Yesterday, I wrote a high level summary of this year’s Venture Capital in the Rockies conference.  I thought I’d give the local press one more day to see if anyone was going to write something substantive about some of the companies presenting.  I haven’t seen anything, so here are my thoughts on the companies I saw. 

24 companies presented in two tracks so the most I could see was 12.  I had a couple of conference calls during the day so I only managed to see 7 of them: Collective Intellect, Confio Software, HomeSphere, Solidware Technologies, iPosi, CreekPath Systems, and XAware.  The only company on this list that I directly have an investment in is Collective Intellect, although I have indirect investments (through VC funds that I’m an LP in) in XAware as well as Collective Intellect.  I’ve listed the companies in rank order starting with the one that I thought was most interesting / did the best job.

Collective Intellect: I backed the founders – Don Springer and Tim Wolters – in their previous company (Dante Group – acquired in 2003 by WebMethods.)  Don and Tim are super second time entrepreneurs, and the way they’ve started up Collective Intellect shows.  Their tag line is “filtering new media for the securities industry” – they are using a bunch of hard core computer science to analyze new media content (blogs, chat rooms, discussion forums) for public market fund traders, analysts, portfolio managers, and quants (i.e. the dudes at hedge funds.)  The intersection of new media, heavy computer science, and the massive hedge fund dollars sounds like a good place to hunt.  Don did a great presentation and announced their round of funding led by Appian Ventures.

Confio Software: I met the CEO and primary backer of Confio – Charlie Sanders – about 18 months ago when he first got involved with Confio and its cofounder Matt Larson.  Charlie’s an impressive guy having been a senior exec at Seagate (and previously Conner Peripherals.)  It sounds like 2005 was a very good year for them as they landed 40 new customers, although reading between the lines it appeared that one or two customers accounted for about 50% of their revenue.  Confio’s market – IT performance management – is a crowded one, but they appear to be doing some unique stuff around digging into the Oracle database layer to look for root cause defects (ah – “root cause” – the holy grail of all APM companies.)  Charlie a super salesman and is determined to scale the business up nicely on modest capital.  He’s off to a good start.

XAware: Tim Harvey, the new CEO of XAware, did a super job of presenting after a mere three weeks on the job.  I generally like XAware – it’s in a market segment (SOA middleware) that I like, understand, and have made some money in.  However, I don’t understand their approach to the business.  While they generated a respectable $3m of revenue last year, it appears that most of it came from financial services customers.  Consequently, I don’t understand why they present themselves as a horizontal SOA middleware provider when they could be kicking ass in the deep pocketed financial services vertical.

HomeSphere: I’ve got to hand it to James Waldrop and his team – they raised money in 2000/2001, survived their market falling apart, focused on growing slower but getting profitable, and have accomplished that.  They now have a respectable $10m business that sells two things: (1) manufacturer incentive and rebate service for through group buying (80%) and (2) construction management software (20%).  While #1 is a solid growth business (and HomeSphere has likely gotten to an interesting critical mass), #2 looks like a flat to declining business.  As a result, HomeSphere is looking to raise $10m to roll out three new lines of business (none of which I can remember a few days later.)  I don’t understand why they’d do this – if I was on their board I’d say “no more money – stay profitable – grow aggressively in segment #1.”

Solidware Technologies: Sue Kunz, the CEO of Solidware, is a firecracker.  I’ve known her and her gang for about a year and watched them do unnatural acts (ah – the joys of entrepreneurship) to get their “Splat Software” up and running.  Splat is an SQA product (software quality assurance) that helps identify software defects through visual analysis of the source code.  I declined to invest last year as I’ve already got an investment in a somewhat competitive company (Klocwork), but I’ve tried to be helpful and encouraging to Sue and her team because I like their style.  I only caught the tail end of Sue’s presentation so I don’t know how she did, but she handled the Q&A nicely.

iPosi: I don’t get iPosi.  They presented a vision for a set of E911 products based on GSM-based location combined with IP geolocation (they are talking to one of my companies – Quova – about working together.)  I listened to the presentation and really didn’t understand either (a) what exactly they were going to do or (b) how they were going to do it.  My brain was working hard when I saw their revenue slide – immediately afterwards my nose started bleeding and I started fantasizing about steep upward sloping exponential curves.  I know – and like – a few of the people involved – I’m sure I’m missing something obvious.

CreekPath Systems: I remember looking at Creekpath in 2000 when it was originally spun off from Exabyte.  I was pretty excited about funding it until one of my partners vomited all over the floor after meeting with the team.  As a result I passed – am I’m glad I did.  They’ve been through a lot of ups and downs and retooled their leadership team – again – last year.  Creekpath is a good example of the endlessly elusive storage success animal (hardware or software) that tantalizes, but eludes, the Colorado VC.  Maybe this will be the one, but as many have gone before them, they have a long road ahead of them.  I keep hearing that none of the storage vendors have this, but then I think about EMC’s software group and just shake my head.

Oh, and Seth and Chris assured me that the skiing on Wednesday was outstanding and the skiing on Friday was social (e.g. not much fresh powder, but lots of friends hanging around, blue skies, and 60 degrees.)

I love stats (also know to serious people as “analytics.”)  In the past, I’ve written about the variety of stats packages I use and track regularly (e.g. at least daily.)  Today, FeedBurner came out with an upgrade to its stats that add a number of new things, including uncommon uses, the concept of “reach”, and item popularity.   Mike Arrington at Techcrunch has a comprehensive post up with screen shots – rather than repeat this here, I’ll simply point you there to take a look.

In other stats news, I thought I’d refresh the list of things I was using.  I’ve added a few (such as BlogBeat – which I love) and removed a few (such as MessageMap, which was intolerably slow, getting increasingly “wrong”, and – now that it’s owned by Google, will likely be integrated with Google Analytics, which I still use, sort of.)  Here’s the old list as of 8/16/05.

• FeedBurner: Core RSS feed and page view metrics
• AWStats: Core page view metrics
• Google AdSense: Page views by channel, ad click throughs
• Amazon: Online purchase metrics
• Bloglet: Email subscribers
• MyBlogLog: Outbound link tracking
• MeasureMap: Inbound / outbound link tracking (in alpha)
• Technorati: More link tracking
• Feedster: Even more link tracking

Here’s the new list as of today:

• FeedBurner: Core RSS feed, page view metrics, item views, reach, and email stats
• BlogBeat: Core page view metrics (plus feed data via integration with FeedBurner API)
• Google Analytics: Page views
• Amazon: Online purchase metrics
• MyBlogLog: Outbound link tracking
• Technorati: More link tracking

I’ve dumped the others for the following reasons:  

• AWStats: Stats weren’t telling me much
• Google AdSense: Google Analytics (and now BlogBeat) gives me much better data
• Bloglet: I dumped Bloglet and use FeedBlitz, which has stats integration with FeedBurner
• MeasureMap: Slow, wrong data, and now part of Google (hence I expect integration into Google Analytics someday)
• Feedster: Increasingly irrelevant / redundant data

Yes – less is more in this case (since I’m getting a lot more data from the services I’m using as they evolve.)

Edgar Stiles, Curtis, Chloe, and even Jack has a MySpace page.  I didn’t realize Chloe was an Aquarius.

After watching 24 last night, I have to remind myself that it’s just not real.  However, this morning, on my ill-fated effort to get to Chicago, I got to listen uninterrupted to NPR’s Morning Edition (I have no one to call between 5am – 6am Mountain Time.)  I got to hear some great stuff, including:

• Anne Nicole Smith’s Supreme Court Case – hysterical
• Port Takeover By Dubai-based Firm – laws, what laws, why bother – we’ve got terrorism under control
• U.S. Confusion Over Darfur Conflict – those dudes creating the atrocities – they aren’t so bad
• Red Cross Is Incompetent – aw, c’mon, let’s keep the focus on FEMA
• Violence In Iraq – 1,300 dead recently
• Danny and Annie Perasa Letters – heartwarming – Amy, I love you

Oh, and did you notice the volatility in Google’s stock today – the day’s range so far is 397 down to 338 back up to 351 on comments by George Reyes, Google’s CFO, about “overall growth slowing” which I’m sure lots of blogs will comment on today.  Kind of as volatile as my emotions have been so far today and it’s only 9:15am.  Maybe Apple will announce it is buying Disney today and make the world a happier place.

I’m sitting at my office in Colorado writing this (yes – you surmised correctly – that means that I did not get to Chicago today.)  Even though my early morning ticketing experience online went well, my drive to the airport at 5am was pleasant (e.g. no speeding ticket), and my experience with TSA was uneventful (e.g. no strip search by a guy named Joe), imagine my disappointment when I showed up at Gate B26 at 6am – five minutes before we were supposed to board – and saw no airplane.

At 6:30am, there was still no airplane.  It eventually showed up at 6:45am.  People came off the plane and the departure time was changed to 7am.  NFW – United never turns a plane around in 15 minutes.  I checked in with the gate agent who very politely told me that he doubted the plane would leave until 7:15am – maybe even 7:30am.  At this point – best case – I was arriving at O’Hare when my meeting was starting. 

I punted, enjoyed my drive back to my office, got a chai, and am doing the meeting by phone.  Geeze – Denver to Chicago – you’d think United would have that drill down.  At least they refunded my ticket and my upgrade certificate.

Most people that live in the general vicinity of Denver International Airport (including me) like to bash on our favorite formerly bankrupt airline – United.  Now that they are out of bankruptcy, we’ve lost one dimension on which to kick them around (e.g. no more liquidation jokes.)

I’m usually profoundly disappointed by airline websites for some reason.  United’s is no different – I go on the site all bright eyed expecting to be able to do what I need to do and 15 minutes later say to myself “fuck it – I’ll just deal with it at the airport.”  Today, however, was a success.

At 4:25am, I went online to try to print out my boarding pass for my day trip to Chicago.  I tried to login but couldn’t get my password to work (it must have changed it, but can’t remember to what.)  I used the site’s “password challenge” but failed.  So – I had the site email me a new password.  It didn’t seem to work so I did it again (hmm – so far this is feeling very typical.)

30 seconds later a new email appeared with my temporary password.  I went and tried it – twice.  No good.  Crap.  As I was about to give up, another email appeared with another temporary password.  Ok – I guess both attempts at getting a new password worked.  I logged in and changed my password to something I could remember.

I then went through the print the boarding pass process.  I got to the upgrade screen.  It wouldn’t let me past – I didn’t have enough electronic upgrades in my account.  Groan.  I chose a menu option that looked like it’d get me to a “purchase electronic upgrades” screen.  Voila.  I put my credit card in and bought a bunch of upgrades, fully expecting the systems to be disconnected, resulting in a 24 hour wait for my upgrades to appear in my account.

Wrong.  When I went back to the print the boarding pass process, my upgrades were there (ah – the joy of a normalized database, or at least a working implementation of a message broker like Tibco.)  I upgraded, printed my boarding pass for my 6:30am flight, and then went looking for my evening return flight.  Nope – not there.  Well – I guess something had to not work. 

For once, the United.com web site delivered – mostly.

My long time friend Jenny Lawton has recently put up a web site for the bookstore – Just Books – that she runs in Old Greenwich, CT.  As part of the site, she has regular book reviews which can be subscribed to via a feed.  They aren’t all by Jenny – she asked if she could put my review up on Max Barry’s hysterical book “Company.”  If you love books, this feed will guarantee that you’ll end up with a bigger stack to read.

I received the following question last week. It’s a good one – very chewy – and my answer is given from my frame of reference (e.g. a managing partner in a large VC fund).  Consequently, I’m not sure that my answer is either generally correct or abstractable to all situations. How’s that for a hedge? The question is:

Do you agree or disagree with the following scenario as a firm basis for Web 2.0 ventures: Raise $2 to $6 million to be spent over a two to three year period, with an exit of a $20 to $50 million sale to one of the GEMAYANI’s. Would you adjust those numbers significantly, as a general thesis? Is such a venture model an attractive VC proposition, by definition, or maybe merely acceptable in the absence of a more traditional, larger-scale exit (say, raising $4 to $16 million with a $80 to $300 million exit after 4 to 7 years)? What model has the most appeal to you these days? Ultimately, it’s a question of what entrepreneurs should be shooting for. Implicit here is the question of whether Web 2.0 is a short-term window which may close in less than two to three years.

Let’s assume an median case where the $2m – $6m raised gets 50% of the company. In this situation, the VC firm gets half of the exit, which would result in a 5x return in the best success case and a 1.5x return in the worst success case. Of course, both of these assume the exit will occur – this only happens a small percentage of the time, so you have to risk adjust these numbers down by this amount (say 1 in 100 success case, although I’d assert given the number of startups in this domain, it’s probably 1 in 1000 right now.)  So – while the “invest $2m – $6m and return $20m – $50m is a reasonable thesis”, it’s missing the “how many times does this actually happen” multiplier.

While the exit numbers are ok, they aren’t going to move the meter on most VC funds with > $100m under management. While VCs need these kind of exits, they are typically looking for are both higher multiples and higher absolute returns, especially when you take into consideration the discount associated with the probability of success.  So – investing in this general thesis is limiting in a way that won’t be attractive for many VCs.

Now there’s been plenty of blogosphere chatter about how the VC business needs to be revolutionized, how new fund types that are motivated to invest in these outcomes should appear, and how “Advisory Capital” should play a role in all of this. All that is fine – but the second question that’s asked is the really interesting one.  What model has the most appeal to you these days? Ultimately, it’s a question of what entrepreneurs should be shooting for. Implicit here is the question of whether Web 2.0 is a short-term window which may close in less than two to three years.

I’ve always invested with the idea that I should be trying to build significant companies, rather than invest for a quick flip.  Occasionally I end up with a quick flip (and I’m always happy), but – if I see an opportunity to create something large, I’d rather go down that path.  Of course, everything is circumstantial – there is often great fit with an acquirer early in the life of a company and – when this is the case – it’s often in the best interest of all parties (entrepreneurs, buyer, VC’s, employees) sell the company and for the VC to move on (remember – a VC has a limited number of things that he can handle at any given time.)

So – the invest for a quick but modest return doesn’t appeal to me as an investment thesis.  However, I’m sure it appeals to plenty of other folks, including some VCs.  Subsequently, the real answer (from the entrepreneurs frame of reference) is to understand the investor you are working with, what his underlying economic motivation actually is, and ensure that you (the entrepreneur) are aligned before you take the investment.

As to whether Web 2.0 is a short-term window which may close in less than two to three years, I have no idea.  Ask me again in three years.  However, I expect that in three years there will still be an opportunity to create great Internet-related companies.

For the last 23 years, the Venture Capital in the Rockies conference has been the signature fund-raising conference in the Rocky Mountain region.  A full day of presentations from companies looking for venture capital (with the presenters mostly in suits – a rarity in this part of the country) followed by a day of legendary skiing (and – while I don’t ski – this year was phenomenal) makes for a great conference.  320 attended this year – 100 were investors including a number from out of state.

It was fun to look through the list of presenters since 1996 and see the following companies that I’ve been involved in:

1996: Mercury Mail – IPO as Exactis

1998: Email Publishing – acquired by MessageMedia
          Vstream – IPO as Raindance

1999: Service Metrics – acquired by Exodus
          Tellsoft – unsuccessful

2000: Finali – acquired by Convergys
          Service Magic – acquired by IAC

2001: Deuxo – unsuccessful
          Latis – now StillSecure – current portfolio company
          Prosavvy – acquired by eWork

2002: Dante Group – acquired by webMethods
          Npulse (Xaffire) – acquired by Quest
          Wideforce – unsuccessful

2003: F4 Technologies – now Rally Software
          Finali (again) – acquired by Convergys
          Newmerix – current portfolio company

2005: Oxlo – current portfolio company
          Rally (again) – current portfolio company

It was also interesting to see all the companies I haven’t invested in over the years that presented at this conference that have either been successful (oops – missed that one) or unsuccessful (sorry – but I’m glad I didn’t invest.)

Chris Onan from Appian Ventures did an awesome job hosting the conference this year.  He followed a tough act from Chris Wand of Mobius Venture Capital who hosted the preceding two years – and did great.  Maybe they should rename the conference “Venture Capital in the Rockies: By Chris.”

All the local papers have now written up their piece on the conference at this point.  The Boulder Daily Camera had a light weight piece on the conference in general.  The Rocky Mountain News ran two pieces – one that highlighted David Moll – CEO of Webroot (and the article said that he didn’t stay long because he had more important things to do – ouch) and one that announced ITU Ventures new $120 million fund.  The article in the Denver Post was the most substantive, actually highlighting several companies including Collective Intellect, Accucode, and Groople.

Given the lack of actual focus on the companies, I’ll write up a separate post talking about the ones I saw at the conference, offering feedback and (hopefully) constructive advice.

I’m working on a project and am looking for the following web sites / blogs.

1. Web sites for runners to track their workouts
2. Web sites / blogs with information for runners
3. Great running blogs

I historically haven’t asked for much on this blog so this will be an interesting experiment.  If you know of any blogs / web sites that fit what I’m looking for can you post a comment with the relevant URLs?  Self promotion is encouraged, as well as passing these questions on to any runners that you know.

I suggested to Amy that we go to a movie tomorrow (Monday) night.  Silly me – something got messed up in my brain and I forgot that on Monday nights we are glued to our couch watching 24.  From the previews of this week, I know we get to see an RPG fired at First Lady Logan’s limo.  But – the bigger question is – will we get to see Kim?  Or will Sydney Bristow make a guest appearance?

As the next election cycle in Colorado gears up, I’ve been jumping up and down reminding everyone who cares about politics that the solution to the “growth of the technology industry in Colorado” is to improve our education system.  Our current governor has done everything he can to ignore education and at least one of our potential gubernatorial candidates can’t spell the word education.  Colorado has an excellent entrepreneurial and technical base – we just need much more supply at both the K-12 and college levels.  This isn’t a quick fix – at 20+ year view is required.

I think CU Boulder is the best college in Colorado and the one most likely to have a huge impact on the region in the next 20 years.  It’s always great to see additions to the faculty that have a clue about entrepreneurship and technology.  Phil Weiser – an Associate Profession in the School of Law with a joint appointment in the Interdisciplinary Telecommunications Program has been doing a great job as head of the Silicon Flatirons Telecommunications Program.  He sent me a note over the weekend that Vic Fleisher, a law professor at UCLA and a blogger at Conglomerate with a deep interest in entrepreneurship, has just joined the faculty at CU Boulder.

I don’t know Vic, but given Phil’s note, I hope to meet him soon and welcome him to Boulder.

Today I decided to read two running books instead of going for a run.  I’ve been struggling with a cold (maybe a low grade flu) and a gout attack for the last week and lost seven days of running.  It’s been a little bit of a drag since I’m in the middle of the training cycle for the 110th Boston Marathon on April 17th, but I’m not too concerned because my base is very deep right now.  So – I figured reading about some big running feats would be good motivation for my 90 minute run tomorrow.

Long Road to Boston is a magnificent novel about a long comeback that a runner has from a near death car accident to being in competition for winning the Boston Marathon (against Bill Rodgers.)  I’ve found only a few great running novels – this one joins The Purple Runner and Once a Runner on my very short list.  Thanks to Matt Fleckenstein of mSpoke for sending this to me.  It was especially enjoyable considering my upcoming marathon.

I then tackled Ten Million Steps: The Incredible Journey of Paul Reese, Who Ran Across America – A Marathon a Day for 124 Days – At Age 73.  The title says it all.  Reese also had been diagnosed with prostate cancer at age 70 – so this was even more remarkable.  He ultimately ran across all 50 states, completing the last one (Hawaii) when he was 80. Paul Reese died in 2004 (at age 87) – he made a huge contribution to the running community.  I’ve read a few other “run across the US” books – they are all enjoyable in a twisted sort of way.

After reading Reese’s story, I decided that 90 minutes was – well – pretty light weight.

I received the following question earlier this week.  It’s conveniently timed, as I recently participated in two angel investments – each with one of the structures defined below.

What’s the best/preferred structure of investment money pre-VC investment. We’re in the beginnings of raising angel capital (~500k) and were wondering what, if any, considerations we should make regarding the investments to allow for VC later. Should we take convertible loans or issue straight preferred stock? What are the other options that are out there for investment structure? Is it too much of a hassle to handle future investments when there is an “angel group (say 5 doctors banded together)” versus a singular angel?

Assuming that you are planning on raising VC money some time in the future, there are two different typical structures for the first angel financing: (1) convertible debt and (2) preferred equity.

Convertible Debt: This is the easier approach of the two.  In this case, the investment is in the form of a promissory note that converts into equity on the terms of a “qualified financing” (where qualified financing typically is defined by having a minimum amount – say $1m of total investment.)  The note will either convert at a discount to the price of the qualified financing (usually in the 20% – 40% range), will have warrant coverage (usually in the 20% to 40% range), or both.  This discount and/or warrant coverage gives the angel investors some additional ownership in exchange for taking the early risk.  This note should be a real promissory note with the conversion and redemption characteristics clearly defined to protect both the investors and the entrepreneurs from any misunderstandings.

Preferred Equity: This is also known as a “light Series A” – it’s preferred stock that is similar to that a VC will get, but usually with lighter terms due to the relatively low valuation associated with it.  For a very young company, a $500k investment can receive between 25% and 50% of the equity in the company and, as a result, many of the terms associated with a typical VC investment are overkill.

While either of these work, you’ll find some angels that strongly prefer one over the other.  In addition, if you don’t believe you are going to raise additional VC money and will only be relying on additional small angel-type investments, the preferred equity approach is fairer to the investors as they’ll more clearly be participating in the upside on terms that are agreed to early in the life of the company.

Finally, I don’t think there is a difference between having “an angel group” vs. a single angel investor.  However, you should try to insure that all of your investors are accredited and – if some aren’t – make sure you understand the implications of this.

I’ve been very busy the past few weeks so I haven’t had much reading time.  I’ve been slowly working my way through Company by Max Barry.  Tonight, after my friends left our condo at Beaver Creek after our Friday night sushi orgy, I laid down on the coach,  near the fire, across from Amy, and finally polished it off.

Company was brilliant.  Imagine a novel about a Dilbert-esque company run amok, with extraordinary character development and a steady build-up to a 24–like plot twist.  I found myself laughing out loud regularly, which is always a good sign (although it means you probably shouldn’t read this book on an airplane.)  The author – Max Barry – claims to have “spent the best years of his life in the bowels of Hewlett-Packard, conducting secret research for this book.”  He did a good job.

I won’t be a plot spoiler here – you’ll have to read this book yourself.  However, Barry’s characters range the gamut from pitiful, to lovable, to hateful with occasional inter-office sex tossed in for good measure.  As with most large companies, donuts, human resources, problems with the network, and the suggestion box play central roles.