May 21st, 2009

AlwaysOn Venture Summit East – Keywords: Optimism, VC Model Adjustment and "The Cloud"

Thanks to Flybridge Capital, I was able to attend the AlwaysOn Venture Summit East today at the Mandarin Oriental in Boston.

I am not exactly a veteran of VC get-togethers, so I am subtitling this post “confessions of a VC conference newbie.”

Highlights:

1. Widespread and unabashed optimism. I watched probably 5-6 panels and despite the pervasive and hard-charging recession going on for everyone else, many panelists said they believe it’s a “great time to start a company.”  I’ve heard that phrase now so many times at so many different events and conferences that I wonder why my friends haven’t quit their steady jobs to become cloud experts (see next topic!).

2.  Love of the cloud. I had not heard the phrase “pay-by-the-drink” before (shame on me) to describe cloud computing – though apparently Bezos has been throwing it around since at least 2006 and probably way before. It makes sense and is catchy, so I am excited to welcome the phrase into my lexicon of buzzwords. For those of you not hip to cloud computing catch-phrases, “pay-by-the-drink” refers to one of the most compelling parts of the cloud business model: dynamic/horizontal scalability and the customer’s ability to pay for only what they use.

Example – server space.  You could buy an entire server for your startup and use some of it or all of it. When you get that spike in traffic that you were hoping for (viral social media marketing success!) your server might crash, negating any benefit that might have come as a result of the traffic spike. OR, you could sign up with a nifty “cloud” service like Amazon Web Services (AWS), Rackspace or Mosso. They charge based on how much server space you use. When you need a lot, the capacity is there and they just charge your credit card – see the “SmugMug” case study for more info.

There’s a lot of momentum surrounding cloud computing and “software as a service” and additionally, these businesses generally fit the capital-efficient + huge upside potential model that VCs look for, so it’s not surprising that talk of “the cloud” was so pervasive.

3.  Quality of deal-flow is better. One quote I wrote down: “There are a lot of people who want to start companies, but they’re not necessarily entrepreneurs.” When VC money was more free-flowing (ahem, 2000) many of these wantrepreneurs got funded and the “noise” level became unmanageable.  Now, the combination of tighter VC wallets, folding funds and newly unemployed former entrepreneurs has resulted in an increased number of serial entrepreneurs getting back in the game and putting together quality early-stage companies.

4.  The importance of angel networks. My favorite panel of the conference was about the state of Angel and Early-Stage investing moderated by Michael Greely from Flybridge. The panelists were John Landry (Lead Dog Ventures), Elon Bloms (LaunchCapital), Bijan Sabet (Spark Capital) and Paul Maeder (Highland Capital). A surprising amount of VC deal-flow comes from Angel networks.  This shouldn’t be too shocking – how many people are there in any one city with piles of cash (their own or others’) to invest in startups? My point: it seems like many startups seek VC funding too early – take advantage of the Angel groups in your city first and if you’ve got a winner that will likely lead to VC anyway.

5.  Changing the VC model. There was also much chatter around the idea that huge mega-funds are on the decline and the VC model will move toward smaller funds and continue to favor capital-efficient business models (ie it doesn’t cost you $1m a month to stay in business). YouTube-type exits simply are not the norm; average VC exits are around $70 million. One of the panelists on an afternoon panel suggested reading a memo about the formation of Valhalla Partners. I found it on the Valhalla website and although it’s dated May 2002 it’s surprisingly relevant to the current pains in the venture industry and definitely worth a read.

Overall – good energy at AlwaysOn. Now if you’ll excuse me, I’m going to get back to writing my world-changing cloud-computing business plan.