The VCJ 20 Most Promising Startups

Welcome to the first edition of the “VCJ 20,” a list of the 20 most promising startups chosen by the editors of Thomson ReutersVenture Capital Journal.

Read profiles of all 20 companies here

See a table listing all 20 companies here

As journalists, we’re constantly second guessing investments made by VCs. (“Can you believe they invested in that?”) The goal of this project is to find out if we really are as smart as we think we are, or are as dumb as rocks when it comes to picking good deals.

To make it fun, we created a virtual venture fund—kind of like a fantasy baseball league. The general partners of VCJ Fund I are me, Managing Editor Alastair Goldfisher, Senior Editors Joanna Glasner and Constance Loizos and Senior Writer Alexander Haislip. We also brought in a venture partner—ace tech journalist Deborah Gage—to help with all the work.

We gave ourselves $20 million virtual dollars to invest in 20 companies that raised seed or Series A funding from U.S.-based investors in 2009. Little did we know how many companies were on that initial list. General Partner Haislip ran a report in the Thomson Reuters’ venture capital database last November and came up with more than 1,200 companies.

It took us a couple of months to whittle the list down to 20. In evaluating the companies, we intentionally avoided looking at the VCs behind them because we wanted to choose startups based solely their merits—not on whether they had raised money from a top-tier VC such as Kleiner Perkins or Sequoia Capital.

We focused on five factors when rating each company:

1. Potential market size. We were primarily on the lookout for companies addressing multibillion-dollar markets.

2. Quality of the team. We were biased toward repeat entrepreneurs with successful track records.

3. Technology edge. Since these were early stage companies, we wanted to know how soon they would have a commercial product on the market—and if their technology was patent protected.

4. Business model. Call us crazy, but we avoided companies without a clear plan for how they would make money—even if they had a lot of buzz (a laTwitter).

5. Exit potential. Given how difficult it has been to take a company public over the past few years, we wanted to see startups that had IPO potential and were also attractive acquisition candidates.

Once we narrowed the list to 40, every GP gave a score of 1 to 5 points to each company to determine the top 20.

I’m quite pleased with the final list, especially since I wasn’t familiar with many of the companies before we started the process. We didn’t want to produce yet another list of the usual suspects, and I’m proud to say we didn’t. I’m also pleased with how eclectic our list is. Even though cleantech and Internet companies get most of the press these days, we aren’t over-weighted in either category.

I’m proud to announce that the company at the top of our list is Cloudera, which offers consulting services and is building tools around Hadoop software and is backed by Accel Partners and Greylock Partners. Cloudera scored a total of 24 out of 25 potential points because it rated highly in all five areas we focused on: It is targeting a multibillion market—tracking and analyzing the mountains of content and behavioral data constantly streaming out the Internet; its team is made up of tech stars from Facebook, Google and Yahoo and led by a successful repeat entrepreneur; it has hired the creator of Hadoop as its chief architect to develop tools based on the open-source software; it already has revenue from a consulting business and plans to make big bucks by selling easy-to-use Hadoop tools; and it has very strong exit potential—either a big IPO down the road or a lucrative sale to any one of a number of giant companies, including Oracle.

Like a real venture fund, we expect our virtual fund to have its share of hits and misses. We already had one near miss: VitalMedix, which was one vote shy of making our final 20. The company, which was working on a way to stabilize people who have sustained massive blood loss, declared Chapter 7 bankruptcy in February. We can only hope someone buys its technology and keeps its vision alive.

We will keep you posted on the successes and/or failures of the companies in our “portfolio.” Sometime later this year, we will start the process all over again.

Read on for in-depth profiles of each of our Top 20 picks. And please let us know if you agree or disagree that they are the most promising companies funded in the past year.

Lawrence Aragon, Editor-in-Chief, Venture Capital Journal