This Week in Venture Capital – Episode 2

I was on This Week in Venture Capital (TWiVC) again this week with Jason Calacanis.  He’s considering making me the permanent co-host so if you enjoy any of this episode or want to see me on the show on a more regular basis please Tweet @jason and let him know (he asked for direct feedback).  I’m loving doing the show and I think that Jason and I have pretty good banter and rapport.  You can watch this week’s TWiVC episode by clicking on the link and my summary notes are below. {if you missed Episode 1 it is here}

High Profile Deal of the Week:

1. TweetUp

This is “Adsense for Twitter.”  In fact, it is Overture 2.0.  Bill Gross is the man responsible for the overwhelming amount of monetization on the web.  Why?  Because GoTo.com was his idea.  It was the first company to do “paid search” back when Larry & Sergey were saying they would never do it.  Overture sold for $1.6 billion to Yahoo! (plus a large settlement on patent disputes paid from Google) so Bill did well on it.  But bill is a BIG idea guy.  He’s behind IdeaLab and has created many interesting companies including innovating in solar energy (eSolar) and electric cars (Aptera).

My take: Never bet against Bill Gross.  Especially when he’s surrounded by Danny Rimer (who funded Skype, MySQL, Last.FM and many, many more) plus Howard Morgan.  I respect everybody involved in this project.  That said I worry that V1 of the strategy isn’t a home run.  In some ways I see it as Overture V2 as in the weakest sense of the comparison.  Overture never built the destination site to monetize from.  In fact, their affiliate partners dissuaded them from doing so.  Google had huge destination traffic.  Google monetized this with AdWords (ads on their home page).  So when Google started pushing AdSense (ads for affiliate or 3rd party sites) they had a HUGE cost advantage.  They were able to “buy” the affiliate business because they had the Google.com cash cow.  They could take a long term view.

Enter TweetUp.  They want to monetize the Twitter stream via contextual search matching.  Um … that’s what Twitter just announced!  I know, I know, it’s different.  But Twitter.com (which will likely improve dramatically on UI, I’m guessing) will be the main event for Twitter search.  So when they fight for affiliate deals (Seesmic, TweetDeck, etc., etc.) it seems that Twitter should have the same Google-like cost advantage.  So my guess is that Tweetup needs to go “multi-stream” (as in Facebook, MySpace, etc.).

There is also another inherent weakness.  I don’t believe that search is the ONLY answer in 2010 as it was in 2000.  Now you follow people (publish & subscribe) and you click on the links they share.  Sure, you might search on Twitter.com but how many of you search in Tweetie or UberTwitter often?  Not me.  I think the best solution for the social networking era is “in-stream” advertising.  I won’t belabor this – I have an investment in this space (ad.ly) so I’m biased.  But I made it for a reason.  We pass links and that’s powerful.  Maybe even as powerful as search?

It’s true that Twitter has announced an enormous number of search queries (19 billion / month – astounding, huh?) and a number of these come from Seesmic and TweetDeck as Evan points out.  Some thoughts: 1) if it really is that substantial it validates my theory that Twitter will push to own the clients or at least where Tweets are consumed 2) it means that if Tweetup can assert itself in the Seesmic/TweetDeck sphere there really might be a high enough volume of queries to make money and 3) it’s not exactly all “true” search in the “discovery of new information” or “intent based advertising opportunity” sense.  Why?  Because I’m guessing at lot of it comes from queries to the API from saved searches people set up in Seesmic and TweetDeck.  Just a guess.  But if so this search traffic is less monetizable.

Finally, I HATE the name.  Golden rule of branding for me: 1) name your company or product your URL and 2) don’t paint yourself into a corner.  ”Tweet” = corner.  My bet: within 18 months they will change the name and go multi-stream.  Plus, a TweetUp already means a meet up in a city organized through Twitter.  Sounds like somebody didn’t do their homework on this name.  BUT.  I would never count Bill out.  He’ll pivot.  He’ll discover the value.  He’ll get deals done.

$3.5 mm in Series A;  IdealLab (Bill Gross), Index Ventures (Danny Rimer), Revolution LLC (Steve Case), First Round Capital, BetaWorks, Jason Calcanis

M&A Discussion

2. Atebits dba Tweetie (acquired by Twitter).  I think everybody heard about this acquisition.  Twitter bough their most used iPhone client.  No big surprise.  I talked about the platform moves of Twitter and why it should be expected.  Atebits had one person if I understand correctly.  They bought distribution and engineering talent.  If I were a betting man I’d say they paid sub $5 million.  Good deal for all.  Twitter also built a BlackBerry app making things difficult for TwitterBerry and UberTwitter.  Message of the week (from Fred Wilson) – “don’t fill cracks” but innovate in new ways with the platform.  I agree.

PLUS RELATED FUNDING …

3. TweetPhoto – Real-time photo sharing platform.  I think this classifies as a “crack filler” and I’m not sure I would have done the investment for that reason.  That said, Photobucket was a “crack filler” that exited for $250 million to MySpace.  YouTube was a “crack filler” that could have been created by then dominant MySpace but wasn’t.  It kicked Google Video’s ass.  So they bought it for a cool $1.65 billion.  I know you could argue that YouTube was much broader but it was really popularized in the social networks.  So if TweetPhoto (bad name, again.  uh, hello!  is it not obvious to people to not name your company on somebody else’s product) can diversify and innovate maybe there’s room for growth.  But I’d say it’s a bigger risk than not that Twitter just does this (well) themselves.  It’s core platform stuff.

$2.6mm in Series A: Canaan, Anthem

Other Deals

4. Groupon – Hyper local same-day offers.  Wow.  WOW.  People are talking a rumored $1.2 billion valuation.  Shazaam.  They only recently raised $30 million at around a $300 million valuation and THAT raised eyebrows.  The investor isn’t disclosed (or I haven’t seen it) but it’s rumored to be DST, the Russian investors who invested in Zynga and Facebook (at a $10 billion valuation).  We had a big discussion about DST and why these investments.  On the founder’s side it’s about taking money off of the table and / or having strategic reserves for big acquisitions.  On DST’s side – they’ll either be seen as geniuses or fools.  In the former case many people scoffed at paying up for Google at IPO.  Genius.  Many other people over paid for Chemdex, VerticalNet, Pets.com, etc.  Fools.  Time will tell.  So far it seems the former.

$TBD mm in Series C; $1.2 billion pre-money.  Rumored: Digital Sky Technologies

5. Stitcher – San Francisco-based service that lets users customize talk radio programming on their mobile devices.  This follows on from a lot of interest in radio.  I especially like Jelli, which is user power radio.  You go onto the Internet and can control what people hear on terrestrial radio.  It’s sort of Jack FM meets Total Request Live meets UCG/Social Gaming (at least in the future).  There is a lot of interest in radio these days and another high profile deal in this sector is TargetSpot funded by USV.  It offers Internet radio targeted advertising and is growing really well.

$6mm in Series B – Benchmark Capital (Bob Kagle); with participation from insiders New Atlantic Ventures and angels Ron Conway and Ed Scott

6. Tiny Speck Online gaming start-up.  I found this investment strange since normally VC’s hate to bet on gaming companies.  Maybe gaming platforms but not MMOG’s (massive multiplayer online games, as in World of Warcraft).  The reason is that like Hollywood these seem to require large up-front investments and seem to be hit driven.  That said, the founder is Stewart Butterfield, who co-founded Flickr.  The investors are some of the best in the Valley.  I’m guessing this is a bit on the “horse” but clearly they’ve also seen something in his vision.  In my mind, not a typical VC investment. But I look forward to seeing what they produce

$5mm in Series A: Accel and Andreessen Horowitz

7. EdgeCast (competes with Akamai and Limelight).  This is a CDN (Content Delivery Network).  They help speed up the network by pushing the highly viewed and large media files to the “edge” of the network (e.g. closer to your house or work rather than at a centralized server).  I like EdgeCast and spent time with the management team.  I also really like the investors (I know and respect Steamboat).  I see this whole industry collapsing (in a good way) into the big telcos so I expect all three of these players to eventually be acquired.  The question will be “at what price?”  And for investors, “at what valuation did they get in?”

$10 million in Series B Menlo Ventures, Steamboat

8. Quirky – Platform facilitating collaborative design of consumer products through an online community.  My take was that this follows three trends: a) customer involvement in product design, b) mass customization [e.g. Zazzle] and c) artisan products [etsy, foodzie].  On the first point – think of Steven Blank’s customer development but for physical products.  This deal mostly caught my eye because of the super smart people behind it.  Jim Robinson of RRE is a super smart guy and has made a lot of really insightful investments.  And Chris Sacca is also in the deal.

$6mm in Series A: RRE Ventures (James Robinson, IV), Village Ventures, Contour Venture Partners, and Lowercase Capital

9. OTHER STUFF

In the interview we also covered:

– How are VC funds structured: closed-funds vs. evergreen funds?
– From whom do VC’s raise money and do those investors ever default on their commitments?
– How do founder get “liquidity” (e.g. money off the table) given the dearth of IPO’s and M&A over the past few years?
– Why did I found LaunchPad LA (versus just to TechStars LA or YCombinator LA)?

(Cross-posted @ Both Sides of the Table )