I am headed off to AlphaLab in a few hours for the kickoff event of Podcamp Pittsburgh 3 - the Meet-n-Greet.  Did someone say “cockatils”?

If you are in or around Pittsburgh this weekend, and want to attend an UnConference, you should stop in and check it out.  We will be at the Art Institute on Saturday and Sunday - details are here.

I am speaking on a panel Saturday afternoon enititled, “Social Media Business Plans”, along with my colleague Aaron Tainter,  AlpahLab’s Meredith Benedict, and Julie Morey of ElasticLab.  We see quite a few business plans that deal with social media, and I plan on having a fun time talking about goat rodeo that is this space.

See you there?

Basil: “Can’t we get you on Mastermind, Sybil? Next contestant , Sybil Fawlty from Torquay, special subject: the bleeding obvious.”

From PEHub:

The National Venture Capital Association and Thomson Reuters (publisher of peHUB) today released data showing that VC fundraising has declined from both the prior quarter and from the third quarter of 2007. Fifty-five U.S.-based firms raised approximately $8.12 billion in Q3 2008, compared to 76 firms raising $9.25 billion in Q2, and 78 firms raising nearly $8.6 billion in Q3 2007.

It’s worth noting that the Q3 tally was higher than what was raised in Q1 of this year, and that it’s higher than all but one quarter of 2006. On the downside, however, the Q3 capital was raised by fewer firms than in any time over the past few years, which means two things: (A) Fewer firms are raising larger funds; (2) Most of those fewer firms are existing firms, rather than new ones.

Download the press release here: q3fundraising. Deal data will be released this coming weekend.

Someone recently told me that he didn’t think our region celebrates enough of the achievements of the growing community of tech companies in Pittsburgh.   He guessed that it was because many of the companies are still small, and therefore don’t make it onto the radar of the established media in Pittsburgh.   [As a side note, if you're looking for more news of local tech companies doing great things, you should subscribe to Pop City's weekly online magazine.]   As an example, the person expressed his surprise that more people in Pittsburgh aren’t aware of the accomplishments of Squirrel Hill-based Vivisimo.     Good point.   Vivisimo is a great example of a growing software company, which demonstrate’s our region’s strength in computer science (and is a CMU-spinout).   Vivisimo consistently wins awards for having the best product in the enterprise search industry, and recently the analysts at the Gartner Group positioned Vivisimo in their “Leaders Quadrant.”  If you don’t think enterprise search is a big deal, consider that in January, Microsoft paid more than $1 billion for Fast Search & Transfer, one of Vivisimo’s competitors.    At Innovation Works, we’re happy to say that we were an early investor in Vivisimo, and we’ve been pleased to watch as the company continues to win customers, win awards and add staff — and if you’re a talented software engineer or a sales person with experience selling enterprise software, be sure to check out Vivisimo’s career page.]

The next installment of that uber-hip phenom that is being talked about all around town - yep, that’s the OpenCoffee Club! - will take place tomorrow at the AlphaLab - Wednesday, October 1st, at 9:00am.

For those of you who know about OCC - be there or be square.

For those of you who DON’T know about OCC - welcome to the 21st century!  OCC was started to encourage entrepreneurs, developers, and investors to organize real-world informal meetups to chat, network, and grow. This is a place to meet people, find out what’s going on nearby you, and then take part. Imagine it as a big open lounge where people come and go, talk to others in their industry, and informally showcase demos of what they are working on. The main goal of Open Coffee is to make investment more transparent to entrepreneurs, and to move away from the formalized “pitch” to an open conversation. Investors can give entrepreneurs really valuable feedback, and this environment is meant to foster that in a pressure-free way.

For directions and more information, please see our link on MyPunchbowl.

See you there!

I have been asked by many friends and former colleagues about the implications of the current credit crisis on my industry.  My answer is pretty straightforward:  I am not too worried.

There are three angles to consider if you are a venture capitalist:

• Investors/Limited Partners - these are the people whose money we invest.  Since we collect money from our partners just before we invest it (”just-in-time investing”), not up-front at the time they make their full commitment to the fund, there is some risk that partners will not have cash on hand to back up commitments, especially if they are large institutions wrapped around the credit crisis.  Luckily for us at Meakem Becker, we have a large, diverse set of limited partners, most of whom are wealthy individuals, not institutions; my analysis indicates that our risk exposure is low here.
• Portfolio Companies - the companies in which we invest are likewise largely immune from the crisis.  In the earliest days of the crisis, in early 2008, there was some exposure to Auction Rate Securities (ARS) that caused many portfolio companies heartburn.  These short-term investment vehicles were sold as a higher-yield alternative to keeping money in a savings account or money market, but ran into a liquidity hiccup due to their structure (remember:  there is underlying risk to EVERY investment vehicle, no matter what your broker/advisor says!).  That early episode woke up our industry, and put VCs and startups on notice about how to manage cash.  We have escaped that miniature liquidity crisis, and are smarter for it.  With the exception of needing to be capital efficient, as I wrote about a couple days ago, risk to portfolio companies is low.
• Overall Market - as Alexander Haislip points out in his post, How Lessons from the Dotcom Bust are Helping VCs and their Portfolio Companies Today, the IPO market has been shut down for some time now, and no smart VCs or startups count on it as the primary source of exit.  VCs and startups need to focus on building companies of lasting value - not on building companies to flip quickly.  When a company does build value, M&A and IPO come naturally, largely regardless of short-term market instability.  This is the area that undoubtedly has the greatest risk, but I would still rank it as low-medium.

Sorry for the late-summer posting lull, but September always brings the re-start of the venture conference season… and we had a nice power outage, to boot!  Ike passed through, but now all tree branches are removed, all wires restrung, all transformers replaced - so we are back in business.

There was a nice post today by Jeff Busgang on PE Hub about how VCs are weathering the latest macroeconomic turmoil, and in general, I agree strongly with the premise of the post:  I, too, am a short-term bear and a long-term bull.

The main point I wanted to highlight in this article is found about halfway down the article:

The holding period for early-stage start-ups is typically 6-8 years, and so an episodic recession shouldn’t materially affect long-term value creation, so long as follow-on financing is available. One VC observed that his partnership had done an analysis and realized that, “we have 20 companies in our portfolio seeking follow-on financing this year.  They’ll nearly all get done, but none of them will be meaningfully up rounds.  Instead, there will be many flat and down rounds ahead”.

In our business, we are seeing the same trends, but perhaps even more exaggerated - we have mentally braced ourselves, as very early stage investors, for 7-10 year holding periods for a majority of our investments.  We are strongly counseling all our portfolio companies to be as capital efficient as they can be, stretching out their budgets by delaying non-essential hires and other expenses.  We have always known that most early stage businesses require long runways to be successful; now, more than ever, that means growing with a “scrappy” mindset, and finding creative ways get more while spending less.

If you are an entrepreneur you need to spend some time thinking about what this means for your business.  There is still plenty of capital out there, but it is generally much more conservative than it has been in the past - hence there will be smaller capital rounds for all but the best startups.  And don’t forget to think about appropriate valuation (a topic for another post).

We just had a meeting with some entrepreneurs last week who came to us with a Series B deal:  they had a nice, completely functioning product, but only a few customers after 9 months in the market, and very little revenue.  They were seeking $10-12M to support a company of ~25 employees and monthly burn of about $550,000.  

I don’t know what boom cycle these guys are living in,  but I don’t think I could go before a VC and ask for such a large amount of money to support such a bloated burn rate.  Better to do some “house-cleaning” first - get your budget in order, reduce your burn by half (or more!), and focus on preparing your company for the long slog that is the commercialization period of growth.  You almost have to be a cactus, so you can survive the drought. 

Let’s hear from some entrepreneurs out there - how are you preparing your business to survive, and even thrive, during this latest dry spell?

I am sitting in the audience at the TechCrunch50 conference, the second annual west coast meetup put on by the highly popular tech blog TechCrunch (I guess this makes one of my first “live blogging” attempts…).

I wanted to shoot of a quick post about one one of the things that good entrepreneurs do:  THEY MARKET THE HECK OUT OF THEMSELVES.  Good entrepreneurs are hustlers, and good hustlers are entrepreneurs; you can’t really tell them apart.  How is anyone else, customers and/or investors, going to know that you exist if you don’t get out there?

In Pittsburgh, we have the 3 Rivers Venture Fair, but if you are a local startup and you limit yourself to just that one venue of exposure, you are missing out on a big world out there; you are acting like a small fish swimming in a small pond!

Many startups believe that all they need to do is spend some money with a reasonable PR firm, and voila, they have checked the publicity box.  No way!

Not only are there significant super-regional venues to gain exposure (Mid-Atlantic Venture Conference comes to mind), but there is a large and growing national stage where you can show off your ideas:  DEMO, TechCrunch, and a bunch of national-regional venues like Mashable and PE Hub’s large city tours.

These events cost money - they aren’t cheap, some coming in as high as $15-20K (!!) for your 6-10 minutes of fame - but they give you two great pieces of value:

1. EXPOSURE - you get covered by the national mainstream press (if you are lucky, Wall Street Journal, New York Times, USA Today, etc) and the national technology blogosphere (TechCrunch, Mashable!, VentureBeat, Center Networks, etc).  All of this filters down to the regional and local levels as well - local papers, if you play your news right, and local bloggers (like me!).  You cannot underestimate the importance of this coverage - it  gains you a user base and name recognition with potential investors.  As an example, see all the outstanding coverage on one of our portfolio companies, Rudder - here, here, and here.
2. REFINEMENT - this is the most important of the two - you get the ability to compete for mindshare on the same stage with some of the best startups in the world.  Like most competitions, this is hard - you have refine your business model, refine your message, and polish your delivery until it short, sweet, and to the point - this takes time and is very painful.  But in the process, you improve the value proposition of your business.  How many overweight and unattractive and unpolished contestants are there on the Miss America stage?  Not too many… they have been filtered out (and sorry that isn’t a perfect analogy, but it is the first to come to mind).  The process of putting your startup on this national stage will help improve your startup by its very nature.

There are companies from all over the US and the globe here - California, New York, North Carolina; Israel, Paris, London, Turkey, Japan - but nobody from Pittsburgh.  What’s up with that?  GET OUT THERE!!

PS - in the epic battle between DEMO and TC50, I think the early lead is going to DEMO (we have partners at both conferences) - DEMO seems to have the experience, professionalism, connections, and staying-power to remain the dominant west coast conference… sorry TechCrunch.

These are my bosses - Original PopCity Article Link

Changemakers: Glen Meakem and Dave Becker

To begin with, it doesn’t look like $75 million. It looks more like a modest, suburban insurance office, Sewickley second story, zoned commercial. OK, there are framed clippings doubling as wall art – deals hither and yon, Inc. and Forbes and the Wall Street Journal, along with copies of their FreeMarkets patents.

This is Meakem Becker VC, the VC for Venture Capital. As Butch asked Sundance, and vice versa, “who are those guys?”

You really can’t talk about one without the other, although it’s Glen Meakem who’s the out-front guy, the one giving talks, sitting on boards, getting his name in the paper, while Dave Becker is perfectly content to work in the back office. There’s Meakem, dishing out quotable quotes like so many glasses of white wine and fistfuls of smoked almonds; there’s Becker, crunching his numbers, keeping his proverbial nose to the grindstone.

“We’re two people with complimentary skill sets that work effectively,” Becker says.

“We’re a very good team,” Meakem agrees. “Dave’s a rock. Brilliant. Hard-working. Clear-sighted. I’m the front-of-the-room speechmaker. Together, we cover a broader front than we would alone.”

It was fall ’89 when they met at a Harvard Business School icebreaker, a golf foursome. Despite disparate backgrounds – Becker from rural Kansas, and Colorado engineering, Meakem from suburban New York, and Harvard – they found common ground, including an entrepreneurial bent. “By the first green we’d become friends,” Meakem recalls.

After MBAs, it was off to careers, time spent with such blue-chippers as Dole and Kraft and Union Carbide and General Electric, until Pittsburgh and FreeMarkets.

Coming to town in ’94, Meakem sought a way to blend old-style corporate purchasing with emerging e-commerce. When GE took a pass, Meakem went for it. As founder and CEO of FreeMarkets, he revolutionized e-trading.

Opening the doors in ’95, he enticed his old friend Dave Becker to join him. Going public in ’99, within a few days the stock had spiked so sharply that Meakem was a billionaire – on paper, at least.

Of course, such things don’t last. Sensing that the e-world was changing at warp speed, by ’03 Becker was gone, to his own ventures, and the following year, ’04, Meakem sold FreeMarkets to Ariba for a sultry half-billion dollars. “Strategically,” Becker recalls, “it made all the sense in the world.”

Walking away with a fortune, why not chuck careers and simply go skiing? “We’re young,” Becker answers. “We’re career-oriented. We’re highly ambitious.” He pauses. “I don’t think we’ll ever sit still. Ever.”

Within a year, they were back, talking. A venture firm? they mused. That October, ’05, the Rubicon was crossed.

Their first fund, at $75 million a full five mil over target, came in two years later, ’07. “It’s hard to raise a first fund,” Meakem admits. “It was a lot harder than I thought it would be. We got a lot of rejections. A lot of people said no. But a lot of people said yes.”

“It was hard,” Becker agrees. “But entrepreneurs find a way to get it done.

“Venture capital is hard,” he adds. “It’s a dangerous business. You’ve got to know a little about a lot of things. And the world changes. Technology changes.”

A Fine Balance
“We’re young enough to identify with entrepreneurs,” Meakem adds, “and old enough to have experience.”

Currently working to get it invested, “we’re off to a really good start,” Becker says. “We’ve got deal flow from all over the United States – all over the world, really, especially Israel and India, where the high-tech ventures are.”

Deliberately positioned in Sewickley, where they both live, they’re close to town and even closer to the airport, where they spend a great deal of time flying to scope out investment possibilities. “In the venture business,” Becker says, “you don’t need a Downtown address on your shingle.”

In what Becker terms “a logical extension of skill sets acquired during our previous experience,” the pair funds early-stage start-ups — much like the FreeMarkets of 15 years ago. “As venture capitalists, we are very attractive to entrepreneurs, because we have been, and continue to be, entrepreneurs.”

“Entrepreneurship is key,” Meakem agrees. “We invest in great people with compelling products or services that target large markets. We use our deep experience to help entrepreneurs build their businesses, creating tomorrow’s market leaders.”

Working in the $2-6 million range, with an eye toward IT and life science — not coincidentally, Pittsburgh’s strong suits – Meakem Becker has invested in such high-tech ventures as:

Leostream, desktop virtualization software; Waltham, MA

LiquidTalk, digital media business applications that that send sales data, product updates, and HR training to mobile workforces; Chicago, IL

HotPads, web-based national real estate search and listing services; Washington, DC

Shipwire, merchant access to a national warehouse network, outsourcing merchandize receiving, warehousing, and shipping; Palo Alto, CA

Spendview, web application for tracking, analyzing, and optimizing personal finances; Houston, TX

And in Pittsburgh:

Akustica, micro-electromechanical microphones, speakers, and other sensors

BitArmor, data security and data lifecycle management

College Prowler, student-written university guidebooks about academics, housing, nightlife, security, diversity, even dating

SEEC, reconfigurable problem-solving software for insurance, financial services, and health care companies

Tiversa, security, advertising, and digital media content distribution

“Venture capital has become very global in the last 10 years,” Meakem says. “We invest all over the country. And we bring in money from all over the world.”

“We have to look nationally,” Becker says, “even if we want to invest locally. There’s no shortage of ideas in Pittsburgh. We see a lot of early-stage stuff. There’s quite a bit of innovation here.

“One hundred and fifty years ago,” he adds, “Pittsburgh was America’s Silicon Valley. The legacy is infrastructure that a lot of companies would kill for. And CMU continues to attract the best and the brightest.”

“We see interesting deal flow from Pitt and CMU,” Meakem says. “I am very, very optimistic about our strategic assets.” He ticks the points off his fingers. “Location. Universities. Headquarters. Diverse economy. A terrific Downtown. Pittsburgh is big enough to matter, but small enough for intimacy and quality of life.

“I love working here,” he adds. “Pittsburgh is a great place to live. I like the people. I like the four-season climate. The blend of East Coast and Midwest.” He pauses. “I’ve never had trouble recruiting great people to move here.”

“Pittsburgh is a great base,” Becker agrees. “It’s steady growth. No big boom, but no disaster either. The future is bright.”

Just to prove that this blog is actually written by two separate people with their individual points of view, here’s a follow-up post to Alan’s Edible Robots post.  

Alan’s hypothesis is that Pittsburgh’s technology sector is more heavily weighted toward research than commercialization, and that Pittsburgh’s startup community often seems to consist of researchers who think that a scientific breakthrough in itself is sufficiently important/valuable to merit the creation of a startup (and that VCs should flock to their door).   [Alan - let me know if I mischaracterized your post]

First, let me say that I’ve certainly seen the situation that Alan describes, but I don’t know if Pittsburgh’s culture is any more heavily weighted toward this type of startup than other regions in the U.S. that have large research institutions.   If anyone has a good source of data for this, please suggest.

Here’s what I do know:   Innovation Works (IW), being a seed fund that only invests in the Pittsburgh region, tends to see a lot of the local startups when they are still pretty raw — oftentimes when they are still in the process of spinning out of a university.    In a typical year, IW will see about 100-150 new startups (not counting companies we’ve seen before), and on average, less than 20% of them are built around university-licensed technology.   Admittedly, I’m using a university license here as a proxy for having deep research, and of course there are plenty of other startups with deep research that do not eminate from a university – they’re just more difficult to objectively quantify, so let’s use the university figure as a starting point.

Sometimes it surprises people to hear that 80% of the startups we see in Pittsburgh are NOT formed around university-licensed research.   Of course, this varies by sector — for example, life sciences companies are much more likely to have a university license, compared to software and IT companies.    And, historically, life sciences companies have only accounted for about a third of the companies we see each year.

So does the predominance of non university-related startups mean that university research (and research in general) is less significant than typically thought?   On the contrary.  When we look at the companies that we have actually chosen to invest in, it turns out that a full 40% of them are commercializing university-licensed technologies — which is double the amount you would otherwise expect based on the percentage approaching IW each year.   And the number gets even higher if you include non-university companies that started by developing broad technology platforms (another proxy for deep research), rather than point-specific applications.

Why the discrepancy?   I’d argue that it is because of the hope/belief that these companies may be able to use their technology as a competitive differentiator…. in other words, that the stuff they’ve been working on in the lab for five years is really difficult to do and requires specialized technical knowledge, and it will be harder for future competitors to become fast followers.   Also, if the technology is hard-enough to duplicate, a future acquiror will be more likely to buy vs. build.

All of that being said, I agree with Alan that scientific and technical breakthroughs aren’t sufficient for company success, and investors are rarely convinced by the number of technical citations for a particular research project.  If anything, it’s just a starting point.  To test this hypothesis, we looked at the likelihood of companies in our portfolio obtaining follow-on VC funding, as well as the resulting growth trajectories.   We found that after several years, the university-licensed technologies in our portfolio were no more likely to obtain venture funding, and were equally likely to result in failure.  

Of the five fastest-growing companies in our portfolio (which are also the five companies with the highest current valuations based on recent financings), two (40%) are commercializing university-licensed technology and three (60%) are not.   Exactly the same percentages as our overall portfolio of 112 companies.    But what do these five companies have in common?  They are all commercializing platform technologies rather than a single application, all have built teams with strong industry experience, and their products all have compelling value propositions for customers and are well-differentiated versus their competitors.

So I guess my point is that university-licensed technology (and deep research in general) is a good starting point and may initially give a company a leg up – but it only really matters if the company can effectively leverage its technological advantage to solve a (large and lucrative) real-world problem and build a high-caliber team to execute on the vision.    Similarly, Pittsburgh’s deep research capabilities should give the region a good starting point, but we can’t blindly assume that our strong research capabilities will necessarily lead to a vibrant, growing regional tech economy.   Our ultimate success (or failure) will likely depend more on business execution than technical research.

This post could be about 10 pages long… when thinking about how to build positive working relationships with partners of any sort (spouses, friends, children, co-workers), there are many “best practices” that apply.  But I am going to focus on only one right now, and it is a high-level one:

With regards to a partner, don’t take any action that, when it comes to light, you aren’t prepared to fully defend to them with a straight face.

Jeff Horing and Jerry Murdock (image from the Wall Street Journal article)

To wit, see this article from yesterday’s Wall Street Journal (yesterday’s paper was chock-full of great articles!).  In a nutshell, the general partners (GPs) of a venture capital firm made a HUGE personal profit on a smart investment that they made outside their fund, and some of their limited partners (LPs) were steamed that they didn’t get to participate in the success.

In an analysis of the situation, Daniel Primack, who writes the PE Week Wire, was surprised that most of his readers didn’t share his point of view that this situation wasn’t a big deal.  From his original post:

Pete Lattman has a piece in today’s WSJ about how individuals at Insight Venture Partners made a fortune off last year’s $300 million sale of Photobucket to News Corp., while the firm’s limited partners made nothing. I love a good VC scandal, but there is much less here than meets the eye.

The facts are undisputed: Certain IVP employees and acquaintances invested $3 million for 20% of PhotoBucket in 2005, while partner Jeff Lieberman took a seat on the company’s board of directors. They did not include the deal as part of its $675 million fifth fund (it has since raised a $1.25b sixth fund), which means that IVP’s limited partners never paid in nor got paid out on what turned out to be a blockbuster investment.

Someone apparently believes this is a case of IVP partners cherry-picking a sweet deal for themselves, at least judging by the number of media outlets he/she tipped off before WSJ ran with it. Maybe a bitter LP, rival VC, passed-over entrepreneur or jilted girlfriend. I don’t know or care, because it’s a bogus accusation.

IVP says it didn’t put Photobucket into its fund because the company was far too small and early for an investment mandate that focuses on growth-stage, revenue-generating companies. This seems to square with a data search I ran on recent IVP deals, in that I couldn’t find an initial check written for single-millions of dollars. The “tipster” also accused IVP of not telling Photobucket executives that the deal was not being done via the fund – a charge that Jeff Lieberman denied during a phone conversation earlier this morning (that part isn’t in the WSJ story, but PaidContent had it).

Imagine if it had invested and Photobucket had cratered? Then LPs would have a legitimate gripe. As it stands, everyone seems to have acted appropriately. No harm, no foul. Guess we’ll have to wait ‘till next time…

My take:  IVP should have seen this train wreck coming, and should have been open with LPs about how they were going to spend their time, or they should come up with an easy way to allow LPs to decide which of these “angel” investment they would like to participate in.  IVP was OK according to the “letter of the law”, but they have been burned by not understanding the spirit of their relationship with their LPs.  Now they have plenty of splainin’ to do.

When I was in high school, I had a part-time job playing in the orchestra pit of a local dinner theater that put on musicals; I asked a very good friend to substitute for me when I went on vacation, but I only paid him half of what I was making.  When he found out what I was making, it almost wrecked our relationship.  Although I was technically in the clear (he has agreed to play for what I offered him!), he was offended that I would establish that sort of relationship with him.  I paid him in full for his time, and have been embarrassed ever since.  That was a tough lesson, but one I was glad to learn when I was 17 years old.