[Updated Feb. 25 with photos from TechFest 2009:]
Yesterday, I reported from Microsoft headquarters in Redmond, WA, on some high-level thoughts about the importance of corporate research from Craig Mundie, Microsoft’s chief research and strategy officer, and Rick Rashid, senior vice president and head of research. It’s TechFest week, which means tons of demos and meetings between Microsoft researchers, product groups, and top brass—see photos below and on the next page. (The event is restricted to Microsoft employees and invited guests.)

This annual event almost never happened. Rashid admits that TechFest was originally “something I wanted to avoid doing.” Before the inaugural fete in 2001, Rashid says, he had concerns about putting on such an extensive show. “I thought, ‘Boy, that’s going to be a lot of work. And who’s going to come?’” The first TechFest went on despite his objections, and the rest is history. I’ll give a rundown here of some of the most compelling demos I saw at TechFest 2009. They span the fields of Internet search, mobile imaging, advertising, and cleantech.

But first, another strategy issue. Given the economic climate that has resulted in Microsoft’s first major layoff, and the software company’s increasing competition with the likes of Apple, Google, and VMware, I wondered if there is more urgency these days to do research that pays off in products quickly—and whether that has led to any subtle changes in Microsoft’s research strategy.

The short answer is no. I talked with Hsiao-Wuen Hon, the managing director of Microsoft Research Asia, who previously spent many years in Redmond. “The issue Microsoft should worry about is the future, the technology,” Hon says. “That’s what we need to work on. The short-term stuff, the financial crisis, no. We want to be in the position to continue to worry about what we should worry about—R&D. The company has a firm commitment to that.”

As for any immediate adjustments, Hon says he’s been asked not to …Next Page »

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Portland, OR-based Vidoop, a maker of Internet security and authentication technology, has laid off 9 of 37 employees, according to the Portland Business Journal. Vidoop’s company blog was less specific, saying it told “several members of the Vidoop family goodbye.” The company moved to Portland from Oklahoma in September.

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Redmond, WA-based WildTangent, a developer and publisher of online games, has closed its development studio and laid off 20 employees, or one-fifth of its staff, as first reported by TechFlash. Co-founder Alex St. John has stepped down as chief executive but remains chairman, according to Gamasutra and others. Mike Peronto is the new CEO.

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OK, this isn’t all that surprising. In the early days of the fourth quarter of 2008, the majority of Washington state’s venture capitalists see the national economy as the top issue facing their portfolio companies, and they’re predicting lower revenue growth and lower valuations for all companies—and no exits.

That’s according to the latest quarterly venture capital outlook survey from the Washington Technology Industry Association (WTIA), which was released today. The survey asks local VC firms about their deal quality and quantity, expected exits, and the financial status of their portfolio companies.

Here are a few lowlights from the survey:

—76 percent of venture capitalists view national business conditions as one of the top challenges facing their companies. That’s up from 43 percent heading into the third quarter of this year (which began July 1).

—One-third of VCs expect revenue growth for their companies to be moderately or substantially lower in the fourth quarter, compared to 14 percent who felt that way heading into the third quarter.

—VCs expect lower deal valuations for companies, regardless of whether they are early, mid, or late-stage. For mid-stage companies, for instance, 88 percent of respondents expect valuations to shrink, compared with 14 percent just three months ago.

—75 percent of respondents expect no growth in hiring of Washington workers between now and the end of the year, with 13 percent expecting a hiring increase. Just three months ago, 57 percent predicted a hiring increase.

—38 percent of VCs expect deal flow to actually increase moderately in the fourth quarter, but 38 percent also expect that moderately to substantially fewer deals will close by the end of the year.

—No exits (IPOs) are expected between now and the end of the year.

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Two weeks ago, the Washington Technology Industry Association launched a survey to get feedback from the tech community about the current financial crisis and its impact on businesses. Xconomy is the WTIA’s exclusive media partner for the survey, and we plan to report its findings next week. The survey is scheduled to close by the end of day tomorrow (Wednesday), so we want to encourage all of our readers to take part while they still can…

The link to the survey is here (it only takes a minute or two):
http://wtia.informz.net/survistapro/s.asp?id=409

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The venture-capital numbers for the U.S. are out for the third quarter of 2008, and they don’t quite reflect the turmoil in the broader financial markets—at least not yet. Total venture investment in U.S. companies in Q3 amounted to $7.1 billion in 907 deals, which is down 7 percent from the second quarter of this year, when there was $7.7 billion invested in 1033 deals. The bright spots were energy and biotech deals, while there could be real trouble brewing for certain types of Internet-startup deals and capital-intensive tech operations like telecommunications and semiconductor companies.

That’s the word from a quarterly report by the MoneyTree division of PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. Dow Jones VentureSource also released its Q3 venture-capital figures this weekend, and they show the same 7 percent drop and grossly similar trends. Namely, deal activity is at a three-year low. Energy is up, information technology and the Web are down, and health care, biotech, and pharmaceuticals are fairly flat.

(To see the Top 10 Deals list for the nation for Q3, read on or click here to go straight to page 2.)

Sector Shakeout?

According to the MoneyTree report, biotech was the top industry sector, with $1.35 billion invested in 114 deals, a 20 percent increase over Q2 of this year. This just barely edged out the software sector, which remained strong with $1.34 billion invested in 214 companies. The fast-rising cleantech sector (defined as alternative energy, pollution and recycling, power supplies, and conservation) saw $1 billion go into 73 deals, up 13 percent over last quarter.

Potential trouble spots include “Internet-specific” companies, which received $1.1 billion in 194 deals —still a large number, but a 36 percent drop over Q2. The telecom industry saw only $323 million go into 45 deals, its lowest investment level since Q3 of 1997. And the semiconductor industry saw $396 million invested in 50 deals—fairly slow, but a 7 percent increase over the previous quarter. More broadly, in terms of overall deal stages, there were 259 first-time deals, which was down 12 percent from Q2, possibly reflecting a future trend towards fewer early-stage deals, as exit markets are all but closed.

Regional Mixed Bag

No surprise to anyone, Silicon Valley topped the deal list, with $2.77 billion put into 292 investments, down 11 percent from Q2. Investments in the New England region stayed reasonably strong in the third quarter as well, as the area saw $834.1 million poured into 117 deals. That was down only 2.3 percent from the second quarter, in which $853.8 million was invested in 123 deals. Similarly, third-place Los Angeles/Orange County rang up $572.5 million in 54 venture deals, down only slightly from the $593.8 million from the previous period.

It got worse both north and south of LA. Venture investments in San Diego in the third quarter fell to just $178.4 million (22 deals), a 52 percent tanking from Q2 and the lowest quarterly tally for the region since the first quarter of 2005. The picture in the Northwest was also fairly bleak, as venture investment sank to $294.9 million, down some 16 percent from $349.3 million in Q2.

On the international front, U.S.-based venture capitalists invested $526 million into 51 Q3 deals in China, down slightly from Q2 ($574 million in 52 deals). Meanwhile, investment into India by U.S. venture firms fell 43 percent to $271 million in 28 deals (compared to $473 million in 40 deals in Q2). On the flip side, investors in Europe and Asia have been playing a greater role in financings of U.S. companies, says venture capitalist Jim Healy of Sofinnova Ventures.

Outcome Uncertain (but the Trend Is Certainly Down)

The question on everyone’s mind is, where is this heading? “While overall venture investing …Next Page »

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Is this the beginning of the end for online real estate companies? Yesterday, Seattle-based Redfin announced it had laid off roughly 20 percent of its employees, leaving it with a staff of about 75 spread across Seattle, Boston, Los Angeles, Washington DC, and Chicago.

The news comes as a serious blow to a company that prides itself on providing a fundamental service focused on consumers, and making it cheaper and better than alternatives—in this case, traditional real estate brokers. It’s also the first big venture-backed startup in Seattle to cut staff since the financial crisis hit—which makes us wonder who might be next. Redfin had raised more than $20 million in venture capital from the likes of Madrona Venture Group, Draper Fisher Jurvetson, and Vulcan Capital.

On his company blog, Redfin chief executive Glenn Kelman expressed remorse for the staff cuts, but explained why they were necessary. “As the stock market wiped out prospective down-payments, tours and offers dropped 30%. Transactions that were done came undone. October will still be pretty good, then we’re headed for a big dip,” he said.

But Kelman also explained why he thinks Redfin can ride out the crash. “The sky may be falling in financial markets but our competitive dynamics haven’t changed. We can become the #1 real estate search site because our data is better than the media sites’ and we think our engineers are better than other brokers’…It’s tempting to write Redfin off now precisely because we are adapting to the market,” Kelman said. “Redfin’s whole business will struggle and fight and may yet fail. But the only way it is possible for us to succeed—and, even today, I believe we will—is if we adapt.”

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It’s what everyone is talking about: the global financial crisis, and its impact on business and markets. But more specifically, what is its impact on local-area tech businesses and innovation, and how will people respond to it? Here at Xconomy, we’ve posed those important questions to some of our distinguished network of Xconomists—leaders in technology, business, and science who serve an advisory role for us—and we’ve published their thoughts here.

So it is with great interest that we note that the Washington Technology Industry Association (WTIA) is launching a survey of its own today, with Xconomy as its exclusive media partner. According to Ken Myer, the president and CEO of the WTIA (and an Xconomist), the goal of the survey is to get feedback from members of the technology community on the following broad questions:

—What is their view of the financial crisis?

—How has their been business affected, or how do they anticipate their business to be affected by it?

The survey, which consists of about 10 specific questions, is going out to the roughly 10,000 people in the Washington technology industry who receive the WTIA’s monthly e-mail newsletter. The link to the survey is here:
http://wtia.informz.net/survistapro/s.asp?id=409

The plan is to keep the survey open to responders through October 17. Then, a summary of the results will be available to the public the week of October 27.

Because Xconomy is the WTIA’s partner for this survey, we’ll have early access to the results—and will be able to report on the important trends and figures that it reveals. So I urge our readers, wherever you are located, to take part in the survey—and to watch this space for analysis.

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Bill McAleer and Enrique Godreau remind me of an old couple. They’ve been through the ups and downs together. They’ve raised three children (OK, venture funds) in the past 10 years. They even sometimes finish each other’s sentences. And together they’ve built Voyager Capital into one of the most forward-looking venture firms in town.

First, some vital stats. Voyager Capital, based in downtown Seattle, has some $370 million under management. It raised its funds in 1998, 2000, and 2007. It does primarily early-stage deals across three main tech sectors: software and services, wireless, and digital media (including e-commerce, advertising, and marketing). It has a satellite office in Menlo Park, CA, and just opened a branch in Portland, OR, last month. Earlier this month, Voyager led an $8 million Series B investment in Los Gatos, CA-based Nusym, which makes software for verifying electronic designs.

I had a chance to sit down with McAleer and Godreau last week to talk about Voyager’s strategy and how it fits in with important trends in the tech industry. They discussed some of their portfolio companies, but they also expounded on the broader theme of “connected computing” (sometimes called ubiquitous computing) and how the Seattle area is uniquely positioned as a tech-business center. They also touched on the effects of the current financial crisis on investment strategy, and how they view the broader future of venture capital.

When McAleer and Godreau co-founded Voyager Capital in Seattle back in 1997, the tech world was a different place. Microsoft still ruled in software. The Web was just taking off, and Google didn’t exist yet. Amazon.com was just two years old. McAleer had come from Seattle-based Aldus (inventor of PageMaker) with a background in multimedia, and had his own firm for three years working with early-stage companies. Godreau had come from Gartner Group and Adobe by way of Xerox PARC; he was an early backer of Seattle-based aQuantive, which had a big IPO in 2000 and was bought by Microsoft for $6 billion last year. “We thought this region would take off as a tech region,” says McAleer.

But there were a number of challenges. “When we first started, it was how to get really senior talent into the city,” says McAleer. “That’s changed a lot. But back in 1997, there were still only a couple of opportunities they could go off to if their startup failed. The cost to build is somewhat less here [than Silicon Valley], so there’s a cost advantage. The other challenge is to attract really top-notch sales and marketing talent. It’s still thin in terms of really qualified marketing people. On the plus side, with the connected computing trend, consumers are leading rather than businesses.”

I’m a technical guy by training, so I wanted to hear more about this trend, and where the Seattle area fits in. McAleer explains connected computing as the “next stage of computing”—the next step in its evolution from mainframes, desktops, and PCs to the Web, Web 2.0, and smart mobile devices. As I see it, the proliferation of smartphones, social networking, and increased connectivity is changing the way people live, and is leading to all kinds of new applications for consumers and businesses. “We’re going through another sea shift in technology,” McAleer says.

He continues, “The unique thing about Seattle is with the software, wireless, and digital media base… eventually we’ll be connecting at all times. Seattle is really well-positioned for the blend of all three… Most other tech areas don’t have the richness in anchor tenants and available talent. When we started investing, you’d see teams from one company. Now you see teams that are from a mix of companies. And around all that has grown up a capital infrastructure, supported by a strong university.”

“This geography happens to have a lot of skills,” says Godreau. “With Linux in Portland, Nintendo and Xbox designed here, network and wireless companies here, and prominent retailers like Nordstrom, Costco, Starbucks. What happens when you combine those elements? You get the computing of the future. That distinguishes us from the Valley, …Next Page »

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