Seed Funding, .300 Batting Averages, Overthinking Investments, & More Takeways from Xconomy’s Consumers, the Cloud, and Beyond

9/28/11Follow @xconomy

Here’s a good cure for the Mondays: an evening panel of venture capitalists whose collective portfolio includes companies like Zynga, DataXu, Backupify, HubSpot, Grockit, and more. I’m talking about our Xconomy Xchange: Consumers, the Cloud, and Beyond—New Rules for Innovation, held this past Monday night at WilmerHale in Boston. The panel featured Jeff Fagnan of Atlas Venture, Rich Levandov of Avalon Ventures, and Larry Bohn of General Catalyst Partners. They talked back and forth about how cloud technology and new investing models are shaping innovation, each revealing a bit about their personal approaches and portfolio experience in the process. Apperian CEO David Patrick, who’s been through the fundraising process a few times now, guided them through the discussion as moderator. The panel discussion was followed by “burst” presentations from four startups making use of cloud technology or big data: CustomMade, Hopper, Yottaa, and Office Drop. Read below for some takeaways from the night.

1. Seed funding was a hot subject of the night. Fagnan says his firm has made 25 seed investments (of less then $1 million each) since 2008. Each deal requires only one general partner for approval, so they skip the eight-person meetings that could otherwise shoot down an investment in a potentially wacky idea. Because, “a lot of the greatest investments in VC have been pretty off the wall,” Fagnan says.

General Catalyst has a similar style, says Bohn. The firm requires two general partners to go in on each seed deal, and has made about 25 of them over the last year. “It really does give partners a way to take a bet on something in the way that venture firms can’t do,” he says.

Levandov didn’t directly weigh in on this, joking with his counterparts about due diligence. But he seems to have the same basic philosophy about seed investing. As he told Bob previously, “The process of three to six months of getting through big partnership meetings is just not market appropriate anymore…Due diligence is information you studiously gather if you want to kill a deal-or information you avoid if you want to do a deal.”

2. Investing is often best done as a gut decision. “You can over-think this every time,” says Fagnan. That brought up the one that got away—Dropbox, a cloud-based file sharing startup founded by an entrepreneur who was incubating at Atlas. Fagnan says Atlas declined to back the startup, thinking that the idea wouldn’t take off. Dropbox claimed a valuation of around $4 billion in its most recent fundraising round. It’s a sore subject for Jeff.

3. Cloud and other low-cost technologies are enabling companies to get off the ground cheaply, but there’s a crucial thing that hasn’t dropped in cost or become more plentiful: good engineering talent. That’s a problem observed by VCs across their portfolios, and is especially challenging in the Bay Area with Facebook, Zynga, Google, and the like paying top dollar for engineering talent, our panel reported. One of the startups that did a quick burst presentation for us the end of the night, travel startup Hopper, picked Boston to move to over Silicon Valley in part because it was easier to find engineering talent in New England.

4. Speaking of the Valley: “This whole thing of East Coast vs. West Coast, I’m starting to think it’s a dead issue,” says Jeff Fagnan. “I think Boston’s coming back.”

But maybe not. Bohn described his “recipe for success” as raising a Series A round in Boston, and a B round in Silicon Valley.

5. When asked by Patrick how they evaluate a deal and pick who to bet their money on, each VC on the panel revealed slightly different criteria:

Leandov says he looks for “some form of transformational technology or services that can enter the market and change the market.”

For Fagnan, “We spend the most time thinking about the market. It’s the factor that has the biggest effect on the overall outcome.”

And Bohn: “I tend to be more entrepreneur centric. Who’s the guy who’s leading the business, who’s got the tiger in his eye. It’s never a straight path. It’s sort of an art, but not a science.”

The rest concurred on that last point. Even with these strategies, “we are wrong 70 percent of the time,” says Levandov. “If we bat .300 as a venture firm, we’re going to do great.”

And speaking of baseball, go Red Sox.

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