Best of peHUB – October

The fall season kicked off with some bad news, following the report on Oct. 1 that cleantech investments were down in the third quarter. The MoneyTree and fundraising reports weren’t any more encouraging, either. But quarterly news thankfully didn’t dominate October. In fact, the editors at VCJ saw quite a range of news items last month, many of which, such as the launch of a new angel fund called ENIAC Ventures or how Alsop Louis raised a sophmore vehicle, are reported in the November issue.

But did you hear about how VantagePoint Venture Partners Managing Partner Alan Salzman is involved in the first LED light bulb? Or have you heard what Harris Barton has planned now? Those stories, which were first reported on our online affiliate last month, might’ve fallen under the radar.

But you don’t have to go digging for them yourself. I went through last month’s stories, and I found 10 interesting peHUB stories, which I reposted below.

—Alastair Goldfisher

Meet WePay, the Startup That’s Been Trying to Ice PayPal

By Connie Loizos, Oct. 29, 2010

Monday night, employees of the 2-year-old online payment service WePay fashioned a 600-pound block of ice that read, “PayPal Freezes Your Accounts.”

Tuesday morning, they rolled it in front of San Francisco’s Moscone Center, set it down, and ran as fast they could, pushing the pallet they’d brought along with them.

They didn’t get far before a security guard caught them by the shirtsleeves, insisting they pick up the giant slab and move it along. But their work was already done. Numerous outlets had picked up the story, embarrassing PayPal, which has long drawn criticism of freezing users’ funds for up to 21 days, and that was holding a developers conference at the center at the time.

More importantly, the move attracted attention to WePay, a 15-person, Palo Alto, Calif.-based startup that helps people collect money for group purchases, like renting vacation houses, and that itself has collected $9.2 million in financing from A-list backers, including Highland Capital Partners, August Capital, Ron Conway, YouTube cofounder Steven Chen and PayPal cofounder Max Levchin.

Levchin has said he was drawn to the startup because it’s exploring a niche that PayPal doesn’t “do well.”

That doesn’t appear to be changing. Though PayPal has invited developers to create new businesses using its payments system and at least one – PayitSquare – has produced a service similar to WePay, PayPal is “not planning to expand our existing functionality in [the group buying] area,” PayPal spokesman Anuj Nayar told me yesterday afternoon.

And why would it when there are far more lucrative markets to chase? Earlier this week, for example, PayPal unveiled a new micropayments service for digital goods that’s being integrated with a number of sites, including Facebook — off which hundreds of millions of dollars are transacted every year.

The partnership should prove an enormous boon to PayPal, which already saw more than $71 billion transacted across its platform last year, via more than 100 million transactions each month. Roughly $2 billion of those transactions came from digital goods, like music downloads, but even before its deal with Facebook, PayPal was on track to make closer to $4 billion off digital goods transactions this year.

In stark contrast, WePay, which launched publicly in April and has been signing up 500 groups a week, reached $1 million in transactions in August. Those numbers are good and bad news for WePay. While they’re not big enough for PayPal to focus on WePay, it’s not yet clear that the market WePay is targeting, or the model it’s using, will become terribly profitable.

The company’s revenue comes from 3.5% transaction fees on credit card transactions and it charges 50 cents for every transaction paid with a bank account. It also offers prepaid Visa cards to users, making money off the interchange fees (the company doesn’t disclose what percentage of customers use them), and it makes money off float, though 25-year-old CEO Bill Clerico is quick to add that float is “not a big revenue driver because interest rates are so low.”

For now, Clerico suggests that the team is content to limit its ambitions, making sure every user experience is as good as possible rather than trying to supercharge revenue. Instead of focusing on profitable social games, for example, WePay is focusing on partnerships with auctions, merchants, ticketing platforms and sports leagues. For example, it partnered with Major League Soccer to offer up to 44% off playoff tickets for users who enlist 10 friends to come to matches this coming weekend.

Such arrangements increase the average order size for merchants, and customers get a discount. WePay creates a separate account for the purchase, so that everyone involved can pay into the account, as well as to see what’s still owed (and who the deadbeats are).

In the meantime, WePay is doing everything in its power to endear itself to new customers. It publishes content at its blog every day to build a community and help readers better understand how to take advantage of its offerings. In addition to an online customer support forum and employees who answer service calls and engage in live chat with users, WePay also brings customers into its office every week to watch them use the application and when necessary, adjust it.

Clerico said the exercise was “painful at first. Things that seem so obvious to us, people don’t understand.” Now, however, he says the team has begun to think like WePay’s customers, something that he doesn’t think has every been true of PayPal.

“Let’s put it this way,” he says. “My mom can use WePay. She can’t use PayPal. It’s had 10 years [to improve its user experience] and it hasn’t improved a bit.”

Zynga Doesn’t Need An IPO … And Brad Feld Doesn’t Follow The News

By Luisa Beltran, Oct. 26, 2010

Companies like Zynga, Facebook, LinkedIn and Twitter don’t need to go IPO, says Brad Feld, managing director of the Foundry Group.

Feld, who was speaking Tuesday at the Quebec City Conference, says the overhead of being a public company is high, while the overhead of being private is low.

“There’s not a need for liquidity [at] these great companies,” he says.

Foundry currently owns a stake of Zynga but Feld declined to comment on any IPO plans. “There are no discussions on a Zynga IPO,” he told me on the sidelines of the event. He would not say how much Foundry, a Boulder, Colo.-based VC firm owns in social gaming company Zynga.

Recently, such companies as Zynga and Facebook have instituted fees on secondary sales of their stock on SeconMarket and other exchanges. Feld says that he supports such a measure because “Zynga does.”

Apart from the Zynga comment, Feld also commented on the potential life span of Foundry.

“We’re not building a long-term firm,” he says.

In 2007, Foundry raised a $225 million fund. The VC firm earlier this month announced it had closed a second fund at the same size. Foundry will likely raise a third and possibly a fourth fund but “then we’re done,” Feld says.

Feld, during a Q&A, spoke extensively about entrepreneurs and the role of VCs, but he says he pays no attention to macro economics. “I stopped watching the news a decade ago,” he said. “What happens in real time has no impact on me.”

However, he does follow tech news and tech bloggers in real time. He reads four magazines in paper form: Forbes, Fortune, Businessweek and the Economist. But even those he goes through a month later in the bathroom. “What goes on in China, what happens in the stock market…it’s irrelevant to my world,” he says.

The Blackout At The Microsoft VC Summit

By Mark Boslet, Oct. 26, 2010

I wish I had something powerful and interesting to say about the Microsoft VC Summit 2010.

Unfortunately, I don’t. The 11th annual event, held today at the Mountain View, Calif.-based campus of the computer company, is invitation-only this year.

And it excludes journalists.

In case you weren’t there this afternoon, on stage were Bob Muglia covering servers and tools, Joe Belfiore discussing Windows phone program management and Don Mattrick talking through interactive entertainment.

What’s particularly interesting is that despite the blackout, there was trickles of news leaking out about the event, which included more than 250 general partners from around the world in attendance.

According to one attendee, CEO Steve Ballmer sighed with relief when he noted that no one was live blogging his 9:30 a.m. talk. Another viewer on Twitter noted that Ballmer (who has jokingly been called the sweatiest billionaire ever) yelled during the presentation, but was not yet sweaty. A third said the Q&A was excellent.

In any event, I can’t offer my observations for reasons stated above. And I’m not going to belabor this rather vacuous post, for obvious reasons. We simply want you to know we tried to cover the VC Summit.

When asked about the event, spokesman Doug Free said, “The conversations and meetings are private.”

OK. We get it.

John Doerr’s Hoodie as a Metaphor for KP’s New Social Fund

By Connie Loizos, Oct. 21, 2010

It was hard not to be taken aback at the sight of John Doerr earlier today, as he announced that Kleiner Perkins has launched a new, $250 million “social fund” for social Web startups called the sFund.

I’m not talking about Doerr’s legendary status in the venture industry. In fact, there were so many other stars at the event, held at Facebook’s Palo Alto, Calif., headquarters, that it bordered on ostentatious. Doerr’s partner Bing Gordon was there. So were Facebook co-founder and CEO Mark Zuckerberg, Zynga founder and CEO Mark Pincus and Amazon founder and CEO Jeff Bezos. All billionaires, or close to it, they were assembled as investors in the sFund, whose backers also include Comcast Interactive, Liberty Media, and Allen & Co.

No, that Doerr himself was in attendance wasn’t the surprise. It was what he was wearing: black jeans, a gray T-shirt, and, gulp, a black hoodie. The site was made all the worse given that Zuckerberg, also wearing jeans and a gray T-shirt, was sans hoodie. In fact, publicly at least, Zuckerberg seems to have shed the hoodie right around the time that he was nearly boiled alive in one at the All Things D event back in June.

I won’t argue that Doerr wasn’t dressed age appropriately, though I personally prefer seeing him dressed professorially, as he usually is. But it says something that just as Doerr is diving headlong into the social ecosystem of Facebook dressed almost identically like Zuckerberg that Facebook’s 26-year-old leader has seemingly moved on.

It’s a lot like KP’s sFund. No matter how you look at it, KP is shockingly late to the social media game. As Infectious Greed author Paul Kedrosky told me earlier today: “The sFund in 2004 would have been ballsy. Unfortunately [for KP], it’s 2010.”

Kedrosky said he “gets it. The returns from their current fund are likely to come from Zynga. But it looks like a big fund that’s surprisingly late in a sector that looks overheated.”

Indeed, earlier today, Miguel Helft of the New York Times asked Doerr what had taken the firm so long. Doerr answered: “With the arrival of Zynga — and it exploded about a year and a half ago — we realized the applications opportunity was going to be enormous, and that’s when we set out to organize the fund.”

Maybe it really took KP 18 months to organize the sFund, though that’s hard to fathom. I asked the firm earlier today if the money has largely been reallocated from a larger fund, but it hasn’t responded.

Either way, KP’s move looks like an overreaction by KP to the angels and so-called super angels that have been leading the way in social Web investing for years — and to which many founders now gravitate.

“It’s a bazooka shot right into the heart of any super angel following this stuff,” said Kedrosky. “It’s showing angels and entrepreneurs that, ‘We’re so serious, we don’t have a partner but a whole goddamn fund into this.’”

Put another way, good luck with your $15 million, superangels. Kleiner can fund your entrepreneurs through 2020 if necessary.

And that’s worth something, certainly. When the next Zynga comes along, Kleiner can promise to go all in. But Kleiner could easily have done that without the sFund and the announcement. In fact, unveiling a $250 million fund that’s expressly for startups that are cheaper to run than ever before seems more than showy. It’s also surprisingly incongruous – much like seeing John Doerr earlier today, dressed like Mark Zuckerberg.

An Analyst Stops Analyzing and Starts a Startup

By Connie Loizos, Oct. 20, 2010

Bartek Ringwelski didn’t set out to be an entrepreneur. After graduating from Columbia University in 2005, he went to work at the investment bank UBS in San Francisco. He “hated it.”

Two years later, he was working for the venture capital firm Canaan Partners as an analyst, focusing on Internet investments in New York. This, Ringwelski hated less. In fact, he says he learned so well to think like an entrepreneur, and as an investor, that he left in May to co-found his own business, SkillSlate.

In fact, just today, Ringwelski announced that he has raised $1.1 million for his startup from Canaan, First Round Capital and numerous angel investors, including Jason Finger, founder of the online food-order service Seamlessweb.

So what does SkillSlate do? Primarily, it’s an online service that marries one-person shops like dog walkers and movers with the people who need their services. It’s not a new idea — think Craigslist, Angie’s List and Yelp, among others — but it’s hoping to make the process less painful for customers by providing as much information about service providers as possible, including their photo, location, particular skill sets and any recommendations (or warnings) about them from past customers. Customers can create a log-in, or simply post comments via Facebook Connect.

The idea was born when Ringwelski posted an ad on Craigslist to have his one-room Manhattan flat cleaned for $60 and received 75 calls within the next two hours. It was so overwhelming that he subsequently posted an ad in which he reduced the price to $40. He got fewer calls as a result. (He also worried about how clean his apartment would be afterward.)

Whether SkillSlate can steal a slice of Craigslist’s business by making it easier to find, say, movers in one’s neighborhood who are affordable, highly rated, and don’t look like serial killers, remains to be seen. But the business model is certainly unique. Instead of selling contextual ads against the service providers, taking a slice of their revenue per lead, or charging for the service as does another competitor, Angie’s List, Skillslate plans to make money off its group buying power.

For example, insurance can cost a fortune for individuals. It’s a major problem for small-time furniture movers in New York City because they can’t operate in Upper East Side buildings. But by aggregating movers all over the city, SkillSlate could purchase the insurance at a discount and offer it to its members for a much lower price. It could similarly connect its members with more affordable credit cards and other tools that help them in their businesses.

The first challenge is in creating a big enough database of self-employed individuals. SkillSlate can’t exactly buy one, so it’s building starter profiles for members by pulling publicly available content from various sources — and hoping those profiled will be happy about it.

“We present [the profiles] to them, and then in something like 99 percent of cases, people either ignore it or claim it,” says Ringwelski. In fact, the more information they provide, the more prominently they are featured at SkillSlate.

Still, there are cases in which people have wanted the profiles taken down, and down they go. “We take privacy very seriously,” Ringwelski says.

In the meantime, SkillSlate is taking things slowly. The startup is focused solely on New York right now, and on just 10 job categories. “We want to provide a good experience for consumers,” says Ringwelski. “We don’t want to publish results about a plumber who is 45 miles away.”

2 Responses to “An Analyst Stops Analyzing and Starts a Startup”

1. Denver Brian Says:

Sound slike ServiceMagic

2. Bartek Says:

Denver — The only similarity to us and ServiceMagic is that we let consumers find service providers. The key differences are:

(1) We are a platform that lets service providers have their own presence on the internet, complete with pictures, prices and reviews.

(2) We focus mostly on individual service providers (not companies) who charge less than larger companies (like the ones on Service Magic)

(3) We let users choose who they want to contact (ServiceMagic’s primary model is to have 3 service providers call you)

Hope this helps clear up your point.

VCs Look Poised to Gain Share in Early Stage Deals

By Mark Boslet, Oct. 15, 2010

Listen to Goodwin Procter Partner Jonathan Axelrad tell it and it is easy to draw the conclusion that venture capitalists will regain early stage ground from angel investors.

Axelrad, a 20-year vet of working in the venture capital industry, says traditional VCs appear to be scrambling harder now for early and seed stage deals than 18 to 24 months ago.

More have set up fund subsidiaries for early stage investing and formalized relationships with third parties for new sources of early stage deals, says the attorney, referring to his client base.

Axelrad declined to discuss specific steps his clients have taken or to identify the third parties that have been striking deal flow relationships. But what he most likely refers to are angels, incubators, entrepreneurs and universities. And most probably, the kind of fund subsidiaries he has in mind are akin to what Greylock Partners set up for Reid Hoffman when it gave him control of a $20 million seed and early stage slice of the firm’s $575 million 13th fund.

“I see venture firms with hundreds of millions of dollars under management who are happily making investments in the sub-million-dollar range,” Axelrad says. And the number is increasing.

VCs have certainly not ignored early stage. Even during the downturn, the percent of investments dollars they turned toward early and seed stage deals increased – to 35% in 2009 from 25% a year earlier. So far this year, the level is largely unchanged. Thirty-three percent of invested dollars are funding seed and early stage startups through the third quarter. As today’s MoneyTree Report states, a third of U.S.-based VC investments are going to first-time deals, which are typically early stage startups.

But some signs suggest angels hold an upper hand. A study this week by the law firm Dorsey & Whitney found that 59% of early stage entrepreneurs who raised money took it from angels. Nineteen percent raised it from VCs.

Yet there are signs these active angels could be over extending themselves. Research from the University of New Hampshire found more angels in the position of needing to reserve cash for follow on rounds. The share of their deals with early stage companies fell to 35% last year from 50% over the previous five years.

This may leave room for VCs to muscle in. “My experience is that venture firms are substantially more energized about doing early stage deals than five years ago,” Axelrad says.

Harris Barton Takes Flight from Capital Dynamics to Focus on Angel Investing

By Lawrence Aragon, Oct. 13, 2010

Former professional football player Harris Barton has stepped down as a managing director at Capital Dynamics to start an angel investment firm called Barton Asset Management, according to Private Equity Insider.

We were unable to find a website for Barton Asset Management or contact information for Barton. We’ll update this story if we’re able to track him down.

Barton joined Capital Dynamics, a Swiss fund of funds, after it acquired the private equity and real estate funds of HRJ Capital last year. Barton co-founded HRJ (originally called Champion Ventures) in 1999 with former San Francisco 49ers teammate Ronnie Lott, with former 49ers quarterback Joe Montana joining the following year.

HRJ invested professional athletes’ money in such notable venture funds as Accel Partners, Benchmark Capital, Kleiner Perkins Caufield & Byers, Mayfield Fund, Mohr Davidow Ventures, Redpoint Ventures, Sequoia Capital, Summit Partners and Technology Crossover Ventures.

HRJ ran into trouble in late 2008, defaulting on a $68.9 million loan from Silicon Valley Bank. About three months after the default, Capital Dynamics agreed to take over management of HRJ’s funds-of-funds and reached an agreement with Silicon Valley Bank that included partial repayment of the defaulted loan. (Capital Dynamics did not acquire HRJ Capital itself, and HRJ subsequently wound down its operations.)

Barton–an offensive lineman who played in three Super Bowls for the 49ers–and Lott said in a press release they were excited to join Capital Dynamics, but Lott ended up leaving the firm in November 2009, about seven months after joining.

Startup Teos Prepares To Rollout First LED Bulb

By Mark Boslet, Oct. 7, 2010

Stealthy startup Teos (formerly known as SuperBulbs) is preparing to rollout its first LED light bulb next spring, an energy-saving product it hopes to price at $20.

LED, or solid-state, lighting is expected to be a major growth market for cleantech companies as businesses and eventually consumers replace today’s bulbs with more efficient ones.

Teos hopes to find itself at the forefront of this emerging market.

VantagePoint Venture Partners Managing Partner Alan Salzman, an investor in the company, says that the Silicon Valley startup will introduce a product that has the equivalent brightness of a 60-watt bulb, but consumes only 10 watts.

The goal is to price it $20, but that price could drop by half in 30 months, he says.

Because of its potential, the market for LEDs, or light emitting diodes, has attracted a wealth of potential competitors, including GE, Philips, Sharp and Osram. Small companies will need to be quick on their feet to stay ahead.

Teos appears ready to try. The company’s first bulb is expected on the market by May and will have an output of 800 lumens. Its lifespan could be as much as 50,000 hours, compared to 11,000 hours for an incandescent, Salzman says.

Welcome to the age of high-efficiency lighting.

Consumer VC Backs Tongue Cleaner Famous for its Viral Videos

By Joanna Glasner, Oct. 6, 2010

Tongue-brushing isn’t currently part of most people’s personal hygiene routines. But if a startup from the Beehive State has its way, the practice could be as common as popping a breath mint.

Orabrush, a Provo, Utah-based developer of a dedicated brush for cleaning the surface of the tongue, has made a mission out of using humor (and its Morgan the tongue mascot) to convince consumers that its product can do a superior job of eliminating bad breath than mints or mouthwash.

Last year, it launched a YouTube video that became something of a pop phenomenon, featuring a halitosis-phobic man scraping his tongue with a spoon and smelling its residue. The video ends with a sales pitch for Orabrush. The company, which has launched several more videos since then, estimates that its clips have been viewed more than 25 million times, which is not bad in comparison to Isaiah Mustafa and the Old Spice ad campaign.

All that viral online attention has helped Orabrush garner the attention of investors. Last week, Orabrush closed an early stage funding round of an undisclosed size from 2X Consumer Growth Partners, a Chicago-based fund that invests in consumer product startups.

For Orabrush, the viral success of its video campaign has also generated some sales. Orabrush COO Neal Harmon says that the company has sold about $1.25 million worth of its brushes over the Internet and is in the process of expanding into more retail locations. The brushes sell as two-packs online for $7.99 and have a suggested retail price of $4.49 in stores.

2X Managing Partner Andy Whitman says that the firm found Orabrush appealing because it represents an opportunity to carve out a new niche in the crowded oral hygiene market.

“We love category creators, because categories are what tend to revolutionize things and create real value,” he says. “They take a lot of work and they’re hard and many of them don’t work, but we believe this has tremendous promise.”

2X Consumer’s website says that its focus is on food and beverages, personal care products, home care, pet care and other branded consumer lines. The firm’s other investments include gDiapers, which makes eco-friendly diapers, and Tasty Bite, which produces off-the-shelf Indian foods.

In addition to Whitman, the firm includes Managing Partner Gary Sebek, a former CEO and CFO in various organic businesses, and the firm counts Michael Levinthal as a special limited partner. Levinthal is a former 20-year veteran of Mayfield Fund and invested in such consumer brands as Pete’s Wicked Ale and restaurant chain Il Fornaio.

Levinthal is also a member of the Orabrush board.

VCs Are Hot For Mental Health Startup Breakthrough After It Wins Startup Competition

By Alastair Goldfisher, Oct. 6, 2010, a mental health provider of online counseling and therapy services, won the Vator Splash pitch competition last week. Since then, investors have descended on the Palo Alto, Calif.-based startup.

The startup’s service allows clients, who can use their insurance to pay for the service, to sign up to talk with a counselor through video, email, phone or a chat room.

For winning the startup pitch event, CEO Mark Goldenson not only received a big bottle of wine, but he got sit-down meetings with Javelin Venture Partners and Norwest Venture Partners.

“The response to winning Vator Splash has been quite exciting,” Goldenson told me this week. He says that in addition to Javelin and Norwest, several other investors have called him to schedule meetings, including Aydin Senkut at Felicis Ventures and Emily Melton and Raj Kapoor at Mayfield Fund, among others.

Breakthrough, which previously raised $260,000 in seed funding from Charles River Ventures and several angel investors, already has a commitment for more capital from a prominent angel investor following the Vator event, according to a person familiar with the deal. Goldenson declined to discuss any additional funding until the financing event was officially closed.

“All of our executives work for $0 salary and our burn rate is only $15,000 per month,” he says “This means each investment goes a long way.”

To win the Vator Splash competition, which was held at San Francisco’s Café Du Nord in front of more than 300 people, Breakthrough first had to beat out more than 100 other hopeful companies in an online competition to become one of the top 25 semi-finalists. A panel of 15 judges and a popular vote whittled that list to 10 finalists. The top 10 then pitched their startup on stage at Vator Splash.

At the end of the night, a text vote was held to decide the winning startup, and Breakthrough came out on top. Even before that, a three-person panel of judges, which included Mayfield’s Kapoor and Tim Chang of Norwest, as well as Thao Tran, head of corporate development at the Washington Post Co., gave overwhelming praise to Breakthrough.

After they were tapped as winners, Goldenson (pictured above with Vator founder and CEO Bambi Francisco, left, and Breakthrough Project Manager Sarah Seegal) then took questions for about a dozen minutes from Senkut of Felicis, Rob Hayes of First Round Capital, Rick Heitzmann of Firstmark Capital and Gideon Yu of Khosla Ventures.

Goldenson says the after-party — which featured Kapoor and Chang performing on stage as part of their band CoverFlow – was the icing on the cake.

“We did indeed stay for the after-party and it’s about as close I’ve come in recent memory to feeling like a prom king,” he says.