and generally cautious. Which is a reasonable reaction of anybody doing fairly well in today's economy. Eileen confirmed that January is also looking good: 30% over projections. So this is not just a holiday buying story; it's more about what specifically Blurb offers.

What Does this Tell Us About Blurb's Market?

Eileen attributed the good results to three factors:

1. Pent-up demand to write books. Who doesn't have a book they have always wanted to write? It is now easier than ever to publish (if not write) a book.
2. The cultural shift of people becoming more active contributors to media, as writers as well as readers.
3. The forced leisure that layoffs create, and the desire to do something that one has some control over and can point to as an achievement. This may be exacerbated by the bad times: get laid off from a big job, take three months to write a book about what you know, do it well and you'll be back in demand pretty soon.

There is one simpler explanation that we see. In tough times, affordable luxuries that provide a high level of emotional satisfaction do well: think movies, roses, and booze.

In M&A transactions, most of them occurred in the consumer sector of online media - 329 transactions, representing 46.5% of the total transaction volume in 2008.

The 2008 reported M&A deal value by sector:

• Consumer - $6.2 billion (36.7%);
• Business - $4.8 billion (28.4%);
• Mobile - $592 million (3.5%);
• Enabling - $2.5 billion (14.6%); and
• Commerce - $2.8 billion (16.7%).

In terms of venture capital, in 2008 $3.5 billion flowed into all sectors of media according to Peachtree. This was a 22% increase over the $2.9 billion in capital raised in 2007 in this sector. Peachtree stated that the "Enabling" category had the largest increase in the amount of capital raised, up 124% with $892 million in 2008. The Mobile sector also saw big gains in investment capital, with $341 million in investment capital in 2008 - a whopping 488% increase over the $58 million raised by that sector in 2007.

The consumer category was the biggest, with 48% of capital raises.

The top five sectors in terms of volume of transactions (not reported deal value) for equity raises in 2008 were as follows:

• Video & Online Games - 59 capital raise transactions;
• Social Networking - 57 capital raise transactions;
• Web Applications/Enabling/IT - 47 capital raise transactions;
• Mobile - 35 capital raise transactions; and
• Blogging/User Generated - 27 capital raise transactions.

It'll be interesting of course to see how the M&A and investment sector pans out in 2009. There were 27 capital raises in 2008 in the Blogging/User Generated sector alone, and I can't imagine there being that many in 2009. Tell us your thoughts in the comments.

How does a small startup secure capital in such turbulent economic times? Being profitable helps - something AboutUs achieved by mid-year 2008. The company is forecasting continued growth this year. CEO Ray King says the company is targeting $5 million in revenue for 2009. The primary source remains advertising, but the online marketing services AboutUs sells - including content creation and custom page development - continue to gain traction.

AboutUs dynamically creates pages from publicly accessible information on Web sites, like meta tags and whois information. Once built, the pages - like any wiki - are available to be edited by the company, users, or anyone who visits the site. AboutUs also offers monitoring services to facilitate "reputation management" - knowing who is saying what about you where. When a monitored page is edited, users are alerted to both the change and the user who made the edit. And given that it's a wiki page, they can choose how best to deal with the edit.

For more information on the company and its offerings, visit the AboutUs page on AboutUs.org.

However, we've also lowered our cut-off to $0.5 million. Tougher times lead to smaller rounds, which is not necessarily a bad thing because tough times force you to do more with less money. This got our list up to nine deals in total for November.

Below, we have linked each company's name to its entry in the Trade Vibes-powered ReadWriteWeb Company Index (or to the company site if there is no entry). You can use this as a starting point for research and comparison, referring to the venture's own site when needed.

• Machinima
• CarWhale
• Maxplore
• Open Candy
• Zuberance
• Carbon Flow
• Casual Collective

Note: a commenter pointed out that in our original A-Team post we missed Siri, which raised $8.5 million in October, although we have written about them before.

So please tell us who we missed in November. We will correct it in December.

Which VCs Are Wiring The Cash?

We identify only the lead VC in the following list (assuming that the first one listed in the PR material is the lead). We aim to make this more in-depth next month by showing all of the VCs that participated.

• Pond Venture Partners
• MK Capital
• Sierra Ventures
• Emergence Capital Partners
• Bessemer Venture Partners: check out its Anti-Portfolio.
• Clean Pacific Ventures
• Lightspeed Venture Partners: it has one of the best blogs in the venture business.

Emergence Capital Partners did two Series A deals in November (Maxplore and Zuberance). That is pretty cool.

If you want to talk to the firm, here are the basics:

Investment categories:

• Software-as-a-Service (SaaS)
• Consumer services
• Digital and social media
• Information services
• Business services
• Cloud computing

Investment criteria:

• Early and growth stage
• Compelling customer value proposition
• Market leadership potential
• Experienced and passionate management team
• $1 to $10 million initial investment
• US preferred

Emergence is riding the enterprise SaaS wave. Most VCs missed that wave, as we found when we surveyed gritty entrepreneurs. That sector was out of favor at the time, and most ventures simply did not get VC funding then.

Where Are Ventures Getting Funded?

It looks like California is still doing the dreaming, with six out of the eight ventures residing there. The other two are from outside the USA: one from England and the other from India.

Which Sectors Are Getting Funded?

The biggest theme was video, specifically games, but there were also two that had a green focus.

Here's hoping that December will be an even better month.

• A minimum of $1 million. We don't want $50,000 financing being called Series A. Sorry, no grade inflation here.
• Lead Institutional VC. There are plenty of other very good types of financing. We celebrate bootstrappers in our Gritty Entrepreneurs series. Angels are wonderful, and we all love friends and family. But this series is about the classic VC fund, the core of the start-up financing world. We only report the lead VC because that is what matters: with a good lead there is never a shortage of followers.
• Reported data. We need to see the dollar amount and the lead VC publicly reported. No "unreported sum" or "undisclosed investors." If you want to be stealthy, you don't need any visibility, which is fine.
• Web technology only. We are seeing a lot in alternative energy, biotech, and other sectors, which is all very interesting, but not what we do at ReadWriteWeb.
• Series A only. We recognize that getting Series B or C financing is important as well, but it is hard to see from public data whether these are really positive events or not. During a downturn, many of them, sadly, will be down rounds that protect VC capital but, because of onerous preference terms, often leave the entrepreneurs with very little. We don't want to celebrate something only to find it is viewed as negative by the participants. But everybody can celebrate a Series A: it speaks of optimism, new trends, and a go-for-it spirit.

The Heroes And their Partners

We believe that entrepreneurs are the heroes, but we also really want to celebrate their partners, the VC guys who have the guts to go against the trend and back them during tough times. All VCs talk the talk, which is that this is a great time for investing. We want to report on the ones who actually walk the walk as well. There is only one way to get into this list: close a Series A round and wire the money.

We want to use this to learn about changes in the VC business and so that entrepreneurs can see who is actually doing deals today.

Our A-Team Series Starts in October

October 2008 was a unique month for anybody in the business world. The word that kept dropping from the lips of even the most experienced been-there, done-that kind of person was "unprecedented." These are not normal times. And October was certainly not a normal month.

So, the October list was pretty short. We have heard plenty of stories from entrepreneurs about deals that were agreed on and in the final legal phase but that got pulled in September and October. We did not track September because the worst and final phase of the crash kicked in mid-September, and deals were still being done in the early days of September. So, October was the first full month of the new reality.

We count from the date when the deal was announced. But we recognize that the contract may have been signed some weeks before then.

Enough Preamble. What Deals Were Done?

Oops! Using our strict criteria, only one deal was done in October. We saw some that came close. We saw a seed round of $225,000 for a game company called Kirkland North from a venture fund called Harrison Meta Capital. We saw a Series B for $4.5 million coming from RRE Ventures to our good friends at Adaptive Blue. We saw an Israeli company called CogniSafe getting an undisclosed seed round from 21 VCs.

The one deal that squeaked into October was Zimbio with a $6.8 million Series A from DFJ and Menlo Ventures. The deal was announced on September 30th. So it is entirely possible (indeed probable) that this contract was signed before our official Meltdown Day. But the deal got done, and that is what matters.

Zimbio has very few facts on its "About Us" page. TradeVibes at least has a CEO listed; so we tracked down Anthony Mamone, and the data was sparse, not even a LinkedIn profile. All we found was a sketchy profile on Link Silicon Valley.

A Special Cheer for Syncplicity and True Ventures

The deal that kicked off the A-Team series and gave us the idea for it was the one with Syncplicity with its $2.35 million Series A funding from True Ventures. So we went to meet Leonard Chung, CEO, at True Venture's offices in San Francisco. True Venture's open-plan offices on Pier 38 do not look like classic VC, and that is probably the point. Phil Black of True Ventures made the point that ever-increasing fund sizes were taking VC away from its entrepreneurial start-up roots.

Then we noticed that our friends at GigaOm have their offices right next door. No coincidence as it happens, True Ventures was the lead investor in their Series A funding. So, True Ventures is a founding member of our A-Team. Take your best venture to them!

We have not had time to fully review Syncplicity yet. We promise to do so soon. So, in the meantime, we will fall back on the journalistic standby, quoting from its site:

"Everyday sync, backup, and sharing as simple as can be. The only all-in-one service that makes sure your files are everywhere you need them."

That is a crowded space. But so was search when Google entered the market. Getting an A round done in today's market makes one think they must have done something right, so we will check them out and urge you to do the same.

Good News from a November Sneak Peek

Here is the good news. Taking a sneak peek at November, around the middle of the month, we already see quite a few Series A deals that meet all of our criteria. We will tell all in our A-Team report in early December.

Who did we miss in October? (No spam please; look at the qualifying rules above.)

Wired.com interviewed several of Twitter's VC backers who remain "bullish" on the subject. Investor Bijan Sabet of Spark Capital notes that Twitter will introduce a business model of some kind within the first half of next year. Others are also betting that Twitter will find a revenue model this late in the game just like Google. Henry Blodget of SAI even suggested a future valuation of $1 billion or more for Twitter. We think anything is possible at this point.

A Dumb Question

Earlier we noted that Fred Wilson of Union Square Ventures initially felt the question of whether Twitter would monetize was the stupidest question in the world. He stated:

"It's like the stupidest question in the world: How's Twitter going to make money. It's like 'How was Google going to make money? Eventually Google was going to make money and they figured out how to do it and they figured out a great business, and I think the same thing is true with Twitter."

Wilson has recanted his statements, but we do agree that Twitter could very well duplicate Google's formula for success. However, Google is not Twitter and vice versa. We're talking about two completely different services. There's still a chance that Twitter won't find a successful revenue model. For all we know, luck may have been on Google's side. Up until recently, Twitter couldn't say the same with numerous outages and stability issues plaguing the service. Personally, I agree with Mark Evans sentiment that the question is not dumb at all. The question at hand could arguably be one of the most important questions any company could ever answer.

Real Venture Capital (RVC) is anything that takes a risk and works hard to create something fundamentally new. Many classic VC funds fall into this category. So do many angels. But I would also put entrepreneurs who bootstrap their ventures into this category. I would also even put Private Equity and Hedge Funds that do turnarounds and transformations.

This is very different from Momentum Venture Capital (MVC). The old asset class categories make less sense in this context. You get all kinds of MVC that would traditionally be called VC, Angel, Entrepreneur, Private Equity or Hedge Fund. But they are fundamentally different from Real VC. MVC jump on trends and amplify them. If they are lucky and smart, they get out in time. They are the bubble inflators. Their core competency is timing trends. They ride momentum.

In a downturn such as this, MVC get crushed. MVC that timed it well and got to cash are sitting pretty, playing golf ready to jump in a gain when the cycle turns. But MVC left "holding the bag" at a time like this get crushed.

RVC is contrarian. They invest when most people are scared and sell when everybody is bullish. MVC is the opposite. Smart MVC invest when the trends are obvious and get out quick, the classic "flip artist". Dumb MVC invest when the trends are obvious and don't get out in time. But both smart and dumb MVC are primarily trend spotters.

Warren Buffet is the RVC Hero

Warren Buffet ignores Mr. Market and buys companies that generate lots of free cash flow. RVC build the kind of companies that Mr. Buffet would want to buy (which mean that anybody would want to buy and that you don't need to sell until the right buyer comes along).

Sure, But Safe??? Look At Alternatives

No asset class looks safe now. Remember that the objective is some cash after inflation, and inflation has certainly reared its ugly head again. Here are some of the usual assets that people turn to in difficult times. (In brackets are the classic "Chicken Little" fear mongering questions that you hear today).

1. Cash (in what Bank? After Inflation? In what currency?)
2. Money Markets (frozen assets in panic, no inflation protection)
3. Muni Bonds (what did Schawzenegger say about California needing emergency funds?)
4. Property, "safe as houses, right?" ('nuff said).
5. Oil (will drop if global economy slows)

I could go on and on. The point is that when nothing is safe the risk/reward of investing in a new business that you really understand, with people you trust, suddenly looks less out there on the risk curve.

The Playing Field Just Tilted To The Little Guy

This is what we wrote about yesterday related to SaaS and traditional IT vendors.

That maybe part of a bigger historical shift of power from BigCo to SmallCo, reversing what happened in the last 50 years when the share of US GDP controlled by Fortune 500 went from 1/3 to 2/3. Coase's Law and the reduction in transaction friction created by the Internet are the theoretical underpinning of this shift.

This historic shift makes it safer to build disruptive innovation from scratch than defend an incumbent position. To put it more simply, today it is better to be a Barbarian than a Roman.

In short, it is time for Real VC to be bold. Some will be bold. Some won't. Enough will be bold for this to work out just fine.

Image credit: Thomas Hawk

Seeing the Blogosphere afire with tales of crisis in start-up land, with emails going from the wise investors to their portfolio companies, makes me think: no duh! Driving with your eye only on the rear view mirror is not smart. I hate to say "I told you so" but some times I cannot help myself. We have been banging this drum for a year. Not that it took a genius to see that a downturn was coming, it was bleeding obvious! We followed up with perspective here and here. When the sky started to fall a few weeks ago we started to look on the positive side.

Of course companies should keep their costs as low as possible. That has been the obvious for centuries. So last week the advice was "spend like drunken sailors?". Seriously, this kind of boom one day, gloom the next reminds me of the crazy behavior that got us into this mess and which, if you want a good laugh, you can watch here or embedded below. By the way, that video was from a year ago!

Blurb Is Just An Old Fashioned Story

The key points that came from Eileen Gittins don't sound terribly interesting, except that in today's world they are so unusual:

1. A "seasoned" management team. Like somebody at the helm who has sailed through a storm before.

2. Aligned with their VC. Some VCs push the "shoot for the moon at all costs" approach. Blurb's backer, Canaan Partners, was aligned with the push to profitability before that was fashionable.

3. Willingness to make trade offs. Sure we all want profits asap. But in the real world there are decisions and trade-offs. These may involve deferring features, leaving a market until later, being more niche than generalist. It is almost always a growth vs profit trade-off ("revenues are vanity, profits are sanity"). The Blurb story is full of those. Now Blurb are in a position to do the things they delayed earlier, while their competition is retrenching.

4. Being contrarian to some degree. Blurb got funded in 2005. They had nothing to do with advertising and you would have to be a spinmeister to call Blurb "Web 2.0". Blurb uses Internet technology (er, who doesn't) to deliver a different value proposition to satisfy a demand that has not changed since Gutenberg. Canaan was clearly ready to be Real VC and back an unfashionable concept.

And, What About The Impact Of The Financial Crisis?

We ask that question to everybody. Eileen Gittins said "we watch the economy like a hawk, because that is what we have always done, it is in our DNA". But so far, so good, they grew in September and the last quarter looks very strong. At least they don't need to go to (more) VCs, who are spending all their time with their problem companies, to ask for more capital. With all the talk of revenue vs profits trade-offs, Blurb grew revenues this year around 3x - not shabby.