Madrona, Amazon Bet $4.4M on Animoto, a Startup With Roots at Bellevue High School

6/18/09Follow @gthuang

Seattle-based Madrona Venture Group has led a $4.4 million funding round for Animoto, a Web software startup based in New York that lets people automatically create professional-quality videos and slideshows from photos and music. Other investors in the round include Seattle-based Amazon, Palo Alto, CA-based SoftTech VC (run by Jeff Clavier), and Bruce Livingstone, the founder of iStockphoto.

The current round includes an undisclosed amount of financing already announced in May 2008, from Amazon and angel investors. Before that, Animoto had raised a $600,000 seed round from friends and family. So the company has raised an even $5 million since it was founded in 2006.

There’s a lot more to the story. The lead investors in the deal are from Seattle, but that’s only part of the local connection. It turns out that “based in New York” doesn’t really do justice to the roots of Animoto. The company was started by four friends who went to Bellevue High School in the Seattle area: Brad Jefferson, Jason Hsiao, Stevie Clifton, and Tom Clifton (the latter two are brothers). Jefferson, who is now Animoto’s CEO, went on to school at Dartmouth College and got his start as an intern at Bellevue, WA-based Onyx Software, where he began working full-time in 1998, and quickly moved up the ranks.

“He was a rock star,” recalls Onyx founder and Dartmouth alum Brent Frei, now with Bellevue-based Smartsheet. “He’s super smart but very humble. It’s amazing the things he does right naturally.” Frei notes that Stevie Clifton was also a superb Onyx intern. “They have assembled a fantastic team,” he says. (Interesting note: Jefferson was the only one of the four founders who didn’t play in an indie rock band around Seattle—he was more into sports.)

Jefferson got promoted at Onyx in 2000 to run a services team in San Francisco. There, he was roommates with Hsiao when Onyx was acquired by M2M Holdings in 2006. Jefferson opted for the severance package, and the very next day, Hsiao pitched him on the idea of Animoto. The basic concept was an online service to make it easy for people to create “animated photos” to capture the mood of events like weddings and graduations in customized slideshows. Animoto’s software creates moving slideshows that match the beat and feel of the accompanying music you select. A hip-hop track will make the picture movements and transitions fast and edgy like an MTV video, while a classical piece will make the slideshow more staid and elegant.

Animoto finished its first working prototype in December 2006, and started getting user feedback over the next few months. At the time, the company used a traditional hosting provider, but it couldn’t handle huge spikes in traffic. “As I started running the numbers, it was, ‘Oh crap, if we’re successful, we’re gonna fail,’” Jefferson says. So Animoto talked to Amazon Web Services about hosting its applications and data, and spent several months enhancing its product and “pushing everything into AWS,” he says, just in time for public beta trials in August 2007. “It was really a good decision from a capital expenditure perspective. From Day One, we were able to scale to the world.”

Meanwhile, Jefferson was sowing the seeds of future venture investment, even if he didn’t know it at the time. In the spring of 2007, he talked with Madrona Venture Group’s managing director Matt McIlwain, as part of Madrona’s due diligence on investing in Smartsheet—an Internet company that makes it easier for geographically dispersed teams to collaborate. (Animoto was a Smartsheet customer—these relationships go in every direction.) Animoto didn’t have a real product yet, but McIlwain made a note of the interesting startup.

“We were super impressed with them,” says McIlwain (another member of the Dartmouth mafia). “We agreed to stay in touch.”

Animoto kept gaining momentum, receiving public praise from Amazon CEO Jeff Bezos at the Y Combinator Startup School at Stanford University, shortly before Amazon announced its investment in the company in May 2008. By summertime, Animoto had released its product for businesses and professional photographers—a key market segment that has really taken off. Its product competes with sophisticated software from Adobe and Apple, but its advantage is that it’s relatively cheap, easy to use, and Web-based. Smaller companies like Slide and RockYou make Web-based slideshow software, but their offerings don’t quite match up. (For an outside opinion, I asked Dan Shapiro, co-founder and CEO of Seattle-based Ontela, a mobile photo-sharing startup, for his thoughts on Animoto. “I played with the app and it’s really cool,” he said. “It made even my bad pictures look good.”)

Last fall, Jefferson started to look for ways to take the company to the next level in terms of revenues and distribution. As the economy collapsed, he says, “we really made a push to cash-flow positive.” At the same time, he started looking opportunistically for venture capital. “In my head, I always thought we’d take Silicon Valley venture capital,” Jefferson says. But in his tour of the Bay Area, New York, and Seattle firms, the best match turned out to be Madrona. “We felt like there was a good culture fit,” Jefferson says, adding that in conversations with Madrona portfolio CEOs, he heard that Madrona acts more like a partner and mentor than a boss. The venture firm has also been very up-front, he says. “Even during the pitch process, we felt there was a lot of transparency. We always knew where we stood.”

McIlwain, for his part, says he’s thrilled with the new investment in Animoto. “They’ve built a really high-quality and simple-to-use product. They’ve been able to get massive adoption. Most importantly, they’ve got almost 100,000 people paying for the product,” he says. “It’s an unusual combination for a Web 2.0 company. On top of all that, this is a cash-flow positive business [since December].”

So why take venture funding at all? Jefferson says he is looking to grow Animoto into a company that sells to millions or tens of millions of users. “We want to crank up our distribution strategy,” he explains. McIlwain notes, “There’s an even bigger opportunity around the notion of multimedia storytelling delivered online.” He adds that one goal is to “invest in some really compelling, mutual-win partnerships.” Neither of them would give more specifics about such partnerships on the record.

Animoto currently has 18 full-time employees—a mix of technologists, designers, and producers. Most are in New York, but Jefferson remains in San Francisco. He and McIlwain say there are no plans to move the company to Seattle, despite its deep local roots and investors. I asked McIlwain whether the Animoto deal represents a departure or shift in Madrona’s strategy of investing in early-stage Northwest companies. “We’re open minded,” he replied. “We have to bend the rules a little bit for the right opportunity, and the right team.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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