Smartphone apps are nothing new. Palm and Symbian had created the first popular smartphones several years ago.  But they never really took off. What was missing was a mass market, affordable, attractive device as well as an easy way to develop and market apps, which Apple is offering through its iPhone and iTunes offerings respectively.

This time around Apple’s success has created fast followers. Google’s Android operating system offers 65,000 third part apps, while Blackberry only offers 7,000. Those are the ones most talked about but there are others still.  After HP bought Palm , there is wide speculation that Palm’s webOS might get a second life (currently with about 5,000 apps).  Nokia now supports two operating systems: Symbian OS for the midrange smartphones (about 13,000 apps) and meeGo for high end smartphones in partnership with Intel.  Microsoft is about to launch its newly overhauled Windows Phone Series 7 (previous version of Windows Mobile OS had about 13,000 apps).  In addition, there are proprietary operating systems like Samsung’s Bada.  Finally, we now have a new class of devices that are driven by a mobile OS, the tablets, the leader of which is the iPad.

The result is a very fragmented market.  So, is this sustainable?  If history is any predictor, it is not.  From several PC operating systems, Microsoft came out on top with few other competitors.  The same can be said about the database market with Oracle or the online auction market with EBay.  An easy way to think about it is to think about the decisions that developers have to make. An app company doesn’t have unlimited resources to develop versions of their app for every mobile platform. They have to priotitize. And they will put their resources behind the most popular platforms.  I see it with my companies.  iPhone is currently No 1, with Android being the logical No 2. Blackberry is a distant No 3 (I hear that it’s hard to find developers that want to develop on Blackberry), with a wait and see approach around Microsoft’s Phone 7.

What are the factors that companies use to determine priorities?  Here are a few:

1. Size of installed base and momentum.
2. Ease of use and engagement of users (likelihood they will download the app).
3. Ease of programming using the SDK for the operating system (I hear good things about the webOS).
4. Availability of developers for programming.
5. Demographic fit of user base with the target market for the app (blackberry is good for enterprise apps but not so strong in the consumer space).

Because of the factors above, this is a market with tremendous network effects:  the more momentum behind a platform the more companies and developers want to support it, which in turn leads to even more dominance.  So, will all these operating systems exist in 5 or 10 years?  Likely not. This has significant strategy implications for some of these large players. Just read this story from today’s WSJ about Nokia’s challenges in the smartphone market.  When a phone is just a phone with few other add-ons, it’s easier to operate against many competitors.  When the phone becomes a computing device whose utility derives by how many apps are available, there are few winners. Granted that developing for a mobile platform is different than developing for a desktop operating system, in that it’s easier to support multiple platforms.  But once you get past 2 or 3, network effects act as a barrier to diversity.

We are still at the nascent stages of the smartphone market, but the ramp is much faster that many other prior trends.  For OEMs this is risky business and strategy around picking the right partners is crucial. For developers and app companies, it’s important to track the trends carefully and prioritize resources for maximum momentum.

The tablet category is off to a strong start.  Apple has sold ~3 million units.  All the usual suspects and a host of minor players have announced plans to offer a tablet (the picture below is Velocity Micro’s Cruzer, whose launch was announced today).  Microsoft was talking a huge tablet game at its worldwide developer conference last week, despite being far behind in the reckoning of most analysts. [Not surprised.]

The key application for the tablet seems to be media consumption:  video, games, on-line reading of print media.  Secondarily it’s an extra PC in the home.  The “lean-forward/lean-back” argument is gaining proof:  the media consumption experience is better on a tablet that you hold in your lap like a book (“lean-back”) versus a notebook PC with its protruding keyboard where you put your hands (“lean-forward”).   [Not surprised.]

And a number of people say they use iPads for work (business or study).  I did not expect this because the iPad’s business applications, on-screen keyboard,  and file system are so limiting.  But I can see the it as a nice travel companion on a short trip where keeping up with calendar and e-mail is the main task, and there is waiting time to kill.  [Surprised.]

Apple’s decision to base its tablet on its phone architecture (versus its PC architecture) looks like the right choice.  Google in particular first said it would offer tablets based on Chrome OS (designed for netbooks) and then quickly backtracked and focused on Android, its phone OS.  They are fortunate to have such a good Plan B.  Microsoft’s CEO is claiming that companies are rushing to build tablets based on Windows 7, but most analysts doubt that a Win 7 powered tablet can offer a good user experience or hit a competitive price point.  [Not surprised.]

There are some obvious gaps in the iPad design that are opportunities for competitors:  removable memory card, USB port, a connector-less charge cradle, and multiple user accounts all come to mind.  And, oh yes, what about a camera for video chat?  Much of this will probably come with iPad v2, which is expected Q1 2011 (but what if they dropped it on the market in October instead?).

The Asian ODM industry that is the supply platform for most portable electronics is having a hard time competing with Apple [I’m truly surprised by this].  I think of Apple as the “BMW” of the industry:  great design, great quality, higher price point.  But, as products start to emerge, it’s becoming clear that providing the combination of screen size, snappy performance, and 10-hour battery life that the iPad offers at a price significantly below Apple’s is not easy.  I’ve briefly used prototypes from a couple of the major ODMs.  So far they are sluggish with smaller screens and short life compared to my iPad, and the price points under discussion are a bit high.

So, the market is off to a good start and beginning to take shape.  Apple has no serious competition six months in, and probably will not have much competition until 2011.  Apple is doing a great job leveraging its design experience from the iPhone and iPod touch, its ability to optimize the system gained by providing both hardware and software, and cost advantages from it’s combined iPod, iPhone, and iPad volume (i.e., in flash memory, A4 processors, and ODM relationships).

What comes next?  Android is clearly the competition to Apple’s iOS, similar to the development of the smart phone market.  But Apple has set the hardware and software engineering bar surprisingly high.  B players will not get to scoring position in this phase of the game.  Tablet competitors will need to bring together best-of-breed components and integrate them tightly to beat Apple’s cost/value proposition.   Our portfolio company, “Tap ‘n Tap”, which is focused on enhancing vanilla Android to make it a first class tablet user experience, can help a lot here.

From beginning to end this process will take ~12 weeks for a non-competitive deal, but your results may vary widely.  In competitive situations, we have been able to compress those first five steps into a few weeks.  Getting to a definite “no” can take forever because if a deal has good potential, but is not of current interest, most VCs will say “not now” and leave the door open a crack.

We at NAV have modified this generic process to suit our investment style and strategy.  For example, we don’t have a final meeting with the entire company team prior to decision.  We have a final flurry of data gathering, but really we have had so many meetings leading up to the final decision it would just be redundant.

I will describe our entire process in detail in a separate post.

There have been a few well-publicized investigations and prosecutions of illegal bribes and kickbacks between money managers and state and local pension funds.  New York Common Retirement Fund is the poster child here.  Bribery is illegal, and those who participate in it should spend time with Bernie Madoff in jail.  Lots of time.

But now the SEC has decided that all money managers – VCs, PE, Hedge Funds, Mutual Funds – anyone who might someday manage Quasi-Government money (whether a State pension fund, a City Pension Fund, a Teachers pension Fund, a local firefighters fund) are not to be trusted.  The SEC has basically imposed a blanket restriction on any money manager (they call us “advisers”) restricting all of us, and everyone in our firms, from contributing money to State and Local politicians.

Just listen to SEC Chairman and Obama appointee Mary Shapiro explain this in her own words:

Shapiro Speech

Oh, and our spouses are covered as well by the SEC rule.  They also can’t contribute to elected officials because they are deemed to think through the brains of their money manager spouse, and not independently.

Why?  Because in the tortured logic of the SEC, if I give $1,000 to my candidate for Governor, then I have “bought” the Governor if he wins.  The Governor gets to appoint people to the Boards of investment authorities, like the State Pension Systems.  The Governor can then tell his or her appointee, “Hey, this guy gave me $1,000.  I want you to put $50M in to his investment fund.”  And the appointee will comply.

The National Venture Capital Association weighs in here:

http://nvcaccess.nvca.org/index.php/topics/public-policy/119-sec-pay-to-play-rule-approved-vc-implications.html

I am at a point in my life where a lot of my friends and former business associates are running for public office.  Mark Warner.  Mitt Romney.  Meg Whitman.  Bob McDonnell.  Chris Romer.  Democrats and Republicans.  But according to the SEC I can’t write any of them a check – that is if I ever want to talk to UVA (Virginia), Mass PRIM (Massachusetts), CALPERS (California), CO-PERA (Colorado).  Because if I do write them a check (and if they win) and if subsequently any state or local agency over which they might have indirect control via an appointment decides to invest with us, then, according to the SEC, they invested in us SOLELY because of my political contribution.  And the remedy is for our firm to shut its doors for two years.

Is the SEC Serious?  I think so.  Read their press release:

SEC Press Release

The hypothesis that this regulation is based upon is that corruption abounds between money managers, elected officials, and their appointees.  Wow.  That is a pretty damning hypothesis.  Last I looked, bribery and kickbacks were illegal.  I think they still are.  If there are bad apples in the bushel, lets send them off to rot in jail.  But lets not punish all of the good apples in the process!

Charlie Rangel, the Congressman from Harlem (seen here relaxing on one of his properties which triggered his current ethics investigation) is the bill’s sponsor in the House.

I responded to a post just now by Jose Ferreira, CEO of Knewton, who worked with us several years ago.  Jose is a very smart guy.  His post is here: http://www.huffingtonpost.com/jose-ferreira/in-favor-of-tax-breaks-fo_b_614151.html

A simple idea:  If you tax something more, in the end you will tend to get less of it.  If you tax something less, in the end you will get more of it.  No one disagrees that Venture Capital is good for the American economy.  According to the NVCA, 20% of ALL JOBS in America are in companies that are, or once were, venture backed.  This is really an amazing statistic. Couple that with Thomas Friedman’s statistic that Jose points out – all net jobs created in the last 30 years were by startups – and we definitely want more startups, more venture capital, and more venture capitalists in America.

Now, that does not mean that Venture Capitalists should be entitled to a tax break.  But they certainly should not be penalized.

Government Policy is used to encourage and to discourage activities.  Right now, there is a big focus on creating jobs.  Venture Capitalists create jobs.  Entrepreneurs create jobs.  We should encourage both.  But Congress has other ideas.

Think for a minute about entrepreneurs.  They put in their blood, sweat and tears to start a company.  Most start their business with none of their own money.  But they invest their time.  In exchange they own stock in their company.  On average today, it takes 5-7 years for a successful small technology company to be acquired, or to go public.  During that time the entrepreneur receives a salary.  The entrepreneur pays ordinary income tax on that salary every year.  Once he or she sells the company (5-7 years later) that entrepreneur receives capital gains treatment on that sale.

Now think for a minute about the venture capitalist. Venture Capitalists raise a fund from institutional investors so that they can provide the equity capital for start-up companies to grow. A venture capitalist is paid a salary to manage the VC fund. They pay ordinary income tax on this salary every year, just like the entrepreneur. Once an early stage VC invests in a company, they, too, invest their time working with the entrepreneur for 5-7 years. When the company is sold, their stock (through their carried interest) should be taxed the same as the entrepreneur.

Venture Capital is the riskiest capital in any capital structure.  For early stage venture capitalists, half of all companies they fund do not succeed, and the VCs lose everything they have invested in them when they fail.

Rewarding entrepreneurs and investors who invest their time into building a company over 5-7 years is good policy.  It should be encouraged.  The current tax code does that through the lower long-term capital gains tax rate.  Lets not mess with it!

Dan Primack (http://www.pehub.com/author_column.php?id=229) covers the venture capital industry for Thomson Reuters and disagrees with my position.  He has written often and eloquently on the reasons for his disagreement.  Fundamentally, he believes that taxing carried interest at a capital gains rate is a loophole, and that while VCs bitch and moan about it, none of them will quit because of higher taxes.

I agree with Dan that many current VCs will not stand up and quit immediately if this bill passes.  However, I suggest that those who believe that this bill will not impact the VC industry are forgetting about the law of unintended consequences.

The biggest unintended consequence will be fewer NEW VCs and fewer young VCs and lower total compensation for the newer and younger VCs.  Why?  Two reasons.

First, the VC industry is shrinking and consolidating.  Several hundred funds have closed shop in the last decade.  And most of the larger VC funds (more than $500M under management for a fund) are raising smaller sized funds these days.  With a smaller fund there are less “economics” to split amongst the team.  Less management fee.  And less carried interest.  Which is why the number of venture capitalists working in our industry is actually shrinking today.

Second, like any business person, current venture capitalists don’t want to see their after tax compensation decrease.  Ordinary Federal Income tax rates are going from 36% to 39.6% at the end of the year most likely.  Tack on to that the new .9% increase X 2 (since employer matches) for Medicare Part A for “rich” people (and assume that VCs will also be disproportionately hit by the brand new 3.8% tax on dividends, interest, capital gains).  Then add in the carried interest tax increase from 15% to 35% (current blended proposal) and a VCs take home pay (assuming annual carry equals annual management fee) will drop, after tax, by 18%.  Most of this drop is in the after tax value of the carried interest.  In order to breakeven after tax, that sample VC will have to take 6% more management fee in salary, and will have to increase their share of the carried interest by 33%!!  This means less for everyone else if the senior partners follow this strategy.

What do you think will happen?  Senior VC partners will accept an almost 20% after tax pay cut, smile, and make no changes in their business?

Or will they try to keep their after tax pay the same, and cut their staffs, or pay them less?  Unfortunately I am guessing that this bill will result in more junior VCs seeking new careers.

This is EXACTLY what is happening in small businesses across the country – and why we are seeing anemic job growth.  When the government imposes new costs (health care) and raises taxes (expiring Bush tax cuts + Medicare surcharge + unearned income 3.8% tax) on small business owners, those owners react by cutting back the costs to run their businesses so that 100% of these impacts do not fall directly on their shoulders.  When Government takes more, it is not the small business-man or woman who is hurt most.  It is their employees who suffer with slow hiring and reduced compensation packages.

Let’s assume that not everyone purchasing one is due for a new phone.  This means that consumers are shelling out several hundred dollars for something they already have that is working just fine.  Why such demand inelasticity?  Because for a very large group of Americans the handheld, as their real-time connection to everything they value, has become their most important possession.  They use it for many hours per day, it has become an extension of their being, and $300 is chump change for an improvement in something so central to everyday life.  Imagine getting a much better car for $300.  Everyone would do it every year.  And the handheld is as valuable to people as the car.  So they are not hesitating.

What an exciting time to be involved in the innovation economy.  Thanks Apple!

“Participating preferred” refers to convertible preferred stock with a special liquidation right: preferred stock holders receive return of their investment, and then they share in the remaining proceeds with other stockholders on the basis of as-converted ownership.  The following chart illustrates how it works for a company where investors own 40% of common-stock equivalents in the form of participating preferred.

Does this make sense?  Like most things in venture capital, there are some good and bad reasons for participating preferred.

Bad Reasons

The familiar refrain is:  “that’s non-negotiable”, “that’s the way we always do things”, or “my partners would not consider any other option”.  We’ve all had crummy terms forced on us.  Venture investors should realize that they are entering into a partnership with entrepreneurs:  there will be lots of give and take over a long period of time, and what goes around might come around.  We need to strike deals that make sense to all key parties.

Better Reasons

The argument “it’s a standard term” makes more sense to me.  Convertible Preferred is definitely standard; participation is common (more so on the East Coast than the West).  “Standard” implies the term is widely used, experience shows it works well, and negotiators on both sides have gotten comfortable with it.  And, related to that, the A round investor knows that later round investors will ask for this term:  if s/he does not get it and the later rounds do, the Series A investor is at a bigger disadvantage to later series than is usual.

Best Reasons

For Series A rounds in capital efficient companies (where we usually play), Participating Preferred can produce a good alignment of interests.  Here’s how.  Let’s assume that a VC invests using non-participating convertible preferred at $10 million post-money value, and the founders own most of the company.  If an exit opportunity comes along at $20m, that can be very attractive for the founders:  they split up $12-$16 million, which is good money for a couple of years of work.   The VC, however, gets about a 2x on a smaller-than-expected investment, which does little for the success of the fund.  If the VC’s preferred is participating, however, the VC would get 3x, and the founders would split up a bit less:  $10-$14 million.  That’s a more balanced outcome if it happens, and it gives the founders more incentive to strike for the bigger win that was envisioned when the VC invested.  One of my CEOs, who accepted a term sheet with participating preferred, told me his board and he understood it in these terms.

“Follow the money” (Deep Throat’s mantra in All the President’s Men) is usually good advice.  If you follow the money in venture-backed companies, you find something that’s not always recognized.

Investors pay in most of the money, by definition.  There may be some additional non-dilutive money from government, etc.  Here is where the money goes:

1)  Most of the money that comes in from investors goes out to employees in the form of salary and benefits: typically about 75%. So, if you follow the money, the first payment goes to the employees. At this point the VCs and other investors have gotten zero.

2)  When the exit comes, employees almost always get a minimum 10% of the proceeds, whether or not the exit is profitable. To check this I looked at three recent unprofitable exits in our portfolio: exits that returned 8%, 20%, and 55% of invested capital. In every case employees got 10%-15% of proceeds, regardless of the cap table: in two cases the payments were promised as stay bonuses to incent employees to work to an exit; in the third case the board decided to pay out 10% to employees as a matter of fairness. Since it always happens, this 10% payment to employees is effectively off-the-top. So employees get the second payment, too.

3)  In a participating preferred stock structure, investors get their cost back next: the third payment goes to investors. This assumes of course that there has been no recap that cut liquidation preferences along the way. Recaps have been frequent of late – if a company struggles for years, raises a lot of money, and eventually has a fair exit, employees present at the exit typically get 15%+, and early investors get dimes on a dollar.

4)  Investors and employees share what is left. The fourth payment is split on the basis of as-converted ownership. If the company does well (4x or better invested capital), the fourth payment dominates the others, and employees receive a share of proceeds close to their ownership of common share equivalents (see chart above for an example).

5)  If the preferred stock is non-participating, then investors have to choose between the third payment and a share of the fourth.

Everything needs to make sense in the specific circumstances, of course. Through this lens, however, participating preferred often looks fair to me.

Two recent news items led me to write this post.  The first is the Senate inquiry of Facebook, and the second is the Boston Celtics.  Let’s start with Facebook.

Not Everyone's Favorite

I don’t know Mark Zuckerberg, so I can’t speak to how he is as a person.  But his company sure is acting arrogantly, and his media persona comes across as anything but humble as you can see from the above image.  He evidently carried business cards that said “I’m the CEO, Bitch.”  Now, he attended famously arrogant Harvard, and his creation is a world beater that crushed MySpace with far superior execution, so I would expect a modicum of swagger.  But Beacon was the first sign that something was amiss in the decision making there.  Now we have a more serious PR fiasco surrounding opt-in policy for personal data exposure.  The Facebook team’s blindness to the backlash that Beacon brought about, and recent refusal to revert to opt-in, leads me to conclude they are losing touch with reality, and are blind to threats.  Complacency – I don’t see it yet.  But two of the three warning signs of an arrogant culture are evident.  I wonder if the company is at its peak?  I hope not.  The good news is that, if they recognize it and work on it, they can overcome their arrogance problem.  Look what happened to the Celtics in games three and four of the NBA finals.

The Celtics team captain, Paul Pierce, taunted the Lakers fans after winning game two, saying “We ain’t coming back to LA!”  He was predicting three consecutive wins at home in Boston.  This is the kind of arrogant behavior that transforms a sense of defeat and hopelessness in your competition into a thirst for vengeance.  The Celtics lost game three.  They became complacent, while the Lakers played with renewed vigor.  Thoroughly humbled, they got down to business in game four and won it.  Mr. Pierce will be heading back to LA, hopefully having learned to keep up the intensity and humility.

I shouldn’t pick on Facebook.  My entire industry is perceived as arrogant.  Which is why at NAV we make a concerted effort to avoid conceit.  Entrepreneurs are highly sensitive to it, appreciate its absence, and we win deals because we are perceived as good guys to work with.  It is a source of competitive advantage.  Please let us know if we ever start to stray.

Big brands and their agencies, as it turns out, are run by rational, intelligent human beings who are highly frustrated with the ad opportunities web publisher present to them.  CPM banner campaigns running against content of questionable quality to an audience that largely ignores them?  Hardly a great solution.  Mobile ads?  For brands?  I have yet to see a good one in the wild.  CPC?  What good is a CPC campaign for a company building a brand that is purchased 95% of the time at a grocery store for $1.50?  Pre-roll video?  OK, but that 15 seconds feels like a half hour traffic jam to me.  I tend to click out.

So where is a brand to turn?  Fortunately, we can apply my grand unified theory of innovation which is:

Innovation Pace = (Budget + Customer Motivation)^2

And we are talking about an enormous budget and a highly frustrated customer.  So I am now seeing a gush of great ideas for brands to get their message to web users, desk top and palm top.  There are campaign optimizers, transparent/brand-safe ad networks, point-of-decision coupon offers, and my current favorite: new ad units that deliver high engagement and recall.  The money will find its way eventually to the web.  And many entrepreneurs will hit home runs as we are still in the early innings of this game.

The Supply Side of the Demand Side

Start-ups are the demand side of the venture capital business.  We’ve all heard a lot about the “Cloud”, but still the degree to which it has changed the cost (ie,  supply-side) economics of IT start-ups and their strategies is a bit surprising, probably because it’s invisible to users

The “Cloud” refers to services offered on the web that allow companies to buy virtual web, application, and database servers and store data, paying only for the amount of service consumed.  It eliminates server, database, and network infrastructure and much of the staff that support it

The Cloud has enormous momentum.  Amazon is the clear leader in cloud services, and its offering (EC2 servers plus S3 storage) is designed to be easy to adopt:  S3 stands for “simple storage system”.  It is particularly appealing to start-ups.  Sun [RIP] used to say it “put the dot in dot.com”.  Amazon EC2 is putting the 2 in Web 2.0.  The chart below shows that the number of objects stored by Amazon has grown ten-fold in three years.

Stored Objects (billions); Source: Wikipedia

The Cloud is reinforced by powerful, free technical platforms that start-ups can leverage:

• The open-source stack of tools for Web 2.0 site development called “LAMP” (Linux operating system/Apache web server/MySQL database/PHP scripting language)
• And, now the Facebook Open Graph API which allows any site to easily link into Facebook’s data on the relationships and “likes” of 400 million people.  Early results are showing that adopters enjoy 2x-3x increases in referral traffic from Facebook.

We surveyed use of the Cloud in the NAV  portfolio.  100% of the web based businesses use the cloud for part of their infrastructure, and over 80% use it for all of their infrastructure.

The most interesting statistic, however, is what we call “dollars to traction”.  By traction we mean either $10k/month of revenue or 100k users: the threshold of a commercial business.  Dollars to traction averages $400k for the companies that use the cloud.  In my first web start-up, in 2000, we spend about $4 million to get to traction; that cost has been cut by a factor of 5 to 10 in many cases.

Cloud plus standard platforms both lowers up-front investment and makes infrastructure and operating costs variable.  This enables new business models:

• Software as a service (by-the-drink pricing) is easier to fund when the vendor’s up-front investment is small
• This lowers the adoption barrier for customers:  a mid-manager can try and buy on his budget authority
• This lowers the cost of enterprise sales:  if the product is already widely used in the enterprise, the time and effort to get the attention of top management is much less
• Cloud based apps are ideal for collaboration by dispersed work forces.

This quantum-step lower cost of entry, combined with market opportunities in spaces like digital media, ad-tech, and mobile apps, and smart people sidelined by the recession, has brought forth a wave of innovation.

Revolution On The Supply Side

The supply side in venture capital is investors.  Supply of venture capital is contracting:  fund-raising is down ~50%, most venture funds are getting smaller, and many are winding down.  But, there has been a boom in seed investing:  angels groups are very active, despite the losses angels suffered in their portfolios in 2008-2009.  Big venture funds are starting captive incubators again.  Stand-alone incubators like Cambridge Innovation Center [full disclosure:  a partner of NAV], Techstars, and Plug-N-Play are thriving.  And new seed funds have sprouted up on the east and west coasts, gaining rapid recognition:  eg, Founders Collaborative, First Round Capital.

Seed investing is more attractive for two main reasons:

• Risk is less because companies can get to proof of traction on the amount of money that seed investors can provide.  When bigger investors do come in, terms can be better for seed investors, and they can focus their resources to keep ownership in winners.
• Companies with modest exit prospects can be funded all the way by seed investors, producing good returns for investors and entrepreneurs from sub-$50m exits.  One of our LPs was fresh from the Angel Investor conference, and he reported on discussion there about dispensing with VCs altogether for many deals.

We do some seed but are primarily focused on the next level up in the food chain:  companies that need ~$10m to break-even or exit, with a good chance of an exit in the ~$100m range, and a real chance of much more.  We think Venture Lite is good for us:

• The best of these seed deals will have upside that warrants more investment than seed funds can provide
• Our economics and philosophy align well with seed funds, strong angels, and angel groups; we’re partnered with them in about half of our recent investments.
• We’re seeing a lot of great deal flow in our sweet spot coming from these seed investors.
• But, deal selection is critical:  the market is producing a surge of seed deals.  To do well we need to pick the right companies at the right stage: when there is early evidence of traction but still an attractive price.

The sign of a strong market is adaptation to change.  It’s remarkable that in these difficult times the venture ecosystem is producing this renaissance of seed investing.  Viva la revolución!