Announcing our investment in AxialMarket

At Redpoint, we are passionate about software-as-a-service companies serving the small to medium business market. We’re also searching for companies who benefit from network effects. Today, we’re announcing a Series A investment in AxialMarket which exhibits both of these traits.

Private capital markets lack a single common platform. As a result of information asymmetry and market fragmentation, private companies suffer enormous costs and miss key strategic opportunities.

AxialMarket levels the playing field for bootstrapped entrepreneurs and the advisors who help them finance and exit their business. AxialMarket enables entrepreneurs and their advisors to access private equity and debt capital sources that include family offices and strategic buyers - ultimately increasing efficiency in the market place. The company has amassed a network of thousands of deal professionals, data on private company profiles and strategies, developed deal marketing tools and deal pipeline software. It’s clear why these deal professionals use AxialMarket: the network makes them more successful.

We believe AxialMarket will be a dominant platform in the private markets. Headed by Peter Lehrman, who was instrumental in the growth of Gerson Lehrman Group, AxialMarket has grown dramatically, helping 8,800 companies execute financial transactions. In the words of their customers, every day on AxialMarket is “the biggest conference of the year in the private markets.”

We’re thrilled to welcome AxialMarket and the Axialites into the Redpoint family and we can’t wait to see how AxialMarket will grow and transform the private capital markets.

Announcing our investment in Electric Imp

We're thrilled to announce an investment in Electric Imp. Founded by a team from Apple and Google, Electric Imp has set a bold vision of connecting every electrical device to the internet. When Hugo Fiennes and Kevin Fox described this broad vision and showed us the technology they built to accomplish that goal, we thought it was pure magic.

Electric Imp will soon release the Imp, an inexpensive WiFi enabled computer the size of an SD card, designed to allow almost any electrical product to communicate with users and services on the web. Imps enable device manufacturers to easily connect their devices to the Internet and empower consumers to control their homes from just about anywhere using just a phone or computer. Electric Imp is building the Internet service that communicates with these devices.

At Redpoint, we believe the connected age is just beginning and that most devices will be internet enabled. Today, the technology platforms to enable these kinds of connections and communications aren't yet in place. Electric Imp will build this infrastructure. We believe that by providing low cost, simple and immensely flexible Imps, the company will become the networking and software layer for the connected home and office.

We welcome the Electric Imp team into the Redpoint family and are excited to help them achieve their vision.

Pure Storage launches their GA product today

Pure Storage launches their GA product today after being hard at work for many many years. Redpoint is super excited to be investors in this team that is   re-defining storage. Every few decades, a tsunami of tech changes creates brand new disruptive companies. The time is now and Pure is the disruptor. Their  value proposition is very simple - what if a company could create software such that the cost of a gig of enterprise grade flash fell below the cost of a gig of enterprise grade disk? This disruptive price/performance goal seems unachievable but Pure has indeed achieved it. By layering an enterprise grade file system that includes state of the art de-dup and compression technologies on top of cheap consumer grade flash, Pure has delivered a disruption that comes around once a decade.  It's easy to write about this on a blog, but to achieve this dramatic vision, Pure had to assemble the very best minds in systems software. We fell in love with Pure's vision from day one, but we fell in love with the team even more. John Colgrove ("Coz") is a visionary technologist who architected and wrote most of the early Veritas file system and, with Pure, re-architected a technology stack that renders the most disruptive price/performance ratio seen in recent times in the storage industry.  When my partner-in-crime from Zimbra and former CTO of BEA/Weblogic, Scott Dietzen, joined as CEO, it was clear that a formidable team was emerging behind this daring vision. We are honored to be working with this world class team that these two have assembled. 

We are excited about their launch and want to congratulate them on shipping 100 systems to customers even before their GA. They have supported production deployments for over a year and it's clear that the market demand was real and there was no solution that could really offer this promise. This team has been hard at work for many months - but they never lost sight of their goal. In fact, they far exceeded their own lofty goals by every measure, and to top it all they have a real sense of humor as evidenced in this video.  .

Congratulations Pure team on achieving what seemed like an impossible goal!

Why we led an investment in Path

We are super excited to announce that we led an investment in Path and to welcome their team to the Redpoint family. When we consider investments, we are generally evaluating people, markets and the idea. Redpoint has traditionally veered towards betting on great entrepreneurs beyond every other variable. In this case, we were struck by the combination of audacious vision, intellect, product sense, leadership, humor and modesty of Dave Morin and the design brilliance that Dustin Mierau brings to Path. We just knew that we had to be in business with whatever it is that Dave is involved in.

 

With Path, the market and idea are equally compelling. Dave has re-imagined a world where mobile devices are the center of a person's social fabric. By building an extremely personal and mobile-centric social network, Dave has tapped into the essence of what people like to do with their devices day in and day out -- stay connected and share experiences. By creating a network that is both impeccably designed and conveniently available in your pocket all the time, Path has created the first truly personal network that allows people to express themselves to their family and friends in ways they can't, or wouldn’t, do anywhere else.

 

Redpoint has always been interested in re-imagining networks and applications on new platforms that are nascent but hold the promise of capturing the imaginations of a new generation. This is why we invested in Rick Marini's re-thinking of the professional network at BranchOut and Travis Katz's innovations around social travel recommendations at GogoBot. This is why we invested in Caterina Fake's vision of every location having a story around it at Pinwheel. With the addition of Path, we welcome my friend and brilliant entrepreneur, Dave Morin and the Path team to our family of great entrepreneurs, and thank them for allowing us to be a small part of their journey. 

 

It is indeed humbling to know that such crazily driven, brilliant, awesome, hungry, passionate founders are working 24x7 for all of us as – both as investors and consumers - so on that note, welcome Path to our growing team. We can’t wait to see what’s next!

2012: After a Big Year, Balance is Back

In 2011, the Redpoint family of companies really delivered. We saw five IPOs (BCD Semiconductor, HomeAway, Intermolecular, Qihoo 360 and Responsys) and 11 acquisitions – which translates to some impressive statistics: five of 2011’s 32 venture-backed IPOs and eight of the year’s 35 venture-backed M&A transactions exceeding $100M came from the Redpoint portfolio. We couldn’t be more proud of our portfolio companies’ achievements.  Thanks to everyone for all of your hard work.

As we move into the second month of 2012, we expect a continuation of many positive aspects of last year’s environment.  However, we also see some increased challenges in macro-economic conditions and the start-up funding climate that could make life this year a bit tougher for all of us.  Here’s our best guess for what 2012 will bring in terms of the funding environment and liquidity, and insights on how we can all navigate through it successfully:

Fund-raising 

It should come as no surprise that 2011 was one of the busiest years in the last decade for new deal activity here at Redpoint, and for the rest of our VC brethren.  Encouraged by the string of Internet IPOs and by several compelling innovation drivers in the Internet space - social, mobile, and cloud to name a few - VCs were eager to back new start-ups and aggressive in courting companies with demonstrated market traction.

Valuations were commensurately high (some may say crazy) for companies that were performing well, and entrepreneurs wisely took advantage of the positive environment.  In Q4 of 2011, we felt hints of the startup funding climate becoming more rational, as the valuations of newly-public Internet players softened, the global macro-economic health deteriorated (particularly in Europe), and as the pace and psychology of the year’s frenetic startup funding activity finally caught up with all of us.

This year, we can’t ignore the macro-economic environment – both the stubbornly sluggish US economy, and the prospect of further deterioration of Europe’s debt troubles– which will make investors more conservative across the board.  Closer to home, the dollars allocated to venture capital continue to shrink as investors concentrate their bets in the top performing firms.  All of this means that we can anticipate the funding environment in 2012 to become incrementally more difficult.  However, we suspect the highest-performing companies will continue to enjoy tremendous leverage in funding discussions as investors fight to get into the top companies.

Liquidity

In 2011, we saw a fairly strong liquidity environment, with the IPO window open for most of the year. Although not all of the tech IPOs have traded well, it is noteworthy that several companies did go public, and mostly at compelling valuations. As for M&A, 11 acquisitions are the most we’ve seen in the last five years at Redpoint.  Buyers came out of hibernation with improved balance sheets, and they made up for having skimped on product investments during the last several years. 

As we move into 2012, it’s likely that liquidity will slow somewhat.  We still expect the favorable acquisition environment to continue, provided the macro-economic climate holds up, as buyers appear willing to paying up for product innovation and growth.  The IPO market is the toughest one to predict.  The sentiment among investment bankers right now is pretty mixed, though as we all watch Facebook’s filing proceeding with baited breath, it seems very possible we’ll see a halo effect from their IPO. At a minimum, we’ll get one new public platform company in Facebook, and that should add another interesting participant in the M&A market.

What this means for you, the Redpoint entrepreneurs:

• Be disciplined with your existing cash.  The cost of capital is likely going up in 2012, so treat the cash you have with care.  Time hiring with revenue if possible.  Force yourself to make hard decisions regarding non-critical resources.  Serialize growth initiatives if it will be tight to fund all of them with existing capital.  
• Execute the model.  It’s time to start showing that your business model works or will work with modest capital.  Entrepreneurs should expect new investors to be more demanding of proof going forward.  The flip-side is that there will continue to be a food fight among investors to be involved with the companies that are clearly working.
• Be opportunistic on fund-raising.  In general, we’re encouraging our entrepreneurs to take advantage of financing opportunities when they present themselves, rather than optimize for the absolute perfect dynamics.  

The good news

Despite the moderating conditions, it’s an incredible time to be working and investing in tech startups. We’re on the precipice of realizing some very dramatic shifts in both consumer and enterprise technology, which should translate into several new and important companies. We see more foundational growth drivers today than we can remember in a long time, including:

 

1. Social – social is impacting everything.  Commerce, media and entertainment, search, sales efficiency, customer service, everything.
2. Mobile – the explosion of smartphones has created a new computing platform that is bigger, more powerful, and more valuable than the Web we know and love.
3. SaaS & cloud – finally, we are seeing wide-scale acceptance of SaaS by SMBs and enterprises, together with cost-effective sales models.  This creates an opportunity to rebuild the business application landscape from the employee inward, and to rebuild the datacenter in the cloud.
4. Digital media – media consumption continues to shift to digital as compelling new consumption experiences emerge.  This shift in consumption is fueling a reallocation of ad dollars, and reallocation creates opportunity. 
5. A global market – given the global adoption of mobile, social and computing platforms, startups are increasingly able to address global markets faster and earlier than ever before.  In addition, we are seeing tremendous startup opportunities targeting the domestic markets of the fastest growing emerging economies such as Brazil and China.

 

The bottom line as we move into this new year: we’re excited to see what 2012 holds for the Redpoint family of companies and we look forward to working closely together to make the world a better place via innovation and technology. It is sure to be another interesting year.

Where We’ve Been & What’s To Come

Venture capital appears to be defying reason. On one hand, early stage fund raising has declined 48% year-over-year. On the other, there’s a start-up boom. Everyone, it seems, is starting something. And in Silicon Valley valuations are astronomical. What’s really going on?

Venture capital isn’t as attractive an investment as it used to be. 10 year median cash-on-cash returns fell 36% in the 2000s (1). In response, LPs have retrenched. For the past 3 years, venture fund raising has fallen below the 20 year median of $17.2B (2). As a result, today there are 31% fewer funds and 26% fewer venture capitalists than at the peak in 2000 (3).

Startup gestation times have never been longer. The median times to IPO and M&A have more than doubled since 1998, jumping to nearly ten and seven years respectively (4). Additionally, the IPO market is constricted. Over the past 20 years, 97 venture backed companies have gone public annually. Since 2001 we have averaged an anemic 36.

We’re observing a correction in the venture market.  LPs have pared allocations to venture funds and pursued firms with established track records. Since 2005, the average dollars committed to the top 25 venture funds varied between 7% and 57%. In 2011, these 25 firms raised 72% of all new investments.

Faced with longer holding periods, fewer winners and concomitant higher exit values at IPO or acquisition, VCs have concentrated bets, moved up market and invested in select growth-stage companies planning an IPO in 12 to 24 months at heady valuations.

If recent performance benchmarks are any indication, this strategy is rewarding investors handsomely. 10 year venture returns have hovered at 2.6% while trailing 1 year returns have jumped 10x to 21% (1). At least on paper, investors are gaining momentum.

With returns growing, VCs will continue to put money to work. Innovation has rarely occurred in as many different sectors as today. Mobile phones are changing consumer. SaaS software is disrupting the enterprise market. Data center innovation is driven by virtualization of the stack. And new consumer companies, whether gaming, curation or ecommerce are fueled by the massive distribution power of social networks.

However, the looming risk of the European debt crisis will surely temper these investment trends. The correlation between venture backed IPOs and stock market performance has grown much stronger over the past 30 years (5).  As a result, raising capital will be a tale of haves and have nots. Rapidly growing companies will have many suitors, while late bloomers and slow-growers will face a challenging fund raising environment.

Nevertheless, the industry won’t change too much. After all, VCs are always game to find the next great entrepreneur building the next big thing.

(1) Cambridge Associates
(2) VentureSource
(3) NVCA
(4) NVCA
(5) Redpoint Research

 

 

The “Mad Men” Years Are Giving Way to the “Math Men” Era

This post is reprinted from All Things Digital

 

“Advertising is based on one thing: happiness. And you know what happiness is? Happiness is the smell of a new car. It’s freedom from fear. It’s a billboard on the side of the road that screams with reassurance that whatever you’re doing… it’s okay. You are okay.”

Don Draper, Mad Men, Season 1, Smoke Gets In Your Eyes

Advertising is based on one thing Happiness

I wonder what Don Draper would think today when the 23-year old digital media buying whiz quips back, “Maybe, but let’s load it up into the system, along with 5,000 other versions of copy, and measure how many Facebook ‘likes’ it drives within our target demo.”

I love the Mad Men version of the ad business. The storytelling. The simplicity. The glasses of scotch at 10am. But these days in digital, it feels like the Math Men media buyers (with their terabytes of data) are taking over for the Mad Men creatives. It may not make for great TV drama, but they’ve got the performance data to prove that it’s their turn in the driver’s seat.

For years, digital ads were bought and sold by young media buyers from ad agencies and smooth salesmen from online publishers and networks, sealed over the modern version of the “three-martini lunch.” But with the steady advancement in online advertising technology over the last ten years, the geeks — I mean the Math Men — have gained the upper hand in determining how to spend these digital marketing dollars. Today, ad buying and selling is automated across nearly every digital channel, driven by complex algorithms crunching terabytes of data, all employed to meet rigorous ROI objectives — typically measured by new customer acquisition, profit margin, or revenues.

It all started in search, where Overture introduced (and Google perfected) a keyword ad marketplace for search pages. We take that marketer proposition for granted now, but it was heretical at the time — only pay us when a user clicks on your ad (vs. every time we show your ad), and you decide how much to pay for that click (vs. the same price for every advertiser). And sophisticated marketers took full advantage by leveraging technology platforms from Math Men companies like Efficient Frontier to maximize the efficiency of their search ad spend across millions of keywords, bids, and text ad copy.

Since then, several major advances in advertising technology have further enabled the Math Men:

• Six years ago, Right Media introduced the first ad exchange for display ads, enabling the Math Men and their algorithms to buy and sell banner ads and skyscrapers across the Web. Google subsequently perfected the display exchange via their DoubleClick acquisition as well.
• Three years ago, Blue Kai introduced the first ad targeting-data marketplace, enabling the Math Men to leverage anonymous audience targeting data to further enhance marketers’ campaign performance.
• A year ago, Facebook launched its own ad platform API to enable Math Men and their algorithms to bid for Facebook ads based on user attributes. It seems likely that Facebook will eventually extend its monetization platform to third-party publishers, similar to what Google did with AdSense, as Facebook already has a strong distribution foothold via Facebook Connect.

It feels like we are witnessing the tipping point in digital media buying. Measured by dollars or by impressions, greater than 50 percent of online advertising is bought via APIs today (granted, most of this is still search). In a few years, I believe that 90 percent of all digital ad impressions, and more than 75 percent of digital ad dollars, will be bought and sold programmatically.

As we witnessed with search marketing, once a) marketers get a taste of the increased spend efficiency offered by these emerging platforms, and b) these platforms (and the associated marketer tools) become sufficiently easy to use, the dollars will flow, and quickly. The Math Men at Efficient Frontier are leveraging these display, data and social platforms to deliver superior ad spend performance for marketers across all digital channels today. It’s no longer just about search.

And the Mad Men are taking note. In the last few years, the ad agency holding companies have rolled out their own technology-driven digital ad “trading desks” to help their clients’ take advantage of these ad trading platforms. I wonder if they’ve replaced the scotch in the mini bars with the Math Men’s drink of choice, Red Bull.

Chris Moore is a partner with Redpoint Ventures and has been enabling the digital Math Men with investments in Efficient Frontier, Right Media, Blue Kai, Auditude, Inadco, Extole, Intent Media and eBureau. Follow him on Twitter @Redpointvc and @Moorski.

 

Social is the Platform

It goes without saying that social networks have forever changed the way people interact on the web. Facebook recently passed 750 million users, Twitter passed 190 million, and Linkedin has surpassed 100 million users. These platforms have changed the way people shop, play games, conduct business, and discover content and in doing so, have created many opportunities for startups.   

We are firm believers that social platforms will drastically alter the Internet landscape and are excited about our investments in this area, with companies like Kabam, which is developing some of the most engaging games on Facebook, and Branchout, which brings professional networking to the Facebook platform. Additionally, many of our most successful companies like Machinima, Scribd, and Thredup leverage Facebook to reach millions of users.

Social platforms offer several important advantages to early stage companies. With hundreds of millions of users, these platforms offer relatively easy access to an engaged user base through viral communication channels. Users are not only willing, but excited to share information and influence their friends and coworkers. Instead of sifting through a maze of anonymous reviews and interactions, users can now find powerful endorsements by trusted friends or thought leaders. These channels are powerful, as shown through the recent success of Branchout, which managed to grow from 30,000 to more than 800,000 users in a single week!

Despite these advantages, social platforms are not without their risks. First and foremost, there is the obvious threat that the platform may subsume a startup’s core business. Twitter has done this on several occasions, most notably in the client and photo sharing spaces. Additionally, there is the risk of changes to the underlying platform which can alter a startup’s business. Gaming companies like Zynga and Kabam are in the midst of a shift to Facebook credits, a virtual currency required for all Facebook transactions. While credits offer some lift to gaming companies from a simpler buying experience, these credits also shift 30% of revenue from gaming companies to Facebook.  

Despite the risks, we’re incredibly excited by the social transformation we’re observing and we believe social platforms like Facebook can be a great ecosystem for startups. Just as gaming was fundamentally altered by the addition of a social layer, we expect other consumer and business categories such as search, commerce, sales and customer support to undergo similar transitions.  A savvy entrepreneur will successfully navigate the risks these platforms expose to take advantage of their tremendous viral power in creating these new categories. If you know one of these exceptional entrepreneurs, we’d love an introduction!  

 

Weekly Tech News for April 4, 2011

Internet & Media

Google launches +1 a way to share high quality search results and ads. The first social initiative, +1 provides a social signal for use in search quality.

Amazon launches a cloud music service that allows users to upload their own music and stream it from Amazon’s servers, similar to Lala. Free for up to 5GB of storage, each additional GB costs $1. Rumor indicates music labels are dismayed with the offering.

The Fed plans to implement maximum fees for debit cards starting July 21 capping the fees at 0.12 per transaction which could decrease merchant processing costs significantly at the expense of processors. Debit cards accounted for 29% of consumer online spending in 2010 and credit cards 40%, estimates Javelin Strategy & Research.

Warner Bros., Sony, Universal and 20th Century Fox will unveil a premium VOD service called Home Premiere which will stream new feature films for $30. DirecTv is the first launch partner with cable companies to launch the service shortly thereafter.

Mobile

Android is providing early access to software updates to OEMs who do not modify Android base code in attempt to mitigate UI fragmentation. LG, Toshiba, Samsung and Motorola have all modified the core Android OS with interface changes.

Android gained 7% market share in 1 quarter at the expense of the rest of the market.

Facebook released a new richer mobile application after revealing the site services 250M mobile users.

Western Union announced M-PESA integration. M-PESA is a mobile wallet in use by 25% of Kenyans with an average monthly transaction volume of $37. Kenyans’ monthly per capita GDP is $133.

Financings and M&A

Bessemer Venture Partners has raised a $1.6 billion fund, with $1.2B for early stage investment and the remaining $400M for India.

Accel raises two China funds, one for early and one for growth investments, totaling $1.3B.

TidalTV, a video ad optimization company, raises $30M from NEA.

Wix, a web site builder for SMBs, raises $40M from Insight and DAG.Limos.com raises $10M from Austin Ventures.

Salesforce acquires Radian6, a social media presence SaaS solution, for $326M.

BubbleMotion, a mobile voice Twitter with presence in South East Asia, raises $10M from Singtel Capital.

Appia, an alternative mobile app store, raises $10M from Venrock.

GameStop acquires P2P video game streaming company Spawn Labs.

Qihoo, a maker of free antivirus tools, and a Redpoint company, doubles share price on IPO and reaches $3.5B market cap.

Venture Industry

Q1 2011 venture backed IPOs increased 55% from Q1 in 2010 in number, though the average amount raised fell. M&A fell about 10% in volume but M&A value increased 3.6%.

 

Weekly Tech News for March 28, 2011