It wasn’t so much the predictions as the discussion that was most interesting at last night’s annual predictions dinner, organized by the Washington Technology Industry Association. Will Twitter be acquired in 2010, and why? Who will have the dominant cloud computing platform in the next couple of years? What kind of startup are you looking to build or finance, and which areas are you staying away from?

A panel of Seattle-area tech entrepreneurs and investors gamely took the bait and had some lively exchanges over the course of an hour. OK, these guys all know each other, and we’ll take what they say with a grain of salt since it’s a public forum—but here were some of the most interesting points they made. (You can read more comprehensive recaps of the panel on Brier Dudley’s blog at the Seattle Times, and soon on TechFlash by moderator John Cook.)

The panel was split 3 to 2, with the narrow majority guessing Twitter will get bought next year. Andy Sack of seed-stage fund Founder’s Co-op predicted Twitter will make more money than Facebook in 2010 (surprising, given the current disparity in the other direction). Glenn Kelman, the CEO of Redfin, an online real estate firm, said Twitter should charge for search (as it has begun to do in partnerships with Google and Bing). Kelly Smith from Curious Office and the startup Pressplane argued that Twitter could be “absorbed by a big company,” but “it’s going to go nowhere.” By the end of the evening, Sack was predicting that Microsoft would buy Twitter next year.

There was a consensus that 2010 could be a big year for acquisitions. Bill Bryant of Draper Fisher Jurvetson boldly predicted that Amazon will buy Netflix, Blockbuster, and Hulu, while opening brick and mortar “Amazon media stores.” Greg Gottesman from Madrona Venture Group said Cisco might buy EMC (for VMware) and Seattle-based F5 Networks, while Microsoft might buy Research In Motion, the maker of the BlackBerry smartphone. Sack predicted Adobe would pick up Seattle photo-editing startup Picnik. Rupert Murdoch (News Corp.) would buy Seattle’s Cheezburger Network, and someone would buy Redfin.

Looking back on 2009 for a minute, the big deals that were questioned by the panel included Adobe’s acquisition of Omniture (Gottesman said it just didn’t make sense strategically) and …Next Page »

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There’s lots of buzz in the startup community about agile software development; there are software programs, books, and seminars on the topic, and even huge firms like IBM are now touting their “agile development solutions”. The general idea is to create a team and a software process that is flexible, quick, and adaptive to feedback from the market. Put stuff out there, collect feedback on what works, kill what doesn’t, improve what does, rinse and repeat.

But there’s a parallel trend occurring in the early stage technology market that hasn’t been talked about much. Programs like TechStars, Y Combinator, and Founder’s Co-op have been pioneering what I like to call agile organizational development. These “initiator” organizations provide founding entrepreneurs with an incredibly compressed calendar of iterative feedback on all aspects of their company. The feedback comes from a broad network experienced entrepreneurs who serve as mentors in these programs, and it comes often, regularly, and relentlessly.

Mentors in these programs provide feedback on the startup’s team, 30 second pitch, fund raising pitch, positioning, product, pricing—on just about every aspect of the organization. Some of the feedback is contradictory—just like market feedback can be. The TechStars program even has a name for the confusion that results from conflicting advice: “mentor whiplash”.

The net effect of all this mentor input is a set of organizations that adapt to market feedback much more nimbly than startup organizations of the past. This feedback cycle and the entrepreneurs’ response is what I’m calling agile organizational development, and my bet is that the companies that embrace it are much more likely to succeed than those that don’t.

These programs are all relatively new, and there aren’t any books or seminars on the topic yet—but I’m betting there will be.

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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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I was chatting with a couple of local investors at the TechStars (seed fund and mentorship program) event in Seattle on Wednesday. They thought the VC panel discussion of the startup climate and culture in different cities around the country was boring. If you’re an entrepreneur or investor, they said, that’s just where you are, and you deal with it.

But au contraire, mon frère—as a journalist and outside observer—I view those comparisons across different innovation clusters and their respective histories as a way to generate some good stories and insights. On the panel, there were certainly some constructive (and at times controversial) things said about the entrepreneurial climate in Seattle, Boston, and Boulder.

Here are a few edited highlights from the panelists, several of whom bring an outside perspective to their current cities:

Brad Feld of TechStars and Foundry Group gave a brief history of the startup scene in Boulder, CO—useful for any city with entrepreneurial aspirations. “When I showed up in ’95, what I found was on the software side you had a lot of smart engineering talent but you didn’t have much else. A handful of entrepreneurial companies in storage and cable infrastructure. Not much in the way of entrepreneurial executive leadership other than from these pockets. In the mid-90s, because of the counter-culture community—and the Internet was purpose-built for places like Boulder—you had a lot of people who were independent, very smart, doing their own things suddenly intersecting with a medium that allows you to be anywhere. It’s 100,000 people plus 25,000 college students. A pretty small town, but it has the largest percentage, per capita, in the United States of computer scientists and PhDs. Yet there wasn’t a broad wave of entrepreneurial experience,” Feld said.

“In the mid-to-late 90s, there was huge activity around the Internet. Anybody with a pulse could get a company started. The predictable thing eventually happened, there was a lot of wreckage. But from ‘95-2001, Boulder had imported a lot of executive talent—CEOs, VP sales, engineering leadership. We also had a lot of entrepreneurs who had one or two companies in that cycle. So by 2003, people were starting to come back and get re-engaged in entrepreneurial activity. There were probably 50-plus people that made $10 million or more, so there was enough of an angel community. There was critical mass around this. But what was missing was something that tied the community together. There was the endless cocktail party circuit of entrepreneurs. Eventually people got bored and stopped going.”

That led David Cohen, Feld, and others to form TechStars in Boulder. “It cemented this notion of first-time entrepreneurial activity is the core of the ecosystem. What was needed was fresh meat into the system. We got a lot of new, young people into the community,” Feld said. “The other thing was that one of the hardest things for first-time entrepreneurs is to have an engaged relationship with an experienced entrepreneur. We found we were creating this thing that integrated the whole value chain of entrepreneurs. It really energized the existing entrepreneurial activity around a thing.”

Chris Sheehan of CommonAngels then gave his thoughts on the Boston innovation scene. [Disclosure: Chris is on Xconomy’s board.] “In the IT ecosystem in Boston, there are a number of things going on,” Sheehan said. “It’s a wonderful place for universities and colleges. MIT has been the granddaddy in terms of the entrepreneurial ecosystem. But what I’m seeing is a fresh set of energy coming …Next Page »

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TechStars, the startup incubation and seed investment fund based in Boulder, CO, and Boston (as of this year), is holding its annual reunion event in Seattle on November 4. (See a couple of local VC blogs here and here.)

As part of the event, a number of TechStars companies that are raising money will make pitches to investors. There will also be a panel discussion on angel and venture investment trends, featuring Brad Feld of TechStars and Foundry Group; Andy Sack from Founder’s Co-op; Steve Hall from Vulcan Capital; David Cohen from TechStars; Greg Gottesman from Madrona Venture Group; and Chris Sheehan from CommonAngels. (Full disclosure: Chris is a member of Xconomy’s board of directors.)

Last February, when Brad Feld spoke to a crowd of tech entrepreneurs and investors in Seattle, there was some hopeful speculation in the crowd about whether TechStars might set up operations in the Northwest in the future. Nothing new on that front, but this reunion event in two weeks can’t hurt for down the road.

It sounds like the event is invitation-only, and meant for local angel investors and VCs. We’re looking forward to a stellar gathering, and will see what comes of it.

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It’s one of the great mysteries of the modern Internet. How can Web publishers make more money from their content? For everything from blogs and journalism to games and entertainment, publishers and software companies alike have been trying to solve this problem for many years.

Now BigDoor Media, a six-person startup in Bellevue, WA, thinks it has found the right approach, at least for a certain market. Its basic idea is to provide a revenue stream for entertainment publishers that bridges the gap between traditional advertising and subscription models. BigDoor, which is emerging from stealth mode today with a beta version of its software, provides an “offer platform” that acts as a gateway to a website’s premium content. Instead of paying for a game by credit card, say, a consumer can opt to fill out a survey, sign up for a newsletter, or buy an advertiser’s product (like Fiji Water, for instance).

This is not an entirely new idea. And in fact, BigDoor operates in a similar space as many other Seattle-area startups we’ve reported on, including AppBank (for social entertainment applications), DevHub (for creating and hosting websites), Mpire (for online-ad optimization), Wetpaint (for social publishing), and Others Online (for behavioral profiling of audiences), which was acquired this summer by the Rubicon Project. These companies have different customers and revenue models, but they are all fundamentally trying to help Web publishers make more money from their content.

What seems to set BigDoor apart is the experience of its founders. Keith Smith and Jeff Malek spent about 10 years in the online advertising world with Bellevue-based Zango, the controversial “adware” company that closed down earlier this year. Smith was CEO and co-founder of Zango, while Malek was vice president of engineering and products. Zango had success but eventually ran into problems, in part because adware in general—software that tracks which sites you visit and delivers targeted ads—became widely reviled by people who felt it violated their privacy or was just plain annoying.

The key is that Smith and Malek seem to have learned from their mistakes as well as …Next Page »

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In the past week, the Northwest has seen its share of debt financings in medical devices and bio-IT, small funding deals and partnerships in Internet software, and mounting interest in an impending IPO.

—Amazon (NASDAQ: AMZN) rolled out a new mobile payments service that lets applications developers and distributors tap into the e-commerce giant’s one-click checkout system on mobile devices. As part of the rollout, Amazon has formed partnerships with mobile content distributors like Kansas City, MO-based Handmark, which sells games, apps, ringtones, and the like. Financial terms were not given.

—Seattle’s Theraclone Sciences formed a partnership with Tokyo-based Zenyaku Kogyo, worth up to $18 million over time, to discover antibodies that could protect millions of people in a flu pandemic, as Luke reported. Under the deal’s terms, Theraclone has given Zenyaku an option for exclusive rights to new flu antibodies in certain Asia-Pacific countries, while Theraclone gets an undisclosed amount of upfront cash and royalties on future product sales in Zenyaku’s territories.

—Seattle-based Omeros, the developer of anti-inflammatory treatments and other biotech therapies, is on the docket to go public this week and raise more than $80 million, as Luke reported. The company is also defending itself against accusations from its former chief financial officer that it filed false records with the National Institutes of Health and then wrongfully terminated him after he reported it to the board’s audit committee under the company’s whistleblower policy.

—Seattle-based Teranode raised $900,000 in debt financing, as Luke reported. The investors weren’t disclosed, although Bellevue, WA-based Ignition Partners has invested in the past. Teranode, a maker of software to organize life sciences labs, was founded in 2002 out of the University of Washington.

—Seattle-based Founder’s Co-op, a seed-stage investment organization, has backed two local Internet startups, Nearlyweds and BigDoor Media. Financial details of the deals were not announced, but Founder’s Co-op says it typically invests $250,000 or less in its portfolio companies.

—Redmond, WA-based Spiration raised $7 million in debt financing out of a $10 million offering, as Luke reported. The financing came from the company’s partner in Europe and Japan, Olympus Medical Systems. Spiration, which makes an implantable device to treat deadly lung diseases like emphysema and chronic bronchitis, has raised about $97 million since its founding in 1999.

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[Updated 9/30/09 2:15 pm. See below.] Seattle-based Founder’s Co-op, the seed-stage fund run by Andy Sack and Chris DeVore, has been busy as of late. The peer-to-peer angel group has made two startup investments that have come to light this month. The financial details of the deals haven’t been announced, but something interesting may be brewing here.

Here are the two Seattle-area startups that have been funded:

—Nearlyweds, led by Porter Bayne and John Scrofano, is a maker of “social wedding software.” The company, which has been in business since 2007, designs personalized wedding websites for couples for a flat fee. DeVore announced the investment on his blog yesterday. The amount wasn’t disclosed, but Founder’s Co-op typically invests $250,000 or less.

—BigDoor Media, led by Zango founder Keith Smith, is still under wraps, but its website says it’s “building a completely new, automated content monetization platform for online publishers.” According to a regulatory filing on Sep. 1, BigDoor received $250,000 in equity funding, and Andy Sack (a former Zango board member) is listed on the form as a director. Smith, reached by e-mail on Sep. 1, declined to comment, saying the company is still in stealth mode.

I’m wondering if these latest investments represent a new kind of early-stage venture funding. I haven’t confirmed this yet with Sack or DeVore (neither would comment on the deal structure for this story), or with the startups in question. But earlier this summer, DeVore posted some intriguing thoughts on his blog about a type of investment model called royalty based financing (RBF).

DeVore described the model as “secured lending, but rather than requiring a fixed coupon and repayment period, the lender obtains a claim on a fixed percentage of gross revenues until an agreed-upon multiple of invested capital (typically 3 – 5x) is returned. RBF investors trade steeper default, timing and rate of return risk for richer potential returns than those offered by traditional business lending.”

So it sounds like the idea is to trade equity in the company for a certain amount of revenue per year—of course, this approach only works for post-revenue startups. DeVore went on to talk about “bringing the RBF approach to riskier, earlier-stage investing, where investors retain an equity position as an option on a future liquidity event, while receiving a portion of the expected return in the form of cash flows.”

Back in June, a related post in GigaOm said of such an approach, “In the middle ground between bankruptcy and an IPO, where millions of small businesses reside, it would provide a return for investors. That compares with today, which finds them stuck, waiting for a big payout that may never come.”

In DeVore’s post, he said his group was looking into the new investment model. “We’re trying it on for size, and—at least for some of our investments—this model may wind up being a better fit than the traditional venture approach,” he wrote. “Most of all, we love the idea of breaking the mold in our industry—early-stage investing—in the same way we hope our companies shake up the status quo in theirs.”

I could see this model working with Nearlyweds, which offers a paid service and has been in business for a while. But BigDoor Media is pre-revenue, so the fit isn’t as clear. I will have more on royalty based financing soon, as it pertains to the broader investment community, so watch this space.

[This paragraph added after speaking with Founder's Co-op.] Reached by phone about Nearlyweds, DeVore confirmed the investment was less than $250,000. He couldn’t comment on the deal structure, but it sounds like Nearlyweds has a compelling offering in the wedding software space that fits well with Founder’s investment strategy. “It doesn’t feel like existing free products have hit the nail on the head,” DeVore said. “They can create a step function in quality, and in what share of the market they have.”

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It was another busy week for deals in the Northwest, with lots of action in cloud computing software, mobile, and healthcare. Xconomy even got into the act, inking a partnership with The Seattle Times (see below).

—Amazon (NASDAQ: AMZN) acquired Lexcycle, an e-book startup based in Portland, OR, and Austin, TX. No financial terms were given. Lexcycle makes an online bookstore application called Stanza for desktops and the iPhone. The move is viewed as part of Amazon’s effort to consolidate its position in the e-book reader market for mobile devices.

—Seattle-based Symform, a cloud data storage startup, raised $1.5 million in Series A financing from OVP Venture Partners in Kirkland, WA. Symform, founded in late 2007, has developed an online data backup service for small to medium-sized businesses that is fast and relatively cheap. It is in public beta trials and plans to release its full service later this year. OVP’s Mark Ashida talked about the deal and some broader issues in investment strategy.

—Opscode, a stealthy Seattle startup working on cloud computing infrastructure for businesses, closed $2.5 million in Series A funding, led by Draper Fisher Jurvetson. Founded last year, Opscode says it will use the new cash to hire engineers and other key staff as it gets ready to launch its core cloud service this year.

—Seattle-based PATH, a global health nonprofit, received two grants worth $52 million to combat the spread of HIV, as Luke reported. The three-year grants are from the U.S. Agency for International Development ($35 million) to strengthen communities’ response to HIV in Ethiopia, and from the Canadian International Development Agency ($17 million) to aid HIV prevention efforts.

—Seattle-based LookStat, a maker of Web-based analytics and workflow automation software for the microstock photography industry, raised $500,000 from Seattle’s Founder’s Co-op and individual investors. LookStat is in public beta trials and looking to sell its service to photographers who want to know what kinds of photos are selling where, for example. Co-founder Rahul Pathak talked about what his company is doing, and provided some more context around the deal.

—Ryan reported on the Northwest’s second-biggest financing deal of 2009 so far, Seattle-based NewPath Networks’ $30 million funding led by Charterhouse Group in New York, with Denver-based Meritage Funds also participating. NewPath, founded in 2004, designs and operates wireless technologies such as antenna networks and underground fiber-optic cables for carriers like AT&T, Verizon, and T-Mobile, who need to provide wireless coverage in remote and difficult-to-access places.

—Bingen, WA-based Insitu, a developer of drone aircraft, received a one-year, $30 million contract from the Canadian government to ship small, unmanned aerial vehicles in support of Canadian military operations in Afghanistan. Insitu was acquired by Boeing (NYSE: BA) for about $400 million last summer.

—Hillsboro, OR-based Kryptiq, a maker of collaborative software for healthcare providers, sold off its health plan network management software line, called Choreo, to Portico Systems in Blue Bell, PA. Financial terms were not announced. Kryptiq’s core product helps providers share information with patients, labs, and pharmacies.

—Luke broke the news that Redmond, WA-based Asemblon has raised $2.9 million in the first installment of a Series C financing, led by London-based RAB Capital and Japan’s Sojitz Trading. Asemblon is working on a novel technology for storing hydrogen fuel using organic carrier molecules that can release hydrogen on demand, enabling the fuel to be stored at room temperature and without high pressure.

—Lastly, Xconomy has formed a partnership with The Seattle Times, whereby the Business/Technology section of Seattletimes.com gets an automatic feed of news and features headlines from Xconomy Seattle, as Luke announced. This syndication deal comes on the heels of another partnership we formed with the Seattle P-I back in December to share online stories.

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Seattle-based LookStat, which develops Web-based analytics, workflow automation, and earnings tracking software for the microstock photography industry, says it has closed a $500,000 Series A financing round from Founder’s Co-op and individual investors in the Seattle and San Francisco areas. Xconomy broke the preliminary news of the funding (but not the amount) last month, while reporting on a talk by investor Andy Sack of Founder’s Co-op.

To get the details, I met with LookStat’s co-founder and CEO, Rahul Pathak, a few weeks ago. Pathak was previously vice president of product management at Judy’s Book in Seattle (which Sack founded), and also spent time in the San Francisco Bay Area as a co-founder of Quova, and Boston as an MIT alum in computer science. LookStat focuses on microstock photos, which are cheap images provided on the Internet by a wide range of photographers, including hobbyists. “Microstock is growing like crazy,” Pathak said, “but it’s still very early days.” In particular, there haven’t been dedicated tools for automating workflow and telling microstock contributors (photographers) which kinds of photos are selling where, for instance. “Nobody’s approached it from a technical perspective,” he said.

Pathak and fellow co-founder Casey Zednick, LookStat’s chief technology officer, consider themselves “early innovators” in the microstock market, which Pathak says totaled about $200 million in 2007, and is expected to become a $600 million market in 2010 and 2011 (out of an overall commercial stock photography market of $2 billion).

The startup’s Web platform is now in public beta trials. As Pathak explains, “We want to sell tools to people. Rather than mine for gold, let’s sell the picks and shovels. It played to our strengths better as technologists.”

The next steps for the company are to expand its site and give photographers more detailed sales information about, for example, which categories of photos are selling at which time of year. From Sack’s perspective, LookStat represents a “proven team with a capital-efficient operating model” in a “fast-growing niche market.” Pathak didn’t give any specifics about revenue models, but it’s safe to say LookStat is looking to collect a fee for its tools in a wide-open and highly targeted market. We’ll be watching closely to see how it performs in a difficult sales climate.

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It was a very quiet week for deals in the Northwest, with just a trickle of activity in software, security, and biotech.

—Seattle-based Haute Secure, a software firm focused on computer security against malware, raised about $1.6 million in Series A funding. Investors in the round included Silicon Valley firms Baseline Ventures and Sherpalo Ventures.

—LookStat, a Seattle-area startup that makes software for analytics and workflow automation for the microstock photography industry, has received an investment from Founder’s Co-op, a Seattle-based seed-stage fund. (The news was mentioned in passing by investor Andy Sack at a financing talk.) The amount of the investment and the closing date weren’t announced, but Founder’s Co-op tends to invest between $250,000 and $500,000 in early-stage tech companies.

—Luke reported that Seattle-based VPDiagnostics received a $2.9 million grant from the National Institutes of Health to run a clinical trial of its MRI technology for determining a patient’s risk of stroke. The technology is based on 15-plus years of research at the University of Washington.

—Seattle-based Second Avenue Partners renewed its investment in Fanzter, a Collinsville, CT-based new media company. The $2 million Series B financing round was led by Steamboat Ventures. Fantzer, which was also backed by Seattle investors Curious Office Partners and Rich Barton (from Zillow), runs a celebrity website called Coolspotters.com.

—Seattle startup TrafficGauge, a provider of road traffic information in real time, was acquired by Networks In Motion, a mobile navigation and search company based in Aliso Viejo, CA. Financial terms were not disclosed. TrafficGauge first rolled out a mobile traffic map in Seattle in 2003.

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It’s always good to hear an outside perspective. Last night, Boulder, CO-based entrepreneur and investor Brad Feld, the co-founder of Foundry Group, Mobius Venture Capital, and TechStars, gave a talk at the Palace Ballroom in Seattle. The event was organized by Dave Schappell of TeachStreet and T.A. McCann of Gist. The crowd amounted to well over 200 people, and there was a ton of buzz about this event.

As there should be. Feld is the author of a popular blog, Feld Thoughts, and he had a lot to say about his entrepreneurial experiences in the 1980s and 90s, as well as lessons learned as an investor. One of his most recent projects, TechStars, is a mentor-driven seed funding program for tech startups. Last week, TechStars announced it is expanding from Boulder to Boston, MA (where Feld went to school—he’s an MIT alum). So Feld had some interesting thoughts on what entrepreneurial communities and innovation clusters need in order to be successful.

Here are my top five takeaways from the evening:

1. Entrepreneurs are king. “Entrepreneurs drive all the innovation that matters,” Feld said. “Especially in times that are economically difficult, when people in powerful positions are in a ‘woe is me’ state.” (I took that to include VCs and heads of big companies.)

2. Entrepreneurial communities need to focus. “Seattle has a lot of interesting things going on,” he said. “Entrepreneurs don’t have that many focal points to engage in. You want breadth, but you also want depth.” People interested in startups and new ideas need more substantive ways to interact than meet-and-greets, he said. (In terms of Seattle, this would seem to include events and educational programs from WTIA and NWEN, as well as mentoring and seed-funding organizations like EO Seattle’s Accelerator and Founder’s Co-op. And content-based events from media outlets like TechFlash and Xconomy.)

3. It’s not the economy, stupid. “There are two categories of people—those who do stuff, and those stuff gets done to,” Feld said. “It doesn’t matter if things are good or bad, people who do stuff will do stuff.” Don’t view raising money as the big goal, he added. If you’re a business person, “find some nerds you want to work with”—and vice versa. “Just do it. Don’t say, ‘I’ll wait ’til this is better or that is better.’”

4. Web 2.0 and online advertising models aren’t dead. “If you’re smart about optimizing your tools, you’ll do well. It’s the same as two years ago,” Feld said. “I agree there’s way too many of the same thing…that’s usually true. The current cycle is challenging some assumptions.” (I took this to mean the field is crowded, but if your technology and business model are sound, you still have as good a chance as anyone. Committed founders will find a way.)

5. The VC model is still strong. “It’s not broken at all,” Feld said, adding that he’s amazed by all the attention from the media and others on “what doesn’t work when things get tough.” Venture funds are a decade-long process—they take 10 years to sort out winners and losers. The pulling back and self-examination that’s going on now is “probably healthy,” he said.

On a related topic, Feld also pointed out that although it’s cheaper to start a software or Web company these days, “it’s not necessarily cheaper to scale a business to a large company…To create a large company, you still need $20-30 milion…it’s not that $250K gets you there.” At the least, venture capitalists have a strong role to play there.

After Feld’s talk, Schappell announced to great applause, “This time next year, TechStars Seattle really needs to happen.” It will be interesting to watch how that program might scale to different cities—and I’m sure Feld will keep an eye on the Northwest (he’s been an investor in local companies AdReady, Smith & Tinker, Shelfari, and Judy’s Book, and is on the board of Impinj).

But perhaps the highlight of the evening was when someone asked Feld for the best Seattle pitch he’d heard that night. His answer marked the return of the Dildo Dude—a legendary local entrepreneur who’s working on a new, uh, application for vibrating electric-toothbrush technology. As Feld summarized it, “Most sex toys get up to 80 Hertz. His goes to 200 Hz.”

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It was a relatively light week for deals in the Northwest, with modest activity in business software, Internet, and biotech.

—PivotLink, a software firm specializing in business intelligence with offices in Bellevue, WA, and San Francisco, CA, closed a $10 million Series C round led by StarVest Partners. Other investors included Trident Capital and Emergence Capital Partners. PivotLink was called SeaTab Software until January 2008.

—Seattle-based Ontela, a mobile-imaging startup, closed an undisclosed amount of new funding from Eastven Venture Partners. Ontela has also signed deals with four of the top five handset makers to pre-install its photo-management software on mobile phones.

—Beaverton, OR-based Infinity Softworks raised an undisclosed amount of financing from undisclosed investors. The company makes software for doing calculations and creating reports on the iPhone, BlackBerry, and other mobile devices.

—Luke reported that Helix BioMedix (OTCBB: HXBM), a Bothell, WA-based developer of peptide molecules, raised $3.2 million through debt that can convert into shares of stock plus warrants to buy its stock. The company’s peptides are used in skin care and other cosmetic products.

—Bothell, WA-based MDRNA, a developer of RNA interference drugs, agreed to license some of its technology for a one-time, non-refundable execution fee from Roche, the Swiss drug giant. The deal is non-exclusive to Roche, as Luke reported, and the financial terms were not disclosed.

—Seattle-area startup Frugal Mechanic, an online search engine for auto parts, closed a round of seed funding from Seattle-based Founder’s Co-op, a peer-to-peer investment fund. The exact amount was not disclosed, but is between $250,000 and $500,000. Frugal co-founder Eric Peters told me the story behind the company and how it got funded in a difficult climate.

—Smartsheet, a Bellevue, WA-based firm that makes work-management software for businesses, formed a partnership with Amazon to deliver outsourcing services to mass consumers. The new offering is powered by Amazon Mechanical Turk’s 100,000 virtual workers, and rates for outsourced tasks run between $0.01 and $5.

—In a snapshot of Seattle-area tech startups, four companies formed significant new partnerships, though no financial terms were disclosed. Bellevue-based Apptio, an IT optimization firm, made deals to work with Amazon Web Services, Skytap, VMware, and Citrix. Seattle-based Earth Class Mail licensed its online postal-mail delivery software to Swiss Post. Seattle-based Evri is providing its content recommendation widgets to the Washington Post for online news stories. And Seattle’s Redfin announced new partnerships with more than a dozen real estate brokers around the country, representing a shift in the company’s business strategy.

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On Monday, Seattle-area startup Frugal Mechanic closed a round of seed funding from Founder’s Co-op, an early-stage investment fund for Internet companies. Frugal Mechanic is an online search engine for auto parts, so people can find the best price for an air filter or muffler, and get the right part to match their car quickly and easily. It doesn’t exactly sound like turbo-charged technology, and the size of the investment (between $250,000 and $500,000—exact amount undisclosed) is barely enough to buy a couple of Tesla Roadsters. But the business lessons for launching a company in the current climate are immense.

I spoke with Frugal co-founder Eric Peters to get the story. Peters and fellow co-founder Tim Underwood were college roommates at the University of Washington. Peters went on to work for Amazon and Microsoft (MSN Search), while Underwood logged time as an Amazon developer. Last June, they were both laid off from their jobs at Bellevue, WA-based Second Space, an online marketplace for vacation homes and retreats.

Peters and Underwood decided to start something new, and spent time looking at different possible Web businesses. They settled on auto parts not because they were car enthusiasts, but because they noticed it was inefficient to go to existing product-search sites like Froogle and find what you need in a niche market, and then match the right part to your car. “The space is very fragmented. There are different sites for different parts,” Peters says. “We wanted to just focus on doing auto parts better, and be more agile.”

The key to their success so far has been their revenue model. (Hint: not much advertising.) For each auto-part transaction on the site, which averages about $100, Peters says, Frugal Mechanic collects a fee of 8 to 15 percent. Because the company connects buyers with sellers, Frugal doesn’t have to worry about managing customers’ credit card information, and so forth. On the flip side, Peters says the company also has been pursuing a “white label” service, whereby Frugal hosts another …Next Page »

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Seattle-based Frugal Mechanic, an auto-parts search engine, has received seed funding from Founder’s Co-op, a peer-to-peer investment firm also based in Seattle, according to TechCrunch. The exact amount was not disclosed, but is between $250,000 and $500,000. Frugal Mechanic was founded in July 2008.

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Have angel investors become the new venture capitalists? Earlier this month, my colleague Wade Roush reported on a presentation by James Geshwiler of the Boston-area group CommonAngels about the changing nature of angel investing. Between Geshwiler’s comments and what I’ve been hearing around Seattle, it seems like the dynamic between angels and VCs has shifted in the tech community.

To get the local angel perspective, I had a chat with Geoff Entress, one of the most prolific early-stage investors in the Northwest. Entress, a former venture partner with Seattle-based Madrona Venture Group, works closely with several regional investor networks, including the Alliance of Angels, Keiretsu Forum, Zino Society, and Founder’s Co-op. “Things have changed radically in the angel community the last few months,” Entress says.

The reasons for this include the economic downturn and lower startup costs. Particularly on the Web 2.0 or social networking side, Entress says, startup companies can now realistically turn to angels, who are usually a network of individuals who have run companies themselves and are able to put in a few hundred thousand dollars in seed capital. “It costs a lot less to start a business these days,” he says. “Companies may raise low millions and that’s all the money they’ll ever need, and they’ll get to cash-flow positive. A lot of companies I’m in, that’s what’s happened with them.”

Whereas venture capital firms typically look for much bigger deals. If you’re a fund with a billion dollars in assets under management and you’re talking to a startup that may ultimately be worth $50 million, Entress says, the potential returns aren’t big enough for the investor. “You’ve got to do better than that. You’ve got to get bigger amounts of money in and get the same multiple to really move the needle for a huge fund. We were seeing all this before the economy turned bad,” he adds. “Optimally, what a venture firm needs is to get the first couple million in, but then the idea is they’re going to put more money in—tens of millions of dollars in order to be a meaningful deal for them.”

Entress then summarized what he sees as the top three trends in angel investing in the current climate:

—Valuations of companies are substantially down. “You’re seeing huge decreases, 80, 90 percent in some cases, and about 50 percent on average,” he says. That must be factored into any investing strategy.

—Angels are getting a chance to invest in deals that used to go to venture capitalists. “VCs have been focusing on triage,” Entress says. “Everyone’s worried about financing risk going forward. If you’re worried nobody’s going to fund a company down the road, you’re going to hold back.”

—Angels can acquire existing companies and websites at the right price. “There are opportunities for interesting strategic combinations,” Entress says. As recent examples, he points to his acquisition of Seattle startup Judy’s Book last year, as well as Pet Holdings’ pickup of Fail Blog.

So, are angels the new VCs? Entress won’t go that far. “Angels have become an alternative to VC, particularly for Web 2.0 deals,” he says. It is true, he adds, that angels have stepped in to fill some of the early-stage funding gap. But it sounds like although they may compete for more deals now, angels and VCs still have very different strategies and outlooks—and it will be interesting to watch how each continues to adapt to the climate.

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Think the super-rich don’t have problems? Try fending off friends and relatives who always want to borrow money, or raising spoiled brats who don’t take responsibility for their actions. Not to mention the more obvious financial questions of how to manage such hefty portfolios—especially in economic times like these. (Granted, some of this might be viewed as insensitive at a time when local food banks are running out of food.)

Enter Tiger 21, an exclusive network for the very wealthy that is opening in Seattle this month. Its goal is to provide a support group for people of high net worth to talk about their investments, portfolios, and problems. Local entrepreneur and investor Andy Sack of Founder’s Co-op will be chairing the Seattle chapter of the national group. Last month, I sat down with Sack and Lewis Haskell, the managing director who runs Tiger 21 west of the Mississippi. I’m a little under-qualified to speak on the problems of the wealthy, but Sack and Haskell filled me in nicely.

First, some background. Tiger 21 was founded in New York in 1999 by Michael Sonnenfeldt. Sonnenfeldt had recently sold his interest in Emmes & Company, a real estate holdings company, for tens of millions, and was looking to build a safe haven for people in similar circumstances to meet and talk. The confidential network has grown into a big business. Besides New York, Tiger 21 has existing chapters in some of the country’s wealthiest places—San Francisco, San Diego, Los Angeles, Dallas, and Miami. It has about 170 members who have an average net worth between $30 million and $50 million.

And that’s the catch: to join Tiger 21, you have to have at least $10 million, exclusive of houses, cars, and other properties (how they verify this, I’m not sure). And it costs $30,000 a year to be a member. All members sign confidentiality agreements.

Sack’s connection with the group is through its founder. Back at MIT around 15 years ago, Sonnenfeldt was Sack’s mentor at the Sloan School of Management, and the two have invested together. Seattle brings some unique challenges to the very wealthy, Sack says. They might be overexposed because the community is relatively small. “The network of support is not as high, or as sophisticated, in Seattle,” he adds.

With the likes of Bill Gates, Paul Allen, Nathan Myhrvold, Steve Ballmer, Jeff Bezos, Howard Schultz, Craig McCaw, and Jim Jannard (founder of Oakley eyewear) in the area, you’d think Washington state would have such a support network in place already. But what Tiger 21 provides that other wealthy social networks don’t is a focus on members sharing how they manage their financial lives, says Haskell.

As for its future Seattle members, Sack and Haskell have been recruiting for about 10 openings. I’m guessing they’re not taking unsolicited applications. Sack says members have to have an interest in learning, and be willing to be open with their peers. And, he added, “There’s a ‘no asshole’ rule.”

Stay tuned for what goes on behind Tiger 21’s closed doors in Part 2—Eds.

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Two weeks ago, Xconomy published our first iteration of what we call the Seattle Layoff Litany. It’s a document that tracks tech and life sciences job cuts in the Northwest. Here is a quick update about three local companies that have gone through layoffs since then (one is unconfirmed). I thought it was especially interesting that each company has spawned successful entrepreneurs who are active in new ventures that we’ve written about extensively in the past month or two.

1. Hubspan

This is unconfirmed, but Xconomy has learned from a source familiar with the company that Seattle-based Hubspan, a maker of business-to-business integration software, laid off 11 employees (roughly 20 percent of the staff) across sales, marketing, and services and development, on November 14. E-mails sent to company representatives were not returned, and one person with apparent knowledge of the situation would not comment. My point here is not to muckrake, but rather to keep up with the facts.

Hubspan co-founder and former CEO Rick Luebbe now leads the Seattle energy-storage startup EnerG2, which we profiled last week.

2. CarDomain

Seattle startup CarDomain, a social-networking site for auto enthusiasts, cut 16 jobs (about half its staff) on November 18. “Although we are growing overall traffic and member engagement year-on-year, the economy and the automotive industry have taken a significant turn for the worse, leading to very pessimistic industry projections of advertising budgets and a protracted recovery period,” said CEO Rajan Krishnamurty, in a statement to TechFlash.

CarDomain was founded in 1998 by Alex Algard, who went on to become CEO of WhitePages.com, and more recently a limited partner in Founder’s Co-op, the Seattle-based peer-to-peer seed stage fund that we profiled last month.

3. Jobster

The Seattle-based office-networking firm Jobster cut some 15 positions (38 percent of its staff) on November 13, as reported by TechFlash. Founded in 2004, Jobster is backed by the likes of Ignition Partners, and once had about 150 employees. It is now down to about 25.

Former Jobster employees Dave Lefkow and Justin Esch, who left in 2007, have since made their name with a new startup called Bacon Salt, which they’ve been promoting using social media, to great effect.

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One of the most influential people in the Seattle tech-innovation scene doesn’t even live in the area. He’s Neil Patel, and if you’re in the Web analytics or Internet marketing business, you already know who he is. That’s because Patel has done marketing and search engine optimization for everyone from giants like General Motors, AOL, HP, Samsung, and Viacom to fast-rising local companies like Wetpaint. He has tons of business in the Seattle area, and he also has some funding news about his own company.

Instead of the drizzly Northwest, Patel makes his home in warm and sunny Orange County—Buena Park, CA, to be exact—where he’s lived since he was a kid. Except he’s still a kid. He’s only 23 and technically still lives at his parents’ house, though it’s mostly a practicality because he travels about three weeks of every month. Still, he knows the ins and outs of Orange County and isn’t in a hurry to move. (I can almost imagine him saying, “Welcome to the O.C., b***h.”)

I chatted with Patel a couple weeks ago after I learned he was a limited partner in Founder’s Co-op, the Seattle seed-stage investment fund. Patel says he comes up to the Northwest every month. “It’s my favorite place other than Orange County. There’s much more investment going on,” he says. “I do more in Seattle than in most places.” For starters, he is an investor in a few area companies, including Bothell, WA-based Sandlot Games and Seattle-based EvoLanding, a media network and website developer. He also serves on the boards of BuddyTV, ICanHasCheezburger.com, CultureMob, LiquidPlanner, and Optify (which TechFlash profiled yesterday).

Patel is also the co-founder of the marketing companies ACS, Crazy Egg, and Kissmetrics. He gave me some news about Kissmetrics, an analytics startup that he spends most of his time with: it recently raised $800,000 from True Venture and other investors. (To his knowledge, this hasn’t been reported anywhere else.) The model for his virtual company is low overhead and small offices: the eight employees are spread out in places like Australia, California, Chicago, and Eugene, OR. “I’ve done so much marketing for these investors, it doesn’t take much to get money,” Patel says. “The VCs let me do whatever I want…The guys have their own startups, so they themselves are used to doing multiple things at once.”

Patel explains what makes Kissmetrics different from other analytics sites that tell you how your website is performing. “All these sites out there, there’s all these solutions, and all they do is traffic stats,” he says. “None of them tell you how to improve your site.” What Patel’s company does is “social analytics”—it tells you “here’s the users interacting, here’s the users commenting, here’s where they come from,” he says. It tells you how best to target visitors who come back three times, say, or how to increase your page views per visitor, or what your “viral growth rate” is. “If you’re an e-commerce site,” he says, “here’s the visitors who are converting, here’s who’s not converting. You might try X, Y, or Z.”

The plan is to start the beta phase in early December, and make Kissmetrics available to the public by the end of January. Patel’s goal, he says, is to “get millions of people” using his analytics software.

But how did he get to where he is so fast? That’s an interesting story. Patel says he started his first company in high school, when he was 16, with the help of business partners and his sister. “I hate school religiously,” he says.

His first company was an online job site to compete with Monster.com. It didn’t work out, because it got no traffic and it didn’t take credit-card payments. “I paid Internet marketing companies, and got screwed over,” Patel says. “They didn’t do much. So I learned it myself.” Soon thereafter, he was taking a speech class at a community college when he met a classmate who was a sales rep from ElPac, an Orange County-based electronics company. “He said, ‘Hey, you should work for ElPac,’” says Patel.

ElPac was bringing in more than $20 million per year, Patel says, and asked him to help boost its Web traffic. By optimizing webpage codes for search engines and hitting up other sites for links, he helped more large companies find ElPac and then buy electronics from it in bulk. The company paid him $3,000 per month for about 10 hours of work. “That’s a lot for a 16 or 17-year-old kid,” he says.

The pay may have changed since then, but not the mission: to help companies find more customers online. “We focus on the website itself,” says Patel.

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Andy Sack’s favorite coffee drink is a 12-ounce, single-shot, non-fat latte. But if you’re meeting with him to pitch your latest technology startup idea, be advised that he’s probably on his second or third cup already. These days, his schedule is filled with meetings and networking—most of it pretty informal. “I’ll have coffee with anyone,” he says.

On Tuesday morning, he sat down with me at Louisa’s Cafe near Lake Union in Seattle. It’s where Sack hosts his weekly “open coffee” hour, drawing a regular crowd of entrepreneur types looking to network over coffee and pastries. (”They don’t have the best coffee, but they have the best blueberry scones,” says Sack—and he’s right.) I wanted to get the full story of Founder’s Co-op, the startup fund run by Sack and fellow Web entrepreneur Chris DeVore, as well as hear feedback from the community. Back in June, I reported on the background and motivation behind the half-year-old venture. Then, just a week ago, Luke reported that Sack and DeVore have raised a new round of funding and announced 14 limited partners in the fund, all of them tech entrepreneurs who are well-known in Seattle innovation circles.

It’s a unique model, and Sack began by clarifying the terms of the new financing. The fund is $2.5 million, with each limited partner (LP) putting in $150-200K, which buys each of them a stake in all of the startups to be funded. They will meet as a group six to eight times a year. “It’s a peer-to-peer, seed-stage fund,” says Sack. “Chris and I are the decision makers—it’s not a democracy. As a group, the LPs provide deal flow and help guide our investment strategy.” Crucially, they will also provide mentoring and connections for the portfolio companies, which Sack says will typically be made up of small teams of young, first-time entrepreneurs (usually just two people).

The peer-to-peer aspect is a big part of what makes Founder’s Co-op different from the Y Combinator and TechStar incubators of the world (we’ve covered those here and here). The firm’s limited partners include Ben Elowitz and Kevin Flaherty of Wetpaint, Andy Liu and David Niu from BuddyTV, Adam Brotman from Corbis and Barefoot Yoga, and Geoff Entress, formerly of Madrona Venture Group. I asked a few of them about their involvement in the fund, and what’s special about it. “The model is special because it really helps entrepreneurs jump start their businesses,” says BuddyTV’s Niu. “They don’t have to worry about some associated startup infrastructural costs like phones, Internet, etc. if they move into the co-op’s office. In addition, they can access a wide range of ideas and experiences from Andy [Sack] and other LPs who have successfully started their own companies and want to give back to other local entrepreneurs.”

As for why he joined, Niu touts “the opportunity to work with Andy and the other LPs. I have a great amount of respect for what they have accomplished individually, and I think pooling their collective experiences will be a formidable asset that portfolio companies can tap…Of course, there is much less certainty and a higher chance to see failure when you invest in something early stage and unproven. At the same time, you can have an outsized positive influence and guiding hand to hopefully channel them towards success.”

Kevin Flaherty of Wetpaint echoes the sentiment about Sack and the other partners. “They all have miles of experience in the startup world. Being able to experience how they evaluate potential investments is a great learning opportunity for me. From a purely financial standpoint, there is a great need in the Seattle startup community for this type of investment. Matching that need with good insight provides a great opportunity for a solid rate of return,” Flaherty says. “We’ve already seen less venture interest in certain types of businesses and renewed focus on certain business metrics that for a while were undervalued. That being said, I expect there to be significant startup activity that is uniquely suited for Founders Co-op. Two folks in a garage are perfect for the fund.”

I also gathered some reactions from people outside the co-op—local angel investors and …Next Page »

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