Do venture capitalists who appreciate the nuances of FPGA chips have the will-and the patience-to learn just as much about the digital lifestyles of teenagers? That’s the question of the moment as techie VCs try their hand at consumer deals. The answer could mean the difference between success and failure.
“We expect a much larger percentage of our investments to be in the ecology of the consumer rather than around enterprises or carriers,” says Bill Stensrud, managing partner of Enterprise Partners Venture Capital. The La Jolla, Calif.-based firm has historically focused on bread-and-butter technology sectors like enterprise software, semiconductors and networking equipment. But, like so many other VCs, Enterprise Partners is looking elsewhere for growth. Last year, investments in business-oriented firms fell by 37% overall, while funding for consumer-focused products and services grew 43%, according to the MoneyTree survey conducted by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association.
Says Strensrud: “Many things, particularly the entertainment industry, are going to look very different five years from now, and we’re actively looking at new opportunities” that might capitalize on that evolution.
Stensrud is intrigued by consumer Internet plays, like multiplayer distance gaming, content delivery-even group exercise-but he is acutely aware that “using yourself as a proxy for most customers is a classic investment mistake that lots of people, including myself, have made, and don’t want to make again.”
With that in mind, Stensrud this year plans to hire a new partner with “either with a media or appliance background.”
Mayfield of Menlo Park is yet another firm that suggests it could use some extra help, owing to its plans to beef up its consumer spending in 2005. Already, in preparation to raise a new fund later this year in the range of $350 million to $400 million, Mayfield has added the founding CEO of online digital photo service Snapfish, Raj Kapoor, to its roster as a venture partner.
Mayfield made millions during the bubble on middleware companies like Tibco, but the firm sees a big opportunity in consumer-related and digital-lifestyle type companies, says Managing Director Janice Roberts. Mayfield has seen a “dramatic increase in opportunity and deal flow” in consumer-related deals and spends about one-fifth of its time looking at them, Roberts says.
She adds that Mayfield saw a valuable addition in Kapoor because “Raj is a little younger, he came up during the Internet era, and digital photography was one of the major applications that got people thinking about moving things around digitally.”
Mayfield invested in just two consumer companies in 2003-the social networking site Tribe Networks and Aliph, which produces audio and speech technologies and sells a headset called Jawbone. Last year it picked up the pace, making five new investments in consumer companies, four that it disclosed. Along with Worldview Technology Partners, the firm invested in the portable Internet radio service startup AudioFeast, in a $10 million Series A. Mayfield also invested in Pure Networks, which makes software for home networking, and which has raised $18 million so far from Mayfield, Intel Capital and Big Basin Partners, among others.
In addition to Kapoor, Roberts herself looks at consumer deals, as do her partners Allen Morgan and Yogen Dalal.
Even firms that already have consumer experts on staff are trolling for more know-how, like Benchmark Capital. Three of the firm’s portfolio companies that went public last year are consumer-oriented Internet businesses: JamDat, a gaming company whose applications run on handsets and PCs; the online real estate brokerage service zipRealty; and online-comparison shopping site Shopping.com. That’s saying nothing of the eye-popping numbers of still private consumer-related investments Benchmark has, including OpenTable, Friendster, the online print and poster store AllPosters.com and several developers of online virtual worlds and communities, including Linden Labs, Sulake and WorldWinner.
“This is a very fruitful place to be,” says Benchmark General Partner Bill Gurley. “Businesses are very capital efficient. You have viral growth because of the way the Internet works. And think about Google, Ebay, Amazon, Yahoo. In terms of value creation over the last seven years, the Internet blows everything away.”
Benchmark’s decision to bring on a new venture partner to identify consumer deals underscores just how important having an experienced bench is becoming. In late February, the firm hired Rich Barton who founded and stayed with the online travel giant Expedia until a year-and-a-half ago.
Barton, who is also the CEO of a stealth Internet startup in Seattle called Zillow.com, has been working informally with the Benchmark team for some time. His new position gives him a “broader view of the world of interesting consumer-oriented startups” while Benchmark, says Gurley, gains someone with the very rare experience of growing an Internet startup into a giant with a multibillion-dollar market cap.
Some venture firms elbowing their way into the fast-heating world of consumer investing don’t feel the need to bolster their current lineups. Norwest Venture Partners in Palo Alto has “competed very effectively” in the consumer arena thus far, says Managing Partner Promod Haque. He attributes that success largely to venture partner Jim Lussier who came to Norwest from online software reseller Beyond.com, where he was a general manager, and Jeff Crowe, who served as president and COO of the privately held online business auction company DoveBid before joining the firm, also as a venture partner.
Though Haque concedes that both men spend much of their time focusing on infrastructure software and services companies that target the enterprise, he says that “now they are getting more companies that have consumer bents” and that they have “enough expertise,” as does the rest of Norwest’s investing professionals, “to handle our investments.”
Haque points to one recent Norwest investment to illustrate his point: Mercora, whose CEO, Srivats Sampath, founded security software company McAfee.com in 1998 and took it public. Mercora produces music-sharing software designed to adhere to Internet radio’s confusing rules, from the royalties a label gets to how many of an artist’s songs can be played without interruption by the same person. Haque says that Norwest, which recently funded a $5 million series A for Mercora, “competed against players that have done many more consumer deals than us.” Winning such deals “has to do with how comfortable an entrepreneur feels with your commitment to the space,” he says. Haque adds: “A lot of these entrepreneurs have their own domain expertise but they want to know how to build a company. A lot more facets go into doing that successfully than one might imagine.”
Norwest has made seven as-yet-unannounced investments in consumer-related startups since the third quarter of last year. One deal that has been announced is a $14 million Series A for Veveo.tv, a stealth maker of Internet-based TV products. Norwest participated in the $14 million Series A with Matrix Partners and North Bridge Venture Partners.
“At the end of the day, I think that there’s nothing more natural than the Internet’s evolution and, its ubiquity,” says Haque. “It is allowing enterprises as well as consumers to do some very interesting things.”
As entrepreneurs cook up a widening array of consumer products and technologies, more venture firms are sure to wrestle with how best to identify those things.