2006 Venture-Capital Roundup | On the bubble
With investors coming off one of the most active years in recent venture-capital history, there's a lot happening in technology to make...
Seattle Times technology reporter
With investors coming off one of the most active years in recent venture-capital history, there's a lot happening in technology to make them excited, anxious and hopeful.
In 2006, roughly 100 companies in Washington state raised about $1 billion in investment money, according to quarterly and annual figures released today by Venture One and Ernst & Young. That's the most since 2001, the year after the height of the bubble.
Here are the assessments of four VCs in the Seattle area, who recounted what happened in 2006 and how things are shaping up for 2007. Len Jordan of Frazier Technology Ventures; Chad Waite of OVP Venture Partners; Matt McIlwain of Madrona Venture Group; and Enrique Godreau of Voyager Capital shared their thoughts by phone and e-mail.
Q: What do you think of Time magazine naming "YOU" as the 2006 person of the year?
Jordan: I can't think of a better person than myself — that I'm person of the year.
But in all seriousness, I thought it was terrific. I've spent the last decade focused on user-generated content, first at RealNetworks, where the thesis of Real was that in addition to broadcasters, anyone can put audio and video on the Internet. The Internet is finally here as the next mass medium for user-generated content.
On venture capital
Four venture capitalists from local firms contemplate the meaning of 2006:
Len Jordan:General partner, Seattle-based Frazier Technology Ventures. In 2006, Jordan said his firm invested in three new companies, which is fairly consistent from previous years.
Chad Waite: Partner, OVP Venture Partners in Kirkland. OVP made about five new investments in 2006. The pace has been about the same because each year, each partner does about one new deal.
Matt McIlwain: Managing director at Seattle-based Madrona Venture Group. Madrona made seven new investments and 10 follow-on investments. That activity level is slightly above our typical investment pace.
Enrique Godreau III: Managing director of Seattle's Voyager Capital. Voyager was quite active.
Godreau: Premature. The puzzle is still coming together. Though we witnessed a strong shift from mass media to personal media, user-generated digital content like blogs, wikis and social networking are still coalescing. But stay tuned.
Waite: If it had been BusinessWeek doing it, I would have been concerned. Like any other person, I'm not sure what the business model of the companies are. As for the cultural significance, I would agree with it. We are now living in a year where various types of technology allow us to consume media where we want to, when we want to and how we want to.
McIlwain: "User-generated content" has had a major impact on the Internet for a long time (Classmates.com, Amazon reviews, eBay listings). Video and entertainment innovations made it a bigger deal in 2006. Several technologies will make it even easier for end users to customize and control their Internet experience in the future — so YOU will keep being important.
Q: In 2006, do you think a bubble started to form?
Jordan: I wouldn't call it a bubble, but I think there's a bit of a minibubble, and we have been cautious in making sure that our investments have good foundations, real products, real customers and traffic and users.
I do think that it's smart to be cautious in the Web 2.0 and wireless areas because clearly there's a lot of money flowing into those sectors, and that's not always good.
Godreau: If not the start of a bubble, we at least witnessed the building of a foundation for one. The relationship among technology vendors, consumers, and investors is a cyclical one. Entrepreneurs invent, consumers and enterprises buy, and public and private investors fund it.
Eventually, though, as the desired value from technology exceeds its real or perceived value, buyers and investors flee — bubbles burst. We are riding a great wave right now. There is clarity on what people, businesses and governments need and want to buy. Before too long, though, the cycle will pause, a technology gestation period will ensue and the cycle will at some point start again.
Waite: Yeah, I would say the mythical Web 2.0 garbage, as I call it, is a bubble. It's a wonderful set of technologies and features, but we've yet to see a Web 2.0 company with a sustainable, leveragable and extendable business model. How many YouTube knockoffs, photoblogging, social networking, real-estate deals have you seen in the last year and a half? One hundred? Maybe more?
McIlwain: There was more hype on the consumer Internet front in 2006, but no bubble. There has been a steady and, I believe, sustainable pace on venture-capital investing (in the $25 billion range) the past few years.
Q: Venture capital is a cyclical business. In 2006, funds saw their biggest fundraising year since 2001 with more than 200 VCs raising $28.6 billion. If that's the case, what's likely the next stage to occur?
Jordan: You'll see two trends: When you have a lot of money available in the market, firms have to specialize and differentiate. Second, I think you'll see a lot of transitions. Some of the firms that used to be thought of as top firms have had a lot of personnel transition, and I think you'll continue to see a lot of change among the historic top firms.
Godreau: Several great innovative companies, some of which will be tomorrow's leading companies, will get funded in this cycle. The great news is that the Northwest will be home to several of these.
The macroeconomic trends on a global scale are quite favorable for innovative, technology-based companies. However, many, many business concepts will also be funded that will not realize the success sought by their backers. With the substantial overall level of capital available, expect those companies that cannot grow, but that also will not die, the so-called "living dead," to have slightly longer life spans this time around than in previous cycles.
Waite: We are entering a cycle now, where the only liquidity in the world is largely M&A [mergers and acquisitions]. A one-dimensional liquidity market is concerning. When you don't have an IPO [initial public offering] threat to hang in front of a large acquirer, they are going to lowball you. I have seen it.
McIlwain: The next stage will be highly dependent on how long the public-equity markets remain strong and the IPO window remains open.
A healthy IPO market provides quality companies with access to new sources of capital and gives those companies negotiation leverage in M&A discussions with public companies. With more than $300 billion in cash on the balance sheets of large, public tech companies, M&A transactions are likely to maintain or increase their pace in 2007.
Q: In 2006, what stood out in the Seattle area? Were there any trends, or did the area get stronger in any particular industry?
Jordan: I think Seattle has really developed in wireless and probably digital media.
Godreau: The University of Washington turned it up a notch. In many areas, the senior leadership at the UW appears committed to leveraging its strength as the No. 1 publicly funded research institution in the country to deliver greater overall value to its constituents, to the state and to the world.
Waite: There were a lot of wireless, Web social-networking deals done and a fair amount of consumer Web-marketing plays done. OVP does not play in those areas, but I hope a lot are successful, so that Seattle is considered a really legitimate venture market again.
McIlwain: Digital media, Internet advertising and next-gen wireless are areas where the Seattle area is really excelling right now. The big news was the increasing pace of highly talented folks leaving companies like Microsoft, Amazon, Expedia, etc. to found or be apart of early-stage companies.
Q: If you could name one, what opportunity did you miss in 2006?
Godreau: Clarity Visual Systems of Beaverton, Ore., is a leader in the area of digital-display systems for command and control and digital-signage applications.
Waite: The one regret I had is that I didn't invest in Talyst when we saw it a year ago. Instead, we invested in it in late 2006. We saw the deal in 2005 and should have invested in it then. The CEO has already told me that, and I agree with him. Talyst makes systems that allow for documented and assured dispensing of prescription drugs in hospitals.
McIlwain: In retrospect, we should have invested in ThePlatform in late 2005 as it ended up being acquired by Comcast in 2006 for a nice gain!
Q: What one investment from 2006 would you like to highlight?
Jordan: I would highlight Smilebox, a new company we funded in 2006. As you may recall, Smilebox in Bellevue is focused on personal greetings and experiences focused on digital photography. It's a great company. It turns your photos into the coolest consumer experiences.
Godreau: Ontela is a Seattle-based, early-stage software company that develops mobile imaging solutions for wireless phones. Really great technology makes hard things easy. Taking pictures with high-resolution (and getting better) cameras on cellphones is easy. Getting those pictures off the phone is what's hard.
Waite: The one I think made great progress this year is BioPassword. The new CEO started this year, Mark Upson, and he's done a terrific job. We invested in it two years ago, and the company just closed a financing [$11 million].
McIlwain: Illumita is an early-stage company that we helped create and fund. The team of University of Washington computer scientists who founded the company is exceptional and it has the opportunity to change the way people publish and use software.
Q: What do you look forward to in 2007?
Jordan: I think there are still exciting new mobile applications, especially around mobility and digital media that we find interesting.
Godreau: Metropolitan area Wi-Fi networks like those being installed in the U.S. cities of Philadelphia, New Orleans and Oklahoma City are changing the rules of connectivity. What if you no longer had to think about whether broadband Internet access is available where you are or where you are headed — indoors or out?
I look forward to experiencing low-cost, ubiquitous access to the content I care about no matter where I am. I also look forward to the remarkable innovations entrepreneurs will inevitably create with these resources.
Waite: I've got one that's in a formulation stage that I've been working on. It is someone I backed before and I want to get back in business with. It's not announced and no one knows he is doing it.
This is what is starting to be interesting about the Seattle market. We are starting to see recycled entrepreneurs, people who were really terrific and were successful, and are getting bored and want to get back and be involved in the early stages of another company.
Tricia Duryee: 206-464-3283 or firstname.lastname@example.org