“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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