VCJ Cover Story: Consumer Passion –

Until recently, David Ladd, a general partner at Mayfield, had never done a consumer technology deal. Enterprise software and telecom were his specialties. But then a young company called Pure Networks caught his eye.

Pure is capitalizing on the advent of the digital home by offering software that makes it easier for consumers to setup and manage their home networks. “The problem is obvious to anyone who has ever tried to share Internet access or printers in the home,” says Ladd, who led a $7 million Series A round in the Seattle-based company in May. “These things are really difficult to make work.” But solving a big pain point wasn’t the only factor that attracted Ladd. “I was looking for a different kind of investment,” he confides.

That should come as no surprise, given the current state of corporate technology. Despite hopeful talk of a tech recovery in corporate America, businesses are still reluctant to make significant purchases. This is clearly seen in the revenue shortfalls of major enterprise vendors, like Peoplesoft and Siebel Software. Even though a new survey by Goldman Sachs predicts that information technology budgets will increase 2.3% this year, many still believe that’s optimistic. Of the spend-

ing that is taking place, most is directed at patches and fixes for existing systems, rather than the implementation of cutting-edge, next-generation technologies.

The consumer technology industry, on the other hand, is a shining star: Its sales will total $101 billion this year-a 4.8% rise over 2003-according to the Consumer Electronics Association. If that’s not enough, market researcher In-Stat/MDR projects that 280 million people will own equipment to make their own media by the end of 2008. Also, the Internet Home Alliance, a technology research organization, says that 26% of U.S. households now have broadband access, compared to 18% last year. And, of course, consumers are turning the home into a digital Mecca. The growing demand for equipment like Wi-Fi routers and digital media servers is igniting an annual market of $150 billion for entertainment products and services, according research firm Parks Associates in Dallas.

Innovation is now being driven by consumers, not corporations, and that shift is having a profound impact on venture capital. After all, the venture world-with the rare exception of the dot-com debacle -has long been about enterprise technologies. Roger McNamee, co-founder of Integral Capital Partners, estimates that about 90% of resources in the venture industry are directed at the enterprise. But with consumers now accounting for an increasingly large chunk of total technology spending, VCs have no choice but to take the consumer seriously.

“The consumer side of what we do is really starting to catch more attention, especially as consumer spending remains strong,” says Larry Marcus, a general partner at WaldenVC who specializes in digital media and consumer technology. “We are certainly getting more inbound calls from other VCs who want to do investments in consumer tech or who want us to take a look at a particular deal with them.” Though it’s difficult to put an accurate figure on the growth of consumer tech deals, Marcus says the quantity and quality of deals has been unlike anything he has ever seen in his venture career.

It was Intel that helped focus attention on the consumer sector earlier this year when it announced its $200 million Intel Digital Home fund. But venture capital firms are hot on the trail. George Zachary, formerly with Mohr Davidow, was recently recruited to Charles River Ventures (CRV). His mandate: to set up a portfolio of “mass-market” companies. Mayfield, too, is focusing more on consumer technologies. Besides Pure Networks, it has made seven other deals in the sector over the last few years. BA Venture Partners is also actively betting on consumer electronics with a series of new investments, including a $51 million financing of Cornice Inc., a Longmont, Colo.-based developer of storage application for portable devices like MP3 players. Mobius Venture Capital, for its part, counts Danger Inc., Wheels of Zeus, Pocket This, and Perpetual Entertainment among its most recent consumer deals. Even Bob Pavey, a partner with Morgenthaler Ventures, said VC firms like his are now branching out into new areas, with consumer electronics near the top of the list.

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