Tech Post: Venture Capital Clouds on the Horizon

Here's Zach Goldfarb's weekly update on the local technology scene.

Featured: LivingSocial, Starfish Retention Solutions, iBelong Network, Millmark Education and SwipePay

It is going to be an adventure for venture capital -- that's for sure.

Locally, the National Venture Capital Association reported this month that second-quarter venture capital investment slid 15 percent from with the same period of 2007, to $234 million.

Funding fluctuates from year to year, but this was only the latest piece of recent bad news that has venture capitalists and start-ups concerned about a pernicious chain reaction: The overall financial downturn is making it nearly impossible for venture-backed firms to go public and difficult for them to be bought at prices they consider fair. That is forcing venture capitalists to pony up more cash to keep the companies in their portfolio afloat. And as a result, they have less money to back even newer companies with new ideas.

"It's really a question of staying the course and surviving," said Roger Novak, general partner of Novak Biddle Venture Partners in Bethesda, a large local firm. "This is the worst we've seen."

It is taking an average of 8.6 years for a venture-backed company to go public, compared with four years a decade ago, and venture capitalists believe that's unlikely to improve soon.

Novak is also concerned that investments venture capitalists have made in Web 2.0 companies -- all the rage recently -- could turn out to be unsuccessful. He said the companies still are struggling to come up with workable advertising models to support their businesses, and venture capitalists may grow more hesitant to plow more money into them.

Companies are still getting funded. In the most recent quarter, Avalere Health, a District company that consults on health-care strategy, received more than any other firm: $19.6 million. On its trail was Competitive Power Ventures, a Silver Spring energy finance and analysis company, which received $19.5 million.

Other recipients included McLean online widget company Clearspring ($18 million), Vienna customer service software firm Parature ($17 million), Columbia sports media firm Digital Sports ($3 million), and tiny Woodbridge biometrics company ArtiNNet, which received just $10,000.

The National Venture Capital Association study, which was based on Thomson Financial data and done in partnership with PricewaterhouseCooper, reported that nationally, $7.4 billion was invested in start-ups in the second quarter, about the same amount as a year ago.

Mark Heesen, president of the National Venture Capital Association, predicted in the organization's report that the industry would withstand challenges.

"The venture industry is operating under the same long-term philosophy it has adhered to historically. Venture firms are prepared to invest for 5 to 10 years and will stick with their companies through difficult times," he said.

Don Rainey of Vienna-based Grotech Ventures said that small technology companies still have access to funding because they are far removed from the complex debt-based securities that have roiled the markets.

"My sense is we're in a fairly steady state," he said. Indeed, Grotech, in partnership with AOL founder Steve Case and his wife, took part in one of the more high-profile venture capital investments of the quarter: $5 million in LivingSocial, a company based in Georgetown.

LivingSocial, formerly known as Hungry Machine (got to love these names), seems in many ways like the ultimate Web player for these times. It builds applications that allow people to share, discuss and explore their likes and dislikes on profile pages on social-networking giants such as Facebook and MySpace. LivingSocial currently has applications for six areas -- books, music, movies, restaurants, games and beers -- that build on more basic tools the sites provide.

LivingSocial makes money in a few ways. If someone clicks on a friend's recommendation to buy a book, it takes a cut. It also integrates ads into the applications, recently, for instance, promoting a Sony movie through its book recommendation widget.

"They are succeeding by monetizing the social network in a variety of ways rather than a single way," Rainey said.

Last week, LivingSocial launched a Web portal, allowing users to search through thousands of recommendations by their friends and other users.

Tim O'Shaughnessy, a 2004 Georgetown graduate and one of the founders of the company, said it launched the site to give people a one-stop shop for exploring their friends' interests.

"There's very much the social discovery aspect and browsing everybody else's collection," he said.

Asked about whether Web 2.0 companies can effectively turn their millions of users into dollars, he said that traditional strategies, such as placing display ads around content, may not work.
"It's going to be a little more integrated advertising campaigns, building add-on functionality that's sponsored by somebody or really kind of integrating their brand into the product experience," he said.

Others receiving money:

Where: Alexandria
Venture capital: $100,000 from Virginia's Center for Innovative Technology
Formed: 2005
Number of Employees: 6

What It Does: SwipePay has created a system for allowing people to refill their prepaid mobile phones (or their children's/spouse's/friends' mobile phones) on the go. It is targeting people who often don't have access to bank accounts -- certain immigrant groups and the young, for instance. SwipePay links with financial institutions, mobile carriers and payment processors, charging a fee to the mobile phone carrier that it says is far below conventional methods for adding minutes, which requires the purchase of a mobile card.

Quote: "We're trying to offer an inexpensive and convenient way for the unbanked to make payments." -- chief executive Chris Wuhrer, former Boost (Sprint) executive

Customers: Several deals with mobile carriers that have not been announced yet.

Risks: Carriers often require lengthy, complex contract and technology discussions.

Starfish Retention Solutions

Where: Arlington
Venture capital: $3.15 million from Novak Biddle Venture Partners and others
Formed: 2007
Number of Employees: 12

What It Does: Starfish's products connect with the highly popular university course management software made by District-based Blackboard. The products try to keep students who are hurting academically from dropping out of school. So if students fail to take a quiz or check grades in the Blackboard software, for instance, e-mails can be automatically sent to the students and their advisers. The software can also set up alerts for a variety of other issues. The technology is licensed to universities for a flat fee depending on the size of the school.

Quote: "We're enabling students to connect better with the resources of the campus." -- chief executive David Yaskin, former vice president for products at Blackboard

Customers: Several schools are testing the product, and one has agreed to buy it.

Risks: Blackboard is continuing to improve its product and a variety of low-cost, open-source course management online tools are emerging.

Millmark Eduation

Where: Bethesda
Venture capital: $3.3 million from NLM Capital Partners
Formed: 2006
Number of Employees: 9

What It Does: Millmark is trying to ride the immigration wave by publishing tools for students to improve their English skills and other academic topics such as science at the same time. (It can also be used for native students who haven't easily grasped language fundamentals.) Millmark publishes posters, workbooks and multimedia such as learning CDs. The company was formed in part in response to the federal requirements enacted in recent years that set standards for English skills in classrooms. The products are targeted toward grades 3 to 12.

Quote: "What we're trying to do with the products is to meet students where they are and get them to where they need to be." - chief executive Ericka Markman, 20-year industry veteran.
Customers: Schools in 35 states

Risks: School budgets shift at the whim of politicians and are notoriously unpredictable.

iBelong Networks

Where: McLean
Venture capital: $2.3 million by Amplifier Ventures
Formed: 2007
Number of Employees: 17

What It Does: iBelong is an Internet company that builds private social networks for organizations and companies. The company doesn't focus on people creating elaborate profiles and then linking, or "friending," each other as on big social networks such as MySpace and Facebook. Rather, the private iBelong social networks focus on particular content areas. So a network iBelong built for Navy Memorial, an associate of Navy alumni, has groups for former members of different ships who post news and converse with each other. iBelong licenses the technology to organizations for a fee. As audience builds, it plans to include advertising.

Quote: "We're about exchanging meaningful and relevant content." -- chief executive Ben Turner, former VeriSign executive.

Customers: 4H, Navy Memorial, Guitar Jam Daily and Optical Medical Alliance.

Risks: The number of social-networking companies vying for business seems to grow every day. Organizations can form free social networks on sites such as Ning and CollectiveX.

By Zachary Goldfarb  |  July 25, 2008; 1:36 PM ET  | Category:  TechPost
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Our experience looking for funding was quite different from others in that we took two months to find our finding source and another two to complete the deal. We started looking for "Angel" funding on March 5th 2008 at Cooley Godward's Capital Call. This event brings together 30-50 venture capitalists to hear 8-minute funding pitches from 5 companies. The event created a fair amount of interest in Starfish that ultimately led to about eight organizations and individuals wanting to become Angel investors. However on May 2nd, 2008, based on a referral from my lawyer, Joe Tiano from Thelen Reid, I met with Jack Biddle from Novak Biddle Venture Partners and almost immediately Jack recognized what a sound idea Starfish was and what a great fit our two organizations would be. Novak Biddle funded Blackboard Inc., where many Starfish team members once worked. Novak Biddle's proposal was to skip over the Angel round and by June 20th, 2008, we had $3.15 million invested in Starfish.

What I think made Starfish attractive is the market is ripe for a solution to its big problem and our experience in education and technology makes us the ideal provider of that solution.

Only 50% of students attempting to get degrees in the United States do so today. Poor student retention is a significant pain for colleges. It stops them from achieving their mission and hurts their pocketbooks. Yet there is little, if any, technology being used to address the problem. On the positive side, the prevalence of e-learning technology has "primed the pump" for the introduction of technology to solve this concern. Over 80% of US colleges have a course management system like Blackboard.

Many team members of Starfish, including myself, were part of Blackboard's tremendous success. I helped it grow from a few dozen customers to over three thousand. The Starfish team has successfully designed, sold, delivered, and supported software solutions for this market many times before. No other company understands both the theoretical and practical issues so well.

Lastly the vision of our solution and our first few products are what schools want. We understand the pain at colleges is three fold: 1) a difficulty identifying and encouraging students who need help; 2) too much expense implementing and growing the services to help: tutoring, mentoring, advising, etc; and 3) little or no hard data about the outcomes of the help so the colleges can't fine tune their methods for even more success. Starfish address each of these and we designed our applications hand-in-hand with students, instructors, advisors, and administrators so they work the way the users need them to work.

Now that we have money to grow and colleges who want our product, we just need more web developers and sales people to handle the demand.

Posted by: David Yaskin, CEO/Founder, Starfish Retention Solutions, Inc., | July 27, 2008 2:09 PM

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