A lot has happened in the technology world in the past year. So let’s take a minute to reflect on the defining moments of 2011 and where we stand now, as a local tech community with increasingly global impact.

This is by no means comprehensive, or even a summary of the most important stories of the year. It’s just a select few of the biggest highlights and lowlights, organized in spaghetti western fashion (cliché alert).

The Good: Oracle Buys Endeca

Some might argue this wasn’t necessarily “good” for the local tech scene, but Oracle’s $1B+ purchase of Cambridge, MA-based Endeca, the enterprise search and business intelligence firm, was one of the biggest deals of the year, and was kept under wraps pretty well. It will be interesting to watch whether Endeca’s technology and talent give Oracle a leg up in its competition with IBM, SAP, Microsoft, and Google. Endeca, which started in 1999, stands as a testament to the notion that billion-dollar tech companies can be built—and are being built—in Massachusetts. (See Acme Packet, Progress Software, Wayfair, and others on their way.)

Honorable mention: Carbonite, TripAdvisor, and Zipcar each went public with successful IPOs in 2011. That’s three more publicly traded tech companies in Boston that seem to be thriving in a tough market. Who will join them in 2012?

The Bad: RSA Gets Hacked

No one would argue this isn’t bad—and not just for local companies. In March, RSA Security reported a data breach involving its authentication products, which are widely used by big companies and government agencies. The Bedford, MA-based division of data storage giant EMC said it had … Next Page »

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[Editor's note: Cross-posted from The Economist, 11/2/11]

New York Mayor-entrepreneur Michael Bloomberg, not known for shyness, recently proclaimed New York City as America’s new entrepreneurship capital, roaring past Boston in venture capital and soon to leave Silicon Valley in the dust as the “go to” destination for entrepreneurs. Indeed, the world media are awash with proposals to kick start entrepreneurship as a strategy for economic revival, with support for venture finance at the heart of many programs. Yet the title of Harvard’s Josh Lerner’s recent book, “Boulevard of Broken Dreams,” is no coincidence, because proclamations are one thing, actual success is quite another.

Fortunately, there is a lot of experience around the world about what works and what doesn’t. Here are some practical principles that the Babson Entrepreneurship Ecosystem Project have been identifying and developing for public leaders who have, correctly in my opinion, identified entrepreneurship as an essential plank in economic policy.

1. Be clear that the objective is to foster an entrepreneurial finance ecosystem, not to directly provide capital to entrepreneurs. Over time, a healthy entrepreneurship ecosystem makes available capital to ventures that deserve it, while denying it to ventures that do not. This does not mean that governments need to revert to selecting the deserving. This idea has regained currency recently, but we learn time and again (Solyndra anyone?) that it does not work. It does mean that the availability of capital, and other resources, needs to be part of a natural process in which the ecosystem elements—in this case, deal flow and capital—continually evolve and adjust to each other, a concept that is consistent with Smith’s “invisible hand.” But the concept goes further by suggesting that enlightened and skillful leadership can play a critical role in encouraging the evolution of a self-sustaining ecosystem, but leaders have to understand how and when to get in, and how and when to get out.

2. Stimulate financing, but stay off of ventures’ balance sheets. Presence of government and government-owned entities as direct debt or equity holders of ventures should be a red flag. The only reason government should be on a venture’s balance sheet is in the rare case when it is absolutely necessary to entice private, profit-oriented entities to get involved as the natural selector of investment targets, and in those cases, government should have a clear plan to get out. Governments can, as have Israel, Finland and some other countries, provide smart, off-balance sheet funding in the form of repayable grants, matching grants and so forth. But presence on ventures’ balance sheets ultimately leads to a conflict of interest between governments’ social priorities and obligations, and the need to provide a positive return to invested capital. Overall, there is evidence that a moderate amount of this kind of financing can be beneficial, but as it gets to be too great, the benefits rapidly turn into liabilities.

3. Make sunset clauses for financial support programs the rule, not the exception. Permanent, or evergreen programs of government-supported venture capital, loan guarantees, startup grants, angel tax credits and so on, risk becoming white elephants and/or political assets, not economic ones, and in the process risk squandering public funds. Sunset clauses, or “sell-by dates,” help focus policy-implementation programs on (a) achieving results, and (b) creating self-sustainability by building capacity and mutually reinforcing systems (for example, by showing private sector players that they can actually make profits.)

4. “Pulse” incentives to foster discovery. An implication of sunset clauses, in general, is that if providers and consumers of risky capital can “discover” that it is profitable to engage, then they will accelerate self-interested behavior when the “visible hand” is removed. Seeing if providers and consumers of entrepreneurial capital “discover” the correct pricing mechanisms to allow them to engage in a profit-seeking transaction is one test as to whether the problem is really a market failure or not, and is not just … Next Page »

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Is your world view marked by a sense of hopelessness? Do you obsess about past errors? Do you tend to minimize or overlook positive news? If your answers are yes, you may not be clinically depressed. Maybe you’re just being realistic.

Depressed people are often told they’re just not looking at things the right way. But many studies suggest that the opposite is true—that depressives actually have a more accurate picture of life’s harshness than the rest of us. If anyone is deluded, this data suggests, it’s the majority of mentally “healthy” people, who harbor rosy illusions about their own abilities and prospects, and who spend little time wondering whether their basic beliefs and assumptions might be wrong.

Overall, it’s probably a good thing that the optimists are in charge. If we focused too much on life’s difficulties, we’d never start anything new. Nonetheless, there may be elements to admire in the depressive mindset—such as a willingness to acknowledge the possibility, even the likelihood, of error in our judgments, and to see our error-proneness as a fundamental part of our being, rather than an aberration.

That’s one of the key messages of a wonderful book that I just finished reading: Kathryn Schulz’s Being Wrong: Adventures in the Margin of Error (HarperCollins, 2010). While Amazon has the book classified under “Psychology & Counseling,” it’s composed of equal parts psychology, neurology, history, philosophy, and journalism—and I’d argue that it’s also one of the best business books of the last couple of years. That’s because Schulz, a freelance journalist who formerly edited the environmental news site Grist, encourages readers to think about the overlooked benefits of wrongness—a condition that any entrepreneur worth his salt will experience even more often than his fellow humans.

After all, being an entrepreneur is all about undertaking new ventures, which entails risk and implies the possibility of failure. And when a product or business fails, it’s usually because the core assumptions behind it turned out to be wrong. So for any entrepreneur who’s taking sufficient risks, wrongness is a familiar experience—and one that shouldn’t be too strenuously shunned or avoided, since, from Schulz’s point of view, it comes with valuable lessons about what it means to be human, and what to do better next time around. “Far from being a sign of intellectual inferiority, the capacity to err is crucial to human cognition,” Schulz writes. “Thanks to error, we can revise our understanding of ourselves and amend our ideas about the world…However disorienting, difficult, or humbling our mistakes might be, it is ultimately wrongness, not rightness, than can teach us who we are.”

As I read Being Wrong, I couldn’t help applying Schulz’s insights to the specific community I spend most of my time writing about, tech startup founders. (If you don’t have time to read Schulz’s book for yourself, by the way, you can get the gist of it by watching this 18-minute video of her March 2011 TED talk.) One thing that came to mind was a meme I’ve heard repeated many times in places outside Silicon Valley. It goes like this: Venture investors in Seattle or Boston or New York or insert-your-city-here look on failure as a black mark. That means that high-risk ideas don’t get funded, and that if you’re unlucky enough to be involved in a startup that craters, it drastically lowers your chances of winning funding from local firms in the future. In Silicon Valley, by contrast, VCs see failure as a badge of honor and a mark of experience. Scratch the résumé of any successful Valley CEO and you’ll find a string of failed startups.

Now, how much substance there is to this meme, I don’t know. I can’t point to a quantitative study to back it up. But to the extent that it’s true, it points to regional and cultural differences in attitudes toward wrongness. A failing startup can be wrong in any number of ways. It can be wrong about … Next Page »

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Timing is everything—especially in the tech world. If you follow trends in technology, science, or business for long enough, you realize there are very few new ideas. Instead, the combination of the right idea with the right timing and execution is usually the key to success in any field.

Look at all the snazzy tech products that have sprung up around us in recent years—iPhones and iPads, Kindle e-book readers, mobile and gaming apps, GPS and mapping technologies. And some services are so ubiquitous that we don’t even notice them anymore, like Internet banking or online shopping.

It made me think back a decade to 1999-2000, the height of the tech bubble, and consider which of these ideas were already around back then, but either didn’t quite pan out or failed. (Of course, you could go back much further than that, but 10 years feels like an eternity in tech these days.) If you paged through Red Herring, Fast Company, or Technology Review in the late ‘90s, I suspect you’d find many ideas that look a lot like the current tech landscape.

So I informally surveyed a few techies and venture capitalists on both coasts, and have compiled a list of 10 old ideas from the dot-com era that have finally arrived. In some cases, the old product was not positioned correctly, or the technology of the day didn’t support it well. But in most cases, the main issue was the timing of the market—the offering just wasn’t compelling enough at its price point or it cost too much to produce back then. Now times have changed.

This list is by no means comprehensive. If you’ve got a company or idea that I missed—or if you have a different take on the reasons for the turnaround—please leave a comment below.

Without further ado, here are 10 oldies that are new again:

1. Group-buying sites (Mercata vs. Groupon)

This is the quintessential old idea whose time has come. Mercata, the Paul Allen-backed dot-com that withdrew its IPO in early 2001 and closed down, struggled to gain traction in part because it competed for consumer-product deals with e-retailers and big portals like Yahoo and AOL. In the past couple of years, Groupon solved this problem by focusing on one deal per day, but across very different kinds of stores. A down economy, mainstream use of the Web, and lack of competitors didn’t hurt. Now there are more than 100 group-buying sites around the world—mostly blatant knockoffs of Groupon, which is … Next Page »

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Sometimes you have to leave a place in order to really appreciate it. That’s not the case for me and Boston. I’ve always loved this area—but coming home after a two-year stint away makes for a nice opportunity to put my appreciation down in words. So, as the incoming Editor of Xconomy Boston, I hope you’ll indulge me in a quick tour of some thoughts on the local innovation community and culture.

My family has roots here. I was born in Arlington, MA, moved away to the Midwest as a kid, and came back to Boston for grad school at MIT. I spent 16 years of my adult life in this fair city. For the past two years, I’ve been out in Seattle reporting on the technology scene and co-leading Xconomy’s office there. Now I’m coming back to Boston to do something similar here. It’s a great opportunity, and I’m really looking forward to it—especially since I’m bringing some outside perspective back with me, which I think will be valuable.

I can’t help but feel a little nostalgic, and think back to when I was first getting to know this city in 1990. I remember when the Red Sox had losing seasons, and the Patriots were 1-15. I remember Larry Bird’s last playoff game, and when “Beat L.A.” meant something different. I remember when Tom Menino wasn’t mayor, and the Big Dig hadn’t even started yet (now that’s saying something).

Certainly a lot has changed in 20 years. What hasn’t changed, I think, is the spirit of innovation around New England, rooted in its long, proud history and traditions. No doubt my Boston colleagues would agree that, if anything, that spirit has gotten stronger—especially in the past couple of years.

With that in mind, here are five general themes I’m intent on exploring as I hit the ground running here. They have to do with the culture of Boston-area entrepreneurs and investors; the top challenges and opportunities for young startups; and the impact of big companies and universities on local innovation.

1. Does the startup ecosystem properly reward risk-taking?

Last fall, Brad Feld, the venture capitalist from Foundry Group and TechStars, said he thought the Boston tech community had “a massive chip on its shoulder.” That’s because this region, once the undisputed technology leader with its venerable Route 128 companies (even well into the ’90s), fell behind Silicon Valley, he said. And I’ve heard others say the New England tech scene has a bit of an inferiority complex as compared to the Valley (who doesn’t?). The question is, what is being done about this?

From what I can tell, Boston tech startup culture has been changing for the better as of late. Anecdotal stories suggest this community is more conducive to risk-taking than some other areas of the country. In other words, failure is tolerated by investors (as long as an entrepreneur failed … Next Page »

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How did Geoff Entress become Seattle’s go-to tech investor and startup guru? For those outside the local technology community, Entress is an angel investor who has put his own money to work in more than 35 startup companies, most of them software-based and in the Northwest. They range from firms that are now well-established like Isilon Systems (NASDAQ: ISLN), Seadragon Software (bought by Microsoft), and The Coffee Equipment Company (bought by Starbucks), to fast-rising stars like Bonanzle, Cheezburger Network, Dashwire, Swype, and Elemental Technologies.

But that only scratches the surface of the impact Entress has had in the business community. He is a trusted advisor to scores of local entrepreneurs. He’s also well-known and trusted by the VCs on the other side of the table, having worked as a venture partner at two of Seattle’s premier tech VC firms, Madrona Venture Group and Voyager Capital.

Just yesterday, Entress, 46, found another way to weave himself deeper into the fabric of the Seattle startup community. He announced he has joined Seattle-based Founder’s Co-op as a managing partner. This means he will help run the seed-stage investment fund and startup mentorship program as an equal partner along with co-founders Chris DeVore and Andy Sack. Entress had been a limited partner of the firm for the past couple of years. As if his new role won’t keep him busy enough, Entress is also retaining his position at Voyager Capital, where he will continue to advise startups and evaluate investment deals.

Overall, the move solidifies Entress’s standing as one of the most connected and successful early-stage tech investors in the country. He has been called the “Ron Conway of Seattle” (after the Silicon Valley early-stage angel investor in Google and PayPal) often enough that the comparison feels like a cliche. But to understand what Entress’s move to Founder’s Co-op really means—and what the long-term impact could be on the startup and venture capital ecosystem—you need to know more about where he came from, and where he’s going in life.

Entress is one of those guys whose track record as a boy wonder boggles the mind. He grew up in Pittsburgh, the son of an oral surgeon with the U.S. Navy who “pulled the wisdom teeth of all my friends in high school,” he says. He went to college at the University of Notre Dame, and returned to his hometown to do a master’s in industrial administration at Carnegie Mellon University. Fresh out of business school in the mid-1980s, when he was in his early 20s, he ran a hedge fund with his father. The fund was successful enough that its sale to Duquesne Capital Management helped launch Entress’s career as an angel investor.

But before he found his golden touch for startups in Seattle, he had to complete a couple more steps in the journey. He learned the ways of Wall Street in various jobs in finance, sales, and … Next Page »

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Last week was a pretty good one for Nick Hanauer. When I visited his office, he was basking in the glow of the mid-afternoon sun—and the afterglow of President Obama’s signing of the much-ballyhooed healthcare reform bill. (Yes, he’s a staunch Democrat.)

But I wasn’t there to talk politics. Hanauer is one of the Seattle area’s most successful investors and businessmen, and one of its most influential thinkers. He is a founder of Second Avenue Partners, an investment group focused on early-stage companies. He was the first non-family investor in Amazon.com (and a board advisor until 2000); the founder of Avenue A Media (which became aQuantive and was sold to Microsoft for $6.4 billion in 2007); and an investor in such diverse companies as Insitu (sold to Boeing for some $400 million in 2008), Newsvine (sold to MSNBC.com in 2007), Market Leader (formerly HouseValues), Modumetal, and Qliance.

He is also a political activist, a die-hard science buff, and an amateur astronomer. And he’s giving the opening keynote today at our Xconomy Forum (“What’s Your Breakthrough Idea?”) at the University of Washington at 1:30 pm. He will set the table by discussing where “breakthrough ideas” fit into the overall taxonomy of startups and entrepreneurship, and he’ll give examples of some transformative ways of thinking from his own experience.

To whet my appetite, and those of our readers, I sat down with Hanauer for an extensive and wide-ranging chat. I should have known better; it was like partaking in a 15-course dessert buffet just before the main meal. But it was vintage Hanauer—talking in depth about not conforming to societal expectations and how to think creatively about new ideas and metaphors, reflecting on why venture capital doesn’t work as a sector, quoting famous philosophers, and discussing the one area in which he would seek omniscient advice if he could. All of that sprinkled with insights from Amazon, Insitu, and other prominent companies.

Here is an edited transcript of the first part of our interview:

Xconomy: You’ve talked about the importance of new metaphors in thinking about potential breakthrough ideas. What do you mean by that?

Nick Hanauer: OK, here’s a non-business example of what I mean by that: The entire edifice of modern economic theory—Chicago school, efficient-market hypothesis, market fundamentalism, that has dominated our political discourse for 30 to 40 years—is based on the understanding of the world as a linear system. Modern economic theory requires the system to be linear in order to make the numbers add up. It requires humans to be rational calculators of their self-interest. The only way it works is if you assume every human can make an instantaneous net present value calculation about what they should do at every moment. What that does is it creates this idea in your mind that the market is this perfectly efficient machine.

The dominant narrative has been that markets are perfectly efficient. If it’s perfectly efficient, then the market is always right. And if it’s always right, you also have to believe, among other things, that the rich deserve to be rich, and the poor deserve to be poor. How could it not be, if the market is always right? You have to believe that any civic intrusion into market constructs is an abomination, because the market is always right. These things have to be true if that’s your metaphor for understanding how the economy works. But if you understand the economy for what it is—it is a complex, adaptive system. Our market isn’t just like an ecosystem, our market is an ecosystem. It’s complex, it’s adaptive, and it is shaped by the evolutionary forces identical to the forces that are at work in Puget Sound.

X: So what’s the breakthrough here?

NH: If you understand the market in that way, then it forces you to reckon with it like a giant garden. In that garden, we get to make choices about what’s going to grow, what we’re going to eat, and so on. All of a sudden, a civic intrusion into that structure doesn’t become an abomination, it becomes … Next Page »

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“People say if you fail in Seattle, you’re screwed,” said Marcelo Calbucci. “If you fail in the Bay Area, you just have a badge of honor.”

We were at the TechStars reunion event in Seattle last week, listening to early-stage investors Brad Feld, Andy Sack, Steve Hall, Greg Gottesman, Shawn Broderick, and Chris Sheehan speak about entrepreneurship and the tech startup scene in their respective cities. Calbucci, the founder of Seattle 2.0 and Sampa (which folded in August), was asking the panelists about how the tolerance of failure, whether real or perceived, affects a region’s culture of innovation.

It’s a deep question, and it continues the discussion of startup cultures in different cities that I highlighted last week. It’s also part of a debate on failure that has been going on since long before I wrote about it in Xconomy last January. There seem to be two camps. Most entrepreneurs I’ve talked to feel there is a stigma associated with having a failed startup in Seattle. Most venture capitalists, not so much. But it’s a much broader issue than just Seattle. My colleague Bruce talked with a Web 2.0 startup founder in San Diego last week who said his first failure, earlier this year, “was truly a painful experience, and I’m still not over it.” And meanwhile, Brad Feld, the co-founder of TechStars and Foundry Group in Boulder, CO, had some provocative things to say about the failure aspect of Boston’s culture.

But first, Andy Sack of Seattle’s Founder’s Co-op gave his perspective on having failed at his last startup, Judy’s Book, after having had three successes prior to that. “As much as you teach entrepreneurship, as much as there’s supply of capital out there, really when push comes to shove, entrepreneurship comes from within,” he said. “I couldn’t take a job at any of the big companies. We’ve been through the tech boom of the ‘90s. We’re just coming off of a major hiccup. I’d say right now, early-stage investors in Seattle have retreated some; venture capital has retreated some, they’re focused primarily on their portfolio. That said, you [Calbucci] failed and went out and started your own thing. I failed and went out and started my own thing. Because we didn’t know any better. The entrepreneurs that don’t know any better, they just go do it again.”

Greg Gottesman of Seattle-based Madrona Venture Group is one of those VCs who says he doesn’t see failure as a black mark. “My sense in this community is, to people who matter most, I don’t think failure is a huge negative,” he said. “There are certain types of failures, like failure of integrity—that’s hard to recover from. But failure of a startup, just speaking with all my partners, that’s not a negative. We talk about that as a learning experience. It’s just another piece of the puzzle.”

So how does Seattle’s tolerance of failure differ from, say, Boston’s or Silicon Valley’s? Feld, who has been investing nationally for 15 years, said, “I actually believe that the shtick of ‘failure as a badge of honor’ is really great shtick. I’ve failed a lot. It’s hard to fail. Failure impacts a person in … Next Page »

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Last week, I reported that Voyager Capital managing director Erik Benson said failure is seen as a “black mark” in the Seattle innovation community—more so than in places like the San Francisco Bay Area or New England. I’ve been asking around at local startups and investment firms to see what people’s reactions are, and (if it’s true) to hear what can be done about it.

The issue has definitely touched a nerve. For the most part, the entrepreneurs I hit up tended to agree with Benson’s assertion, while investors generally disagreed. I’m not sure what that means yet—maybe it’s all a matter of perspective—but there is definitely something to this discussion. And definitely a divide.

Local entrepreneur Matt Hulett, the CEO of Mpire (which runs the ad network Widgetbucks) and a fourth-generation Seattleite, says he strongly agrees with Benson. “The culture in the Northwest is very conservative. It’s one of the reasons why entrepreneurs based in the Northwest look first to Silicon Valley to fund big ideas. If you are building a truly disruptive company, then you are bound to fail,” he said in an e-mail. “In the Northwest, the demeanor is usually around ‘prove first.’ The proof is most likely around a proven management team as well as some traction on the business model.”

And why is that? “It could be that we’re more enterprise software and telecom/wireless focused in this state, or maybe we’re just built that way,” says Hulett. “Truth is, in the Northwest, having done something in a big company (Amazon, Microsoft, etc.) will be more highly valued than having tried a number of startups.”

Interesting take, but Bill Bryant, a Seattle-based venture partner with Draper Fisher Jurvetson (and an investor in Mpire), disagrees. “I think it’s more a function of ‘survivor bias,’” Bryant says. “There are all too few startups to begin with, so the successes, and the failures, tend to stand out more than in the Valley. In a small sample size, when ‘failed previously funded entrepreneurs’ do not get support for their next project, it’s simply more visible. Statistically and culturally, I do not believe that investors shy away from failed entrepreneurs any more so than investors in, say, the Bay Area—and they do so for the same reasons—that they didn’t demonstrate quality strategic leadership, were not good at execution, failed to attract a quality team, and generally squandered their initial capital backing.” That litany, Bryant adds, will not allow you to raise capital in any community.

But entrepreneurs and startup observers—not all, but most I talked to—see some problems … Next Page »

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Erik Benson is a quantum particle. OK, that’s the only metaphor I can think of to explain how he can be in so many places at once. The managing director of Voyager Capital is based in Seattle, but his orbit also includes Portland, OR, Silicon Valley, and San Diego. From what I can tell, he’s one of the most active (and connected) venture capitalists on the West Coast.

Which fits the Voyager Capital model pretty well, as I reported on a few months ago. Benson, who has been with Voyager since 1998, focuses on investments in software and digital media. He serves on the boards of Portland companies AboutUs, Elemental Technologies, and Kryptiq, as well as Seattle-based Trailfire and San Diego’s Covario. He was previously on the board of CapitalStream, which was acquired by HCL Technologies for $40 million last February. And back in 1999, he sourced Voyager’s investment in aQuantive, which was bought by Microsoft for $6.4 billion in 2007.

Last week, during the holidays, I had a chance to meet with Benson at his Seattle office (“money never sleeps,” he says). So I wanted to share a few of his keener insights on startups and the venture world here.

Heading into the new year, a lot of people have been talking about the future of venture capital in pessimistic tones. “2009 will be a tough year,” Benson admits. But he points to a couple of areas that he thinks will do well: health care and online marketing, particularly search engine marketing.

I asked Benson whether VCs will be focusing on their existing portfolio companies and later-stage deals at the expense of new startups. To Benson, the key issue is being profitable—the companies that make money will always be the most attractive. “Is that later-stage? Not necessarily,” he says. Entrepreneurs and investors will do fine, he explains, “if you stick to the fundamentals of what makes a great company: an entrepreneur who has done it before; a sound business model; great technology; differentiation on the technology or business model, or both; getting to revenue and cash flow break-even quickly.”

He certainly makes it sound simple—if not easy. “My goal in the Northwest is to invest in entrepreneurs who’ve done it at least once before,” Benson says. “And maybe they’ve failed two out of four times.” According to Benson—and this was interesting to hear—this is not the mainstream view of failure around here. “In Seattle, it’s like a black mark if you fail,” he says. That’s as opposed to some other places, like Silicon Valley or Boston, where failure is a “badge of honor” (as long as it’s not every time, of course).

That was the most surprising thing Benson said in our meeting. But I can see what he means. It will be interesting to hear what other investors and entrepreneurs have to say. Is the Seattle innovation community intolerant of failure, and if so, what can be done about it?

In any case, it sounds like this year will be business as usual for Voyager Capital, mainly because great tech ideas and startup talent aren’t going away anytime soon. “You’ll see an investment per quarter,” Benson says. “The best entrepreneurs don’t go back to work for Microsoft or Intel.”

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It was billed as “an evening of candor and compassion,” but with onetime M*A*S*H screenwriter Neil Senturia serving as impresario, a San Diego forum on business failure became an extended tragic-comic riff, abounding with one-liners.

Entrepreneurs are rarely willing to publicly discuss their failures after they shut a company down, perhaps with the exception of Christopher Herot, who talked with Xconomy’s Wade Roush about last year’s shutdown of Zingdom. Yet much can be learned in the post-mortem of a startup.

Senturia, an irreverent and restless serial entrepreneur, says he proposed the topic to San Diego’s MIT Enterprise Forum to share such insights—and because it felt like the right time considering the current economic downturn for a panel discussion among local CEOs who have confronted failure.

“Failure in itself can be a transformative event,” Senturia said in warm-up remarks that set a poignant-but-funny tone. “Remember Nietzsche said that whatever does not kill me makes me stronger. But Nietzsche never had to interact with venture capitalists.”

Ken Kalb, who left the company he founded, Continuous Computing, after winning an Ernst & Young Entrepreneur of the Year award in 2005, told the audience Senturia had invited him to talk “emotionally and candidly about what it feels like when things go into the crapper.”

There is usually no single explanation for why startups fail, Kalb and the other panelists agreed. But if there is a single reason why startups implode. Kalb says the “quintessential” factor is … Next Page »

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It was a pretty slow week for tech deals in the Northwest—chalk it up to the election and the Veteran’s Day holiday. Nevertheless, there was a trickle of activity in software, digital media, and energy.

—Seattle-based Voyager Capital has led an investment in Keystream, a Mountain View, CA-based online video advertising startup. The deal closed earlier this year, and the financial terms were not announced. Keystream’s software allows Web publishers to insert ads into blank spaces in their video content.

—Entrance Controls, a Tukwila, WA-based security company, acquired Portland, OR-based 1Pointe, a startup that delivers secure networking, storage, and wireless technologies to businesses. The terms of the deal were not disclosed.

—Puget Sound Energy, the Bellevue, WA-based utility company, purchased 22 wind turbine generators from Vestas, a leading turbine manufacturer with U.S. headquarters in Portland, OR. The turbines will be used to expand the Wild Horse Wind and Solar Facility in eastern Kittitas County, WA, and they make up most of the project’s $100 million budget.

—Apptio, a Bellevue, WA-based startup that helps companies manage and optimize their IT costs, signed up a new batch of customers, including Alaska Airlines, SkyTap, and SumTotal. A year ago, the company raised $7 million from Madrona Venture Group, Greylock Partners, Ignition Partners, and other investors.

—Not a deal, but a list of dealbreakers: Seattle angel investor Geoff Entress, formerly a venture partner at Madrona Venture Group, gave his Top 10 list of why startups fail. (The list goes to 11, like a Spinal Tap amp.)

—Also not a deal per se, but Luke reported on how Portland, OR-based Wellpartner, a mail-order pharmacy, is helping clinics that serve the poor gain access to drugs at half the average wholesale price that private insurers get charged. Wellpartner does it by cutting through the red tape of a federal program known as 340B.

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Despite the post-election glow in some circles, the financial reality for most people remains gloomy (along with the weather here in Seattle). As Geoff Entress succinctly puts it, “The economy still sucks…Nobody’s writing any checks right now at all.” I sat down with the Seattle-based angel investor yesterday in between his appearances at the University of Washington—as part of a seminar series for UW faculty—and the “Entrepreneur University” event run by the Northwest Entrepreneur Network at the convention center downtown.

Entress was a venture partner at Madrona Venture Group for eight and a half years before leaving the firm this past June to focus on his own investments. He still works out of his office there. He has invested in about 35 companies in the past decade, including investments in prominent Northwest startups like BuddyTV, Isilon Systems, CultureMob, Sandlot Games, ICanHasCheezburger.com, Elemental Technologies, Geospiza, and Pressplane.

Although Entress actually sounds fairly optimistic about new ventures, I thought his talk at the UW was an appropriate dose of reality. It was titled “10 Reasons Why Early-Stage Companies Fail.” As Entress pointed out, his “top 10″ list actually goes to 11, like a Spinal Tap amp (“when you ‘need that extra push over the cliff…’” he says). The audience of about 50 included folks from UW TechTransfer, as well as bioengineering professor Buddy Ratner (an Xconomist). I’ll give a quick recap of the talk here, in Entress’s words.

The main reason startups fail, of course, is that they run out of money, Entress said. Sometimes they shut down and investor money is returned, as in the recent case of Seattle-based ClayValet for instance, but that’s not the norm. Entress proceeded to drill down into the underlying reasons for startup failure:

1. They spend the money they raise too fast. “Conserve your cash,” Entress said. It’s very difficult to raise more funds, especially these days.

2. They hire too fast (ahead of their product development). The common mistake is hiring sales staff before the product is ready to sell.

3. They fire too slow. It’s better to do one deep, painful cut than to endure multiple smaller cuts, which are demoralizing to the team. … Next Page »

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Part of the reason high-tech entrepreneurs are attracted to Silicon Valley is the perception that it’s a place where risk-taking is encouraged. West Coast venture capital firms not only excuse failure, so this perception goes, but celebrate it: if a high-tech entrepreneur doesn’t have a couple of tanked companies on his resume, he probably wasn’t being innovative enough. By contrast, the perception about investors in New England is that they penalize failure, which therefore becomes a taboo subject.

Both perceptions are probably exaggerations. But whereas West Coast companies come and go like the butterflies in Santa Cruz, it’s still unusual to hear any of the details when an East Coast startup closes down. That’s why a blog post last week by Christopher Herot has been attracting so much attention.

Herot was co-founder and chief technology officer of Lexington, MA-based Applied Messaging, which later became Convoq, which later became Zingdom. Founded in 2002, the company made Web-based business conferencing software that competed (unsuccessfully) with WebEx, and later released a consumer-oriented click-to-call system for initiating anonymous phone calls or instant-messaging sessions from web pages on networking sites, dating sites, or classified-ad sites.

On December 9, Herot posted an obituary of sorts for Zingdom, explaining that despite the project strategy adjustments and three rounds of capital over five years—Bay Partners, North Bridge Venture Partners, and Polaris Venture Partners put in about $30 million altogether, according to PE Hub—the company “never achieved the traction that would have provided the necessary return on capital” and was closing its doors. Herot’s account was remarkably frank and unvarnished, lamenting, among other things, that the company had spent too much time perfecting software features that users didn’t want.

Given that Herot didn’t seem to have any hangups about telling Zingdom’s story, I called him up last Thursday to see what other insights he could share into the rarely-discussed process of coming to grips with the failure of a product—or a company. Here’s the writeup of our conversation.

Xconomy: That was a very unusual piece you posted. We don’t hear much about that side of the startup process—when things don’t turn out as the founders or investors envisioned.

Christopher Herot: They say success has many fathers and failure has none. There are always articles about the miracle of somebody starting a company in his garage and selling it three weeks later for a billion dollars. But there’s very little written about the other outcomes that can happen.

X: What did you hope to achieve by telling the story?

CH: I guess there were a few reasons for writing the post. One was that it was just kind of therapeutic. Also, I was thinking that somebody should write the definitive story before it all evaporated from our memories. There is also a very practical reason: The company is winding down and I’m helping the investors sell off the IP and helping the engineers find homes. In the old days, you started making phone calls. Now you just write a blog post and everybody knows about it immediately and responds appropriately. I’ve already gotten quite a few inquiries about both the IP and the engineers.

X: How common do you think it is for technology startups to end this way?

CH: Let me put it this way. There’s this myth that everybody makes money in Las Vegas, because when your friends go there, there are only two outcomes—either they come back and tell you how much money they made, or … Next Page »

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