Pittsburgh Ventures

Hey Pittsburgh Ventures readers, I’m Matt Humphrey. I am a Pittsburgh native, an alumnus of CMU Computer Science and Tepper MBA, Y-Combinator 2007, and serial startup guy who did a number of things in Pittsburgh from virtual worlds to content delivery to consumer internet and a lot in between. For the last twelve months I have been out in Silicon Valley working on a stealthy company called Kickball Labs and trying to learn about the world. I wanted to offer some SV vs. Pittsburgh insights, having just been back in da ‘burgh for a week.

Coming back to Pittsburgh a week or so back was excellent, and it was very cool to see a lot of entrepreneurial activity in and around the city. Generally, I was very impressed, and things have gotten noticeably more active, even since only 12 months ago when I left. Kudos to everyone involved.

In this post, though, I want to talk about one of the things I didn’t see as much as I would have liked to in Pittsburgh. It is one of the softest but most crucial elements of entrepreneurship, and that’s scrappiness.

It’s fun to see people ‘just do stuff’ in an incredibly intense manner and ask all the details questions later. If you’re a technical person, scrappiness means getting an idea, doing a back-of-the-envelope validation to convince yourself it’s decent, and hacking it up. If you’re a business person, scrappiness means talking to people who have real problems in life or business, discovering even a simple solution, and putting together a team to create a it.

California lives and breathes this concept of scrappiness, that is, as Nike would say, ‘just do it’. Almost everyone is a self-starter and a risk-taker, not just thinking about wanting to succeed or worrying about failure, but methodically building up success with hard work.

I think Pittsburgh has a little bit of a ways to go to get there. I say this because, when I was back, I heard a lot of the same comments over and over. Here’s a few examples, with comments following:

1) “I am just putting the finishing touches on our great business plan.” — why not talk to customers instead? why not build a prototype? talking to a potential customer for 5 minutes is better than planning in solitude for 5 years.

2) “Yeah you know it’s so hard to find the time with school and everything.” — you can always find ample time to work on an idea, even with something else full-time, if you really want it. it may not be easy or comfortable, but that’s why it’s so rewarding and why so few people can really do it.

3) “I’ll tell you about it in a month or two when we’re a bit farther along.” — get all the feedback right away. you don’t need to be perfect before you exhibit what you have. if you’re scared to get feedback, chances are you won’t be able to adapt quick enough.

4) “I have a great idea, I just need some people to do it!” — more often than not, the idea is 10% and the team/execution is the other 90%. with only the former, it’s nothing to get excited about yet, so work on the latter.

5) “I want to do a startup, I just haven’t had a great idea yet.” — just ‘wanting to do a startup’ doesn’t entitle you to success. be humble and join something, even at the ground floor. in the mean time, immerse yourself in cool work and think critically about interesting markets until you don’t have to make this statement anymore.

In general, I think this scrappiness point boils down to turning every moment of inaction, uncertainty, and fear into one of action, boldness, and opportunity. Scrappy people figure out a way to make money without an elaborately detailed business plan, find every minute they have to work on their company despite outside time sinks, meticulously gather feedback early and often, build excellent teams that win regardless of the ‘big idea’, and voraciously seek out opportunities instead of just ‘wanting’ them. Scrappiness is seeing all of the angles to find a win, versus worrying about all the reasons you might lose. Scrappiness is wanting it really bad.

I think the pervasiveness of the scrappy mentality in California exists because there are so many visible successes. It forces people to be modest and determined, and provides a large supply of successful mentors to teach the up-and-comers how to win. When you’re in somewhat of a smaller pond, like Pittsburgh, there are fewer people to learn from, and not as many competitive forces to drive you to work harder and more meticulously than the next guy. We need to grow the pond and, in the mean time, get some piranhas in the water.

The good thing is, we have so many smart people in Pittsburgh via industry and the universities. We have more than enough raw talent. The trick is grooming these individuals and turning them into scrappy, voracious entrepreneurs who know how to win, and more importantly, want to win more than the next guy, even the next guys in California. And that isn’t an academic exercise or something that can be taught in the classroom, it’s a macro cultural/psychological exercise. And that means improving it is a tougher and more drawn-out battle for sure. We’ll get there, but it will take time.

A couple of weeks ago, I was in Cleveland at a conference of seed-stage investors from across the U.S.   For me, the high point of the conference was undoubtedly the keynote speech by David Wilhelm, founder of Adena Ventures in Athens, OH.   The central storyline of his remarks seemed to be the following:

1. The current financial crisis is the result of a system that rewarded financial creativity over entrepreneurship;
2. Entrepreneurs are what made this Country great, and the solution for the Nation’s economic crisis is to refocus our collective efforts (and funding) toward encouraging entrepreneurship; and
3. For entrepreneurs and seed-stage investors, the coming increase in attention may be the silver lining in the current financial cloud.

He also talks about the difference between “Private Equity” and “Venture Capital” (especially seed-stage), and makes an interesting argument that the big private equity funds have been hiding behind the skirts of their much smaller and more risk-tolerant VC brethren.    [I'm not brave enough to comment on that one]

I highly recommend reading the entire speech, posted here.

Last up today is Sonya Labs, the creation of Rodrigo Guzman, Nathan Collins, and Walter Chen.  These three Pittsburgh imports are creating the “Google of legal research.”

The legal profession today uses LexisNexis and Westlaw to find legal information to buld cases, but these resources are old-school, mostly manually based sources of legal information.  SonyaLabs is proposing to harness the power of algorithms to make the research process more efficient.  They are in the process of plugging in the large global database of legal information, and you can test out their alpha product, enfacto.  Still early days, but very interesting - and increasing the size of their database is their focus.

The most attractive feature about this company is their link to a large revenue stream - what legal professionals currently spend today on legal research.  And they are being smart about their go-to-market strategy:  they aren’t trying to kill Lexis/Nexis/Westlaw, but rather become the starting point for legal research.  If they can build enough value into their advanced tools solution, even a small piece of what is currently spent on legal reseearch makes for a nice sized company.

These guys wrapped up the day of demo presentations - and showed off what AlphaLab can be at its best:  a first-stage creation engine for innovation in the Pittsburgh region.

Founder Felix Lloyd used to be a school teacher in Washington DC, and he hopes his startup, Skill-Life, willl be able to help school-aged children learn about personal finances.  He likens his idea to “SIMS meets Quicken.”

Felix is a great salesman, and his entertaining walk through the Skill-Life online virtual world, Cents City, showed off the fun nature of the experience that will be attractive to their young demographic.  Like the other AlphaLab companies, he has created alot from a little in a short amount of time.

Skill-Life hopes to get the Cents City experience into schools as well as after-school and summer youth programs, utilizing foundation, community development, and government grants.  This was a change from the initial model to sell to financial institutions, but both pathways have issues on the revenue generation/funding front.  Eventually, the revenue model relies on entering the consumer market.

I also think that Skill-Life needs to be careful about building too much overtly educational content into what feels like a somewhat compelling game - there is no faster way to chase kids off than to push education at them…

CORRECTION:  I earlier listed Todd Waits as a co-founder; Todd has been working with Skill-Life on a contract basis (and has done a pretty bang-up job, based on the look and feel of Cents City!).

Game Huddle is the creation of a couple avid gamers, John Carson and Tyler Ewing, likened to “eHarmony meets Facebook for gamers”.

The site provides a toolset for other big gamers that allow them to ply their passion in a social medium that gives them the ability to chooose who they play with, what news they read, how they organize their gaming life, and how they show off their gaming conquests.

The gaming space provides this startup the ability to generate some revenue - unlike other social site users, gamers are willing to spend money on subscriptions for services that provide value,  The site is nice looking and intuitive, and seems to have a distinctive advantage over competitors in how they allow users to organize their gaming “clans” and “guilds”.  These guys need to push this side of their development.

These guys have done alot in six months - congrats to Game Huddle.

Image by Malabooboo via Flickr

Next up is crono, a CMU spinout of Jarun Ngamvirojcharoen, Liz Crawford, and Manuela Velloso.  They have created an application that makes the process of scheduling meetings easier.

Currently, they don’t have a website (that I could find), and their alpha product only works in Google Calendar.  They are targeting other polular calendar programs, such as Outlook.

For revenue, they plan to release a “freemium” version that provides a free version for basic use, and extra features for users who pay a subscription fee.  This is a tough way to build a business.

Scheduling is a tough problem, but the question I come back to is, “Does the world need another scheduling program?”  Perhaps the answer is yes, if the solution is compelling enough, but I know that Microsoft has tried and failed to create somthing like this, and if there was a load of value to be found here, Google would likely have built it already.  This feels like a feature - not a product or a business, at least at this point.

Next up is online comic strip creation startup Chogger.  Founders Jeremy Herrman, Alex Moore, and Jim Keder are behind what looks to be a very colorful and attractively designed site.  On Chogger, you can create and distribute any type of digital comic you would like.

This is an interesting corner of the otherwise over-crowded social media space that feels like it has some legs for growth.  Much like YouTube famously did for the user-generated content video space, Chogger rides the wave of creativity froma broad base of creative-types from around the globe.  Scanning through some of the content on their alpha site, you can already find some funny views on life, politics, and technology.

These guys feel like they have made some real significant progress with their time at AlphaLab, and are in a space that can experience some significant growth if they can gain some viral spread.  Getting the word out about their startup is going to be key - and I believe they will need to get some social shoutouts from some of the web’s creative graphics bloggers and kingpins.

Revenue is a different story - it is so tough today to be reliant on a primarily ad-driven revenue model, and neato sites like this rarely are able to convert enough users to subscription paying members.  But these guys have a relatively unique and interesting offering, and I encourage them to “stay scrappy”, get some angel funding, and give their idea the time it needs to develop a following and solid user base.

BlenderHouse founders Jason Wilburn and Mike Cham kick the morning off, introducing their startup that provides social media “apps” to popular sites such as Facebook, Hi5, mySpace, etc.  They have built two apps thus far, WhichWheels? that helps Facebook users decide which car they should buy based on recommendations from friends, and a “white-label” app for local startup/maturing company, CollegeProwler.

This is a really crowded space, so it is going to be tough for these guys to differentiate themselves - the name of the game here is CONTENT, and this team needs to work hard to partner/ride with companies like CollegeProwler who will support building unique, edgy apps, or they need to make a name for building quirky/viral apps themselves.  This is a hard game to win… good luck to you guys.

Their other options are to be on the bleeding edge of new app platforms - like the iPhone, or the emerging GPhone from Google - finding blue ocean is tough but crucial to success in this space.

I think they can build a nice business here, but doubt whether it is venture fundable or not.

I am at AlphaLab’s very first Demo Day, when each of the six companies that have been incubated over the last six months presents what their company is all about.  There is a great crowd here - I would guess close to 150 people crowded in their Southside location on Carson Street - STANDING ROOM ONLY.

All the Pittsburgh notables are here… angel investors, VCs from in-town and out-of-town, entrepreneurs, academia-types, social media moguls, and some local politicians.

I will be covering each of the six companies who present this morning - and giving my impressions of how I believe each of these companies will fare.  I am looking forward to hearing about how these companies are planning to BRING THE THUNDER!

Opening by Rich Lunak, some introduction by Jim Jen… on to the companies!

National VC Trends:

Monday, Dow Jones VentureSource came out with their 3rd quarter venture capital deal totals for the United States.  As expected, the national trends in venture investing are not encouraging.   It appears that the number of venture deals fell in all sectors, compared to the same quarter last year.   

Some quick takeaways:

• The number of healthcare deals declined only 1%, perhaps reflecting investors’ belief that healthcare is relatively recession-proof.  
• VC investment in IT companies declined 21%, and the number of IT venture deals fell to a 10-year low.   Additional bad news can be found in a September report in which Datamonitor released the results of a survey of large corporations, half of which said they are planning to freeze their IT budgets in 2009. 
• Continuing recent trends, the big winners seem to be energy-related companies.  The total amount of energy-related investment was higher by 91%, but the total number of deals declined, perhaps suggesting that energy investors are getting more selective and may be trending toward later-stage deals.

Local VC Trends:

So how did Pittsburgh fare in the third quarter?  [Note: Here I'm shifting to Thomson VentureXpert data.] Compared to the third quarter of 2007, local VC investment levels experienced greater declines than the U.S. as a whole, exhibiting a 31% drop in the number of deals and an 11% decline in the amount of dollars raised by local companies.  

Since Pittsburgh’s venture market is relatively small, and therefore a single deal can cause a large percentage increase or decrease, it’s difficult to draw too much of a conclusion from one quarter’s numbers.  But it is interesting to note that healthcare-related IT deals led the way in Pittsburgh’s Q3 venture stats:   Three of the four largest rounds were raised by:

• Aethon - a robotics company that sells to hospitals;
• Immunetrics - a bio-simulation company that uses software to model acute illnesses; and
• ClearCount - utilizes RFID technology for patient-safety solutions in the operating room.

[Disclaimer:  Innovation Works is an investor in all of the above companies]

Given the Pittsburgh region’s (and CMU’s) historical strength in software, robotics and IT, as well as the presence of one of the Nation’s largest integrated healthcare providers (UPMC), it shouldn’t come as a surprise that the convergence of healthcare and IT continues to be a strength in Pittsburgh’s tech community.  

Regarding the overall downward trend in venture investing, industry watchers are predicting continued declines in the amount of funding and number of deals nationwide.   Here in Pittsburgh, we should likewise expect some tough sledding ahead - but smart application of our tech strengths toward targeted industries may help to soften the blow.   As we saw in Healthcare IT, when we align our technology strengths with industry sectors that are recession-resistant, we are likely to continue to see companies in Pittsburgh that are able to raise funding and grow.   Also, with a continued trend toward energy investing nationwide, we should likewise be looking for ways to use our IT talents in this sector.