ZapThink Startup Insights: Interview with Brad Feld & David Cohen

ZapThink Startup Insights
Week of April 19, 2010

Funding Insights
Interviews: Foundry Group & Techstars
This week, ZapThink spoke with Brad Feld, Managing Director of the Foundry Group, a Venture Capital firm based in Boulder, CO, David Cohen,CEO and Executive Director of Techstars in Boulder, and Shawn Broderick, Executive Director of Techstars in Boston, MA.

What’s Hot
iPhone & Mobile Applications
Shawn tells us that iPhone / mobile apps of all sorts are particularly hot as both revenue-generating businesses and investments. The only challenge, as he puts it, is whether the startup can really build a business around the application. If it’s a business, how can it be more than a single application in a marketplace?

Software-as-a-Service (SaaS) plays
SaaS players are still doing great – None of the investors have a doubt in the SaaS model, that is a proven business model [Shawn]

Social gaming & social network applications
The explosion of social networks as a center of human interaction and the popularity of online games such as Farmville have sprouted hundreds of businesses and lots of opportunity. [Shawn]

Brad tells us that companies are even seeing success extending the social networking environment to enterprises. David tells us that social networking for small and medium-sized businesses is also a hot startup and investment space.

Experience
While the IT startup and investment landscape is no doubt warming up, investors still are rewarding experience more than concepts. David Cohen relates that investors are seeing a lot more repeat and serial entrepreneurs in their pitches, which means that those without experience might be less competitive.

Web infrastructure (at protocol level)
Brad told us that web infrastructure is still hot, especially those businesses who charge on a utility model (Brad cites recent Foundry Group investment SendGrid as an example)

What’s Not
Traditional Enterprise Software Business Model
Startups and investors are eschewing the traditional enterprise software model: large-ticket licensing plays with large direct sales forces. There are very few traditional software startups getting funding or any traction in the market claims Shawn and David. Exception are extremely niche applications for targeted industries. Part of the reason is that massive consolidation in the market has resulted in very long sales cycles and high-touch sales activities that are difficult for fast-paced, thinly-funded startups.

Geolocation-based Services, especially Coupons
All three interviewed investors stated that if they see yet another geolocation, mobile-based app for coupons, they’ll barf. Please don’t send them any more business plans with that as the fundamental objective.

Country- or Vertical-Specific Social Networks and Local Market plays
This is another area where there are far too many business plans chasing questionable market opportunities. Too many people are trying the Foursquare type idea of microtargeting local areas, and this has not proven to be a large enough market to sustain significant startup development.

Micropayments
David Cohen told us that he’s also seeing a lot of entrepreneurs attempting to create micropayment / microtransaction businesses to exchange money under $5 or so. While there have been a few modest successes in this area, he claims that the only people that care about this sort of service are young people. There’s not much market opportunity in this area, he claims.

Advice for Enterprise IT Startups
Focus on Team First, Revenue Next
The tried-and-true enterpreneurial success strategy of building a great team and solving a critical problem with as short a gap between concept and revenue still works well. In fact, investors are much more picky about team and revenue than perhaps they might have been in the past. If you are in the enterprise IT software business, the best approaches seem to be SaaS, hosted, and transactional models. Leave the large-ticket license-and-direct-sales approach to the incumbents.

Consumer/Business and Technology Lines are Blurring
Brad Feld told us that the old venture capital (VC) approach of focusing on a specific technology horizontal or enterprise vs. consumer plays are starting to break down. Enterprises are starting to buy things using a consumer model. Many companies are blurring the lines between what’s traditionally B2B and B2C, and so VC firms are no longer as dogmatic as they might once have been on their strategy. For example, Foundry Group invests in five “themes”: Human-Computer Interaction, Glue (middleware), Digital Life (access to your digital assets), Protocol (SMTP, RSS, XML), and Distribution.

Techstars sees over 1,000 applications a year
The Techstars mentorship-driven seed stage investment program sees over 1,000 applications for its three-month intensive investment and boot camp opportunity. Needless to say, almost all applications are rejected, most out of hand. To stick out, focus on a problem first, not on a technology. There’s still too much of that.