There was a recent Wall Street Journal article highlighting the nation’s biggest Web 2.0 investment hot beds.  New England was named the biggest market for Web 2.0 deals in the first half of 2007, topping the 2006 frontrunner, San Francisco.  According to data from Dow Jones VentureOne and Ernst & Young, New England venture capitalists invested $102 million into Web 2.0 companies in 10 deals. This is a lot in six months, especially when you realize that New England only invested $62 million, over 12 deals, in Web 2.0 start-ups in all of 2006.   

The underlying message to these telling statistics is that social media, online video, and blogs are powerful forces that individuals as well as enterprises and the media are actively incorporating into their personal and business lives. There is no shortage of Web 2.0 opportunities to invest in and I would anticipate New Engalnd, as well as the Valley, will continue to invest huge sums of money into the space.  Care must also be taken to avoid over investment in technologies that have no real underlying market.  There is significnat competition for both “eye ball” time and corporate dollars.  Having a thorough understanding of the market nuances is extremely important.  Factors that we all (entrepreneurs and investors) must consider include (but certainly not limited to): potential market size; timing of market readiness; likely product and service strategies; company differentiators and barriers to entry; competition and competitive challenges; and of course revenue models.  The best companies address these factors early which go a long way to helping a company gain that early market lead.    

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Varolii allows businesses to communicate with customers across multiple channels including voice, e-mail, SMS, pager, Web and fax. Varolii’s on-demand, hosted platform currently handles on average more than 3.5 million notifications each business day, including flight cancellation notices, credit card fraud detection alerts, scheduling of service calls, medication adherence notifications and payment reminders.

We first invested in EnvoyWorldWide, and in December 2005, Varolli acquired Envoy and we received Varolii stock. Since then, these two companies have powered to build a best in class on-demand interactive communication solution. As the market leader in their space, we are very exited about the public company potential for Varolii.

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Q: Did you find it challenging to introduce such an innovative and dynamic technology to a profession that is used to hand-writing patient charts and only interacting with colleagues in their own hospital or specialty area?

Daniel: Trying to get physicians on-line and engaged has long been a holy grail for the technology and venture capital communities. There is a long, very impressive list of companies that have tried and failed to “crack the code”. With over 20,000 physicians Sermo is now the largest on-line physician community ever, making us one of the few “successes” in this regard, but an early success at that. In our case we have benefited from a very talented team of developers, a talented management team, and a very active and involved board of directors. However, I would not want to underestimate the role of luck in all of this.

When Longworth first invested in Sermo is was little more than just an idea. In fact that’s all it was, me and some PowerPoint slides. The diligence process was much more of a long working session to feel out the strengths and weaknesses in the Sermo concept. While this was a much more involved and time intensive process than other potential investors were pursuing, it was mutually beneficial for me and the Longworth team. In the end, we were able to convince ourselves (and each other) that there was enough “right” about the idea that it was worth pursuing.

As Sermo moved from concept to execution, there was much that changed in the opportunity, evolving from a straight information arbitrage to an on-line community. The fact that our physician members were pointing us in this direction made it a very easy decision. We did not have to convince physicians to do anything, or necessarily change their ways. We had only to listen very carefully to what they were saying and act upon it. It is at that moment that so many companies, management teams, investors, or boards fumble. In our case, we have been fortunate enough to have people at each of those levels that were engaged enough so that when those opportunities presented themselves, we could seize upon them.

Q: What is one of the most powerful examples of doctors accomplishing more by collaborating than they could have done alone?

Daniel: The examples are almost too numerous count. There are literally hundreds of posts that hit the site a week. However, the two posts that have been the most powerful, and emotional for me as a physician, were in some ways the most simple. The first post involved a patient who presented with a buzz saw blade embedded in their hand. The patient was ultimately seen in the ER and treated in the OR, however, the treatment course was an interesting dilemma because the blade was serrated in one direction and angled in the other direction. Removing it in either direction could cause significant tissue damage. After the patient had been treated in the OR, a physician posted this “puzzle” of sorts to the community along with a photograph of the impaled finger. In just a matter of hours, there were dozens of responses and comments. However, later that day, a doctor posted a “trick of the trade”, that described a way to slit a drinking straw, and use it as a “shoe horn “of sorts. This meant that the blade could be removed with little or no additional damage, probably at the bedside in the ER. Think of that. Those are the sorts of “pearls” that very dramatically impact day-to-day patient care. That sort of information would never have a home in a text book, a journal, even the web. It is now part of the fully searchable corpus of knowledge that Sermo is rapidly assembling.

The other case involved a proverbial “needle in the haystack” diagnosis. A patient came to their physician with a complaint that their lips had been “burning” for months. Thinking that this was a run of the mill contact dermatitis, the physician ran through several different combinations of anti-inflammatory medications. On a hunch, the physician logged into Sermo and described the clinical situation. Sure enough, one of the physicians who read the post noticed that the patient was on an anti-seizure medication. The consulting doctor asked if there was any chance that the patient had switched from the brand name to the generic form of the drug, because there were some rare reports of this side effect. Guess what?….problem solved.

Q: In what ways do you foresee Web 2.0 technologies, like Sermo, changing the medical profession?

Daniel: Healthcare is an inherently collaborative undertaking. Not only do physicians benefit from each other’s insights, the aggregation of collective knowledge allows the entire profession to advance, and with it, the quality of patient care. Indeed, this is why journals and medical societies were originally created. Today, however, medicine is increasingly out-patient. As physicians spend less and less time in the hospital and more and more time in the office, the usual places for discussion have disappeared, and with them, the opportunity for physicians to benefit from each other’s knowledge. In that regard Web 2.0 technologies, and all of the social media plays re-enable this exchange of information. So Sermo definitely is changing medicine, but in some ways, the more they change, the more they remain the same.

Q: Are there any measures in place to verify the authority of specific postings by physicians to ensure that only accurate information is shared with the community?

Daniel: Social media in general and Sermo in particular use a different paradigm from conventional editorial oversight. On Sermo, the validity of information is based on its degree of corroboration in the community. While the barrier for someone to post something is very low, the community is able to render an opinion and insight on that posting with incredible speed and consistency, ultimately making a very effective screening mechanism. In many ways, though, this is similar to the peer review method that medicine has been using for hundred of years. The main difference is that the peer review process is taking minutes, rather than months and is tapping into the collective insights of literally thousands of people, rather than a select few. With this said, however, it is important to note that Sermo goes to great lengths, through our physician authentication/credentialing process and our rating/ranking process to help the community surface the most valuable information.

Q: Have you considered launching additional interactive communities in other professional fields? If so, which ones and why? If not, why not?

Daniel: Sermo’s technology, business model, intellectual property, even our branding would be easily transferable into other verticals. Indeed we have had several parties approach us about taking Sermo into other verticals. Having said this, healthcare is the largest industry in the country. We increasingly have a commanding lead in terms of penetration into the physician community, yet there is plenty of untapped opportunity, both in terms of bringing new resources to the physicians and finding ways to build value around that community. Sermo’s biggest challenge is prioritizing our opportunities and staying focused. For now, the plan is to stay absolutely intent on the physician community.

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August 24, 2007 – Mass High Tech, “Where to find the next big growth markets” 

August 31, 2007 – Boston Business Journal, “Mobile sector signal softens with VCs” 

September 1, 2007 – Business Finance Magazine, “Top of Mind: Gauging your company’s IPO”    

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One of our portfolio companies,Marathon Technologies, has compiled a useful list of virtualization words and phrases that help navigate through the technical aspects of virtualization. The “High Availability Glossary,” which clarifies commonly used, but rarely understood words like storage virtualization, data replication and disaster recovery, is housed on Marathon’s blog, “Are you available tonight?”

It is a valuable tool for those wanting to learn more or brush up on their knowledge of virtualization. The complete glossary can be viewed at: http://marathontechnologies.net/category/glossary/.

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First of all, the market hasn’t seen an IPO this large by an infrastructure company in quite a while. (Not to marginalize Bladelogic’s recent successful IPO.)  Infrastructure is a Longworth focus area, and it’s always a good sign when an infrastructure company makes waves. VMWare’s success is also a good signal for the relatively sluggish IPO market.

Digging deeper, the virtualization market looks to be evolving quickly and accelerating. Both VMWare and XenSource have new liquidity to invest in building out their portfolios, either through acquisitions or R&D. (I would argue that VMWare was comparatively limited while under the EMC umbrella.) Based on the VMWare S-1, it looks like the company will come out of the IPO with net proceeds of around $500M after payments to EMC. Combined with equity currency, this cash gives VMWare a deep pool of capital for acquisition activity. Meanwhile, if there was any question before about the viability of XenSource, it has now vanished. With two (soon to be three) viable hypervisors, the secondary ecosystem of virtualization software - migration, management, security, backup, redundancy, etc. will become even more important than ever for the three to differentiate.

This heterogeneity and competition in the market will drive more innovation by startups and entrepreneurs in the 3rd party tools market. This means more exciting investments for venture investors, and more features for end customers. All in all, we should expect a very active startup, venture funding, and exit environment around virtualization.

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Here at Longworth we have thoroughly researched the market and identified companies we view as emerging industry leaders. Current investments include Scrapblog and Sermo. Scrapblog is the first web-based service for creating and sharing multimedia scrapbooks. For more information about Scrapblog’s innovative ideas, read our previous Q&A with Carlos Garcia, CEO of Scrapblog. Sermo is an online community that creates a place for physicians to submit and discuss their clinical observations and challenge or corroborate each others’ opinions. We look forward to posting a Q&A session featuring Sermo CEO Daniel Palestrant in the near future.

According to a recent Financial Times article, the growing popularity in Web 2.0 technologies helped bolster a record growth of venture capital investments for the second quarter of 2007. In fact, VC firms invested a total of almost $1 billion dollars in IT-based services, including Internet companies that produce blogs and social media networks. The U.S. venture capital industry hasn’t put that much money into Internet-based start-ups since the dotcom bust. This reinforces what we, as Web 2.0 observers, have been noting for some time; people and businesses are increasingly relying on innovative tools to create a sense of community and common interest in their personal and professional lives. Web 2.0 is a platform for unique connections to take place and it will be interesting to see which industries will be most affected by the evolution of the Internet.

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