Where Will the Money be Spent?

Last week, the MIT Enterprise Forum held a panel discussion on venture funding. Bob Metcalfe of Polaris Ventures Partners, Ann Winblad of Hummer Winblad Venture Partners, and Guy Kawasaki of Garage Technology Ventures discussed their views on technology, venture capital, and where the industry is moving.

Technoflak arrived in time to hear Metcalfe explain that there are approximately 1,000 venture capital funds and 700 are in the process of going out of business. On that cheery note he introduced Ann Winblad who presented a series of detailed charts illustrating trends in venture funding. To be succinct, there isn’t much funding, but software and health care receive most of the surviving investment. Restarts, companies in which the entrepreneurs stayed around after their second round of funding fell through, are now winning funding.

Winblad showed a pie chart illustrating the geographic distribution of venture funding. The West Coast receives almost everything, but some investments in Massachusetts, Texas, North Carolina and only four percent to the Potomac area. Technoflak wonders if Potomac area entrepreneurs prefer to deal with the Small Business Innovative Research program. In fact, it would be interesting to compare the success of the SBIR program to that of venture capital funds, though admittedly an apples to oranges comparison and outside the scope of this post.

Kawasaki began his remarks by telling the entrepreneur-dominated audience, ”All that counts is that you get your funding,” and that while all the discussions of trends was intellectually interesting, entrepreneurs should concentrate on building their companies. He said he had seen bumper stickers in Silicon Valley saying God, I’m just asking for one more bubble. This received a big and sympathetic laugh.

In what he characterized as a ”rare moment of venture capitalist humility,” Kawasaki described the entrepreneur as the center of the venture capitalist universe. He suggested that venture capitalists should not pretend to know what is the next big thing but focus on finding the entrepreneur. He gave a glimpse of the pitches venture funds receive, such as Israeli entrepreneurs explaining they understand wireless technology from years of spying on the Palestinians, and Asian entrepreneurs explaining that since they never had land lines they understand wireless technology.

Winblad talked about hybrid open source companies, such as jBoss, and how they are creating ”whole new ecosystems”. Technoflak thought this was a nice puff for jBoss, who has been getting some negative press. Winblad said software is moving beyond application servers to truly distributed computing.

Kawasaki waxed enthusiastic about micro payments, including BitPass. He said digital content’s free ride was over. A sigh was heard across blogosphere.

Winblad suggested that there were opportunities in the content management space. She named Hyperion as a content management vendor who offered customers the ability to perform analysis on existing data.

Metcalfe speculated that we are getting to the point where we will be storing all information forever. Aside from the rising tide of compliance laws requiring us to keep everything for future investigations, it is now increasingly cheaper to save information than to delete it.

Metcalfe suggested that hardware for parallel processing might be a hot area for investment, but Winblad dismissed parallel processing as yesterday's idea, saying that clustering technology and gridded computing was the way of the future.

Metcalfe joked, ”Since open source is going to make it impossible to make any money in software, all the money will be in hardware.” This received a huge laugh.

The floor was open for questions, which were phoned in from around the country. The first questioner was Pierre Dupont, who asked about metamaterials and advanced materials. Metcalfe replied, ”We’re an IT panel.”

Another questioner asked about the ”explosion of pixels, digital cameras and video archiving.” Kawasaki talked about istockphoto.com, a company that sells royalty free photos for $1.50 each. Ann Winblad talked about the pent up demand for an affordable printer for all the digital photos so many people store on their computers.

A participant from Florida asked the question everyone is thinking at such events, ”What is the next killer application?” Panelists seemed to agree there was no way to know for certain. Winblad suggested that on-demand applications that allow vendors to sell to mid-market companies would be big. Someone mentioned blogging, but Kawasaki characterized blogging as a function, not an application. Technoflak had not previously considered this but is inclined to agree with Kawasaki.

Someone asked about entertainment infrastructure. Metcalfe suggested that in the future, the people who currently steal music will steal feature films. Technoflak would add that those who embed spyware in music sharing programs will embed far more sophisticated spyware into video sharing programs.

Winblad raised the question of what is entertainment? Where does it happen? She talked about the experience of Ultimate Arena, a game company. The games themselves did not do so well, so they began to aggregate buddy lists for games, and that part of the business is doing very well. Kawasaki described this as a venture capitalist’s nightmare. Had someone gone to him and said that aggregating buddy lists for games was a profitable business, he would have laughed in the entrepreneur's face. But clearly it is profitable.

A gentleman from Toronto congratulated the panel on their successful investments and asked what they had learned from their failures. Kawasaki sighed and said, ”We don’t have the time” (sympathetic laughter).

Metcalfe said investments often fail because of bad timing - the company is too far ahead or behind the industry.

Kawasaki talked about the Silicon Valley proxy effect. One firm starts promoting something and others follow, so you get ”six ways to do dumb things.” He criticized venture capitalists for lack of independent thinking.

Winblad said, ”Don’t be a venture capitalist if you don’t like to experience failure. The first time you shut down a company is a horrible experience.” Technoflak resists speculation but is guessing Winblad does not like failure, but has come to accept it as the price of finding successful companies.

Metcalfe told a sadly humorous story of a startup whose prospective customers were companies like Global Crossing and Worldcom. By the time they were ready for market their customers were out of business or in jail.

A participant asked how globalization had changed venture funding. Kawasaki joked that, ”Statistically, there are at least ten Bill Gates in China.” But he cautioned participants, suggesting that dreaming about selling to those large markets was a way to go broke.

Ann Winblad decried the under-enrollment at America’s engineering schools and said we should permit any engineering Phd. to enter the United States. (Unemployed engineers reading this can put their flames in the comments below.)

Kawasaki gave his email address, guy@garage.com. Technoflak thought this a very sporting gesture and is sure he received a big response. Winblad closed by saying this was a vibrant time for venture capital and that ”the funding you get now will be committed.”