It took about a year and a half before I could even begin to understand the I Can Has Cheezburger (or “LOLcats”) phenomenon online. The mundane yet bizarre cat pictures. The misspelled captions. The curious Internet-slang grammar. They were kind of funny, but mostly they were weird—and, at times, even a little annoying.

Yet millions of people flocked to these Web pages, submitting their own photos and captions and commenting on others. The Cheezburger Network, as the company behind it is now called (formerly Pet Holdings), has become a runaway success—an Internet sensation that has spawned a total of 26 humor sites, including FAIL Blog, GraphJam, Engrish Funny, and Emails From Crazy People. The original Cheezburger site hit 1 billion page views (10 billion cat images) earlier this month. And during the first half of 2009, the company raked in seven figures’ worth of revenue from advertising, licensing fees, and sales of merchandise, according to Time magazine.

So what’s its big secret? Why has the Cheezburger Network succeeded where so many other humor sites and blogs continue to toil in obscurity? It took me a while to realize it’s not about luck, or marketing, or the power of certain kinds of humor. There’s some good timing involved, sure, but mostly it’s about the drive and mentality of the company’s leader, Ben Huh.

Huh is often portrayed in the media as a jokester. Photos in articles show him wearing a funny hat or mask, surrounded by stuffed animals, or posing with a cheeseburger. That image is pretty far from the reality, as I understand from reading more about Huh and interviewing him recently. In a Q&A with Advertising Age earlier this week, for instance, Huh emphasized, “I am a business person.” And he shed some very interesting light on his approach to business: “We’ve gotten into situations where we’ve tried to acquire a blog for large sums of money, and they turned us down, and we’ve gone on to compete and we’ve won,” he said. “My final offer is, ‘If you do not do this, we will start a competitive blog, and we will not stop until we win.’”

Clearly, Huh has the killer instinct. He is deeply competitive, but not in an over-the-top way. He could turn out to be the Michael Jordan of consumer Internet startups, though we probably shouldn’t put him in the Hall of Fame just yet. Still, as a promising entrepreneur in his early 30s with a pretty big success already under his belt, his story—and his company’s strategy—is worth a closer look.

Huh first arrived in the Northwest in 2005 to work for Intava, an interactive media startup in Bellevue, WA. Before that, he had graduated from Northwestern University with a degree in journalism during the dot-com bubble. “They were handing out bonuses to college grads because we’d used the Internet once,” he jokes. Huh worked for a number of startups in the Chicago area, including his own Web analytics firm. “I made all the mistakes they say you’ll make,” he says. “I raised too little money, and spent all my time fundraising and not making a product for the market.”

By the time he landed in Seattle, Huh had made it a priority to always work for a company’s CEO, or at least have a dotted-line connection to them, in any job he took. “That was going to teach me more about running a company,” he says. “This is for my career, not for [any particular] job.” Huh had also learned from his previous startups to have a “huge focus on staying profitable.”

In 2007, he came across the I Can Has Cheezburger site, which had been started by a …Next Page »

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Fundraising by U.S. venture capital firms continues to lag. A survey released overnight by Dow Jones Private Equity Analyst shows that 26 VC funds raised about $3.5 billion during the three months that ended September 30—down about 51 percent from the same quarter last year.

The findings nevertheless represented an improvement over the previous quarter, when VC fundraising was down by almost two-thirds compared with the second quarter of 2008. While fundraising was down for all types of VC firms over the past three months, those that invest in late-stage startups were hit hardest.

In a statement, Jennifer Rossa, the managing editor who oversees the survey, says, “The venture industry hasn’t been able to escape the turmoil affecting the rest of private equity. But brand-name firms and emerging managers with strong stories are still able to raise capital.”

The survey noted that Khosla Ventures was the biggest closer, raising $1.06 billion for a pair of funds that are focused mostly on cleantech investments. Star power also may have helped Andreessen Horowitz, the venture firm launched by Netscape founder Marc Andreessen, raise $300 million from limited partners that typically include college endowments, pension funds, and other institutional investors. The survey also noted the $500 million raised by Domain Associates, which specializes in life sciences investments, was short of the firm’s $700 million goal.

So far this year, 83 funds have raised $8 billion, or 42 percent of the $18.9 billion that 141 VC firms raised during the first nine months of 2008. The survey reported that all private equity firms, including VC funds, have raised $79.9 billion in 265 funds so far this year—a 59 percent decline from the same period last year.

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Healthcare-IT is a hot topic in Seattle these days—and it’s about to get even hotter. Sources with knowledge of the company tell me Appature, a two-and-a-half-year-old Seattle startup focused on improving marketing and customer relationship management in the healthcare industry, is close to getting its first round of venture funding—and may even be the subject of a bidding war between venture capital firms in both the Seattle area and Silicon Valley.

I won’t reveal the identities of the VCs involved, because the deal hasn’t closed yet, but let’s just say they are some of the more prominent investors in software and tech. Appature was apparently considering a local deal (with a very different structure) when another Seattle-area venture firm swooped in with great interest—and probably a lot more money. Appature’s founders did not return e-mails seeking comment on the company’s strategy or funding status.

Appature is already profitable and has some big customers, including Johnson & Johnson and Microsoft Health Solutions Group. The company has been bootstrapped up to this point. In the past few months, we’ve reported on Appature’s Twitter search engine, Chatterfly, and CEO Kabir Shahani’s tech entrepreneurship award from BusinessWeek.

The startup is known for its marketing software, which helps companies in the broader healthcare industry do things like deliver targeted and personalized marketing campaigns (and measure their effectiveness in real time), track marketing activity and the performance of their corporate and community websites, and learn more about their customers via sophisticated business intelligence and analytics tools.

Appature was founded in early 2007 by Shahani and senior engineer Chris Hahn. They had met previously at Seattle-based social networking startup Blue Dot, which was backed by prominent angel investors including Richard Fade (now with Bellevue, WA-based Ignition Partners), and former Starbucks senior vice president Donald Valencia, who passed away in late 2007. In an early interview with Seattle-based nPost, Shahani said his startup’s main opportunity was in improving customer relationship management for medical device, pharmaceutical, and healthcare companies. Appature helps these companies “understand what’s going on in their organizations in regards to their customer segments and how they can drive more revenue,” he said.

Earlier this month, Appature was featured as “startup of the day” by Microsoft’s BizSpark program. In a published interview, Shahani said Appature has 11 full-time employees (five are developers), and is planning to expand its team by the end of the year. “We are in the fundraising process to commercialize our product and increase our time-to-market,” he said.

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If you’ve seen from the inside how technology startups get created and funded, you know that law firms are involved at every step in the process. But to outside observers, it might be surprising just how central a role the attorneys can play—not just by helping entrepreneurs with incorporation papers and the other legal rigmarole of starting a business, but by connecting them with the right venture capital firms and making sure investments are structured fairly for both the founders and the venture funds. And while nobody likes to pay legal fees, a good outside attorney can literally save a company when things start to go south: an experienced firm can help straighten out founder-investor conflicts or line up emergency financing, for example.

Given that Boston was the birthplace of venture financing, it’s probably not surprising that it’s also home to a large group of law firms specializing in company creation and financing. Indeed, you can’t go far in the startup world without bumping into names like Cooley Godward Kronish, Edwards Angels Palmer & Dodge, Foley Hoag, Foley and Lardner, Goodwin Procter, Mintz Levin, Proskauer Rose, Ropes & Gray, Nutter, and Wilmer Hale (see tables on this page and page 4). Several of these firms are home to former partners from Testa Hurwitz, the Boston firm that more or less invented the modern corporate technology practice; Testa launched and represented scores of Boston-area startups, venture capital funds, and technology giants between its founding in 1973 and its dissolution in 2005.

Last week I sat down with Tom Burton and Lewis Geffen, two attorneys from the corporate practice at Mintz Levin’s Boston office, to hear more about how law firms fit into the local innovation ecosystem. Founded here in 1933 by Herman Mintz, Benjamin Levin, and Haskell Cohn—three Harvard Law School graduates turned away by Boston’s white-shoe firms because they were Jewish—Mintz Levin now has nearly 500 attorneys, making it Massachusetts’ fourth-largest law firm. It has long represented Biogen Idec—one of the first big biotechnology success stories—and was intimately involved in AOL’s acquisition of Time Warner in 2000. The firm also has major operations in San Diego. And under Burton’s direction, it has developed a booming practice representing clients in the energy and clean technology sectors on both coasts. Many of the firm’ clients turn up regularly in these pages, including EnerNOC, Greatpoint Energy, FloDesign Wind Turbine, General Catalyst, and Rockport Capital.

At Mintz Levin’s office near San Diego’s Carmel Valley, partner Carl Kukkonen tells Bruce, “We represent a lot of small, pre-funded venture-backed companies as well as multi-nationals.” Kukkonen, who was among the lawyers to open the San Diego office in 2006, adds, “I like to tell people I was working with solar, fuel cell, and battery companies before I ever heard of the term ‘cleantech.’”

From Mintz Levin’s 43rd-floor conference room at One Financial Center in Boston, one can peer down on the Federal Reserve building, the Custom House Tower, and every downtown landmark. It’s a far cry from the brick warehouse district of Kendall Square where we scribes at Xconomy spend most of our time—but the visit was an interesting reminder, for me, of all the high-level networking, negotiation, advice, and other homework that goes into getting a technology startup off the ground.

In my interview with Burton and Geffen, portions of which are transcribed below, we covered everything from the state of the cleantech industry and the challenges of working for both startups and venture funds to non-compete agreements and that old chestnut, the difference between East Coast and West Coast investing cultures.

Xconomy: Explain to me how Mintz Levin wound up developing an energy and cleantech practice.

Tom Burton: One thing that’s interesting about Mintz is the entrepreneurial nature of the firm itself, and the way it moves into markets that other firms haven’t placed a bet on. I was pitched that back when I joined the firm in 1996, and I chose Mintz over a lot of safer bets like the Skadden Arpses of the world.

Lewis Geffen: At Sherman and Sterling in New York, where I spent my first five years, no one ever thinks “I have to produce business somehow.” At Ropes & Gray or Wilmer Hale, new associates are simply given work. Whereas we teach “business development 101″ to our associates. It’s part of our fabric here.

TB: For me, all I knew was that I wanted to build something that hadn’t been built before. I wasn’t sure what it was going to be, but I trusted in the firm’s pitch, and took advantage of some luck. When I was a second-year associate, I brought in my first client, who …Next Page »

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Investor Jeff Schrock calls Seattle-based EVO Media a “ramen profitable” startup. Co-founder and CEO Geoff Nuval calls it “roast beef sandwich” profitable. Two guys, two spellings of the same first name, two different food analogies. But the message is clear: these guys are hungry.

Call it what you want, EVO Media is turning a profit some six months after launching DevHub—a free Web publishing platform that helps companies and individuals manage and monetize niche websites—and after going through a strategic downsizing. The company, founded in late 2007, had raised money from Monster Venture Partners and prominent angel investors including Alex Algard, John Cunningham, and Geoff Entress.

But early this year, EVO realized it would not be able to raise a favorable round of venture funding. So what did it do? Focused on getting revenue. Schrock, a tech entrepreneur-turned-executive-turned-investor (he co-founded Seattle-based Activate before his time at Yahoo, RealNetworks, Monster Venture Partners, and now Intel Capital), has overseen the company through this formative period as its chairman. (See more on DevHub in this TechFlash piece.)

The story goes back to the fall of 2007, when Nuval, a Stanford grad, moved to Seattle from Silicon Valley, where he had worked at Lehman Brothers Venture Partners, doing mobile and Internet investments. He had been introduced to fellow EVO co-founders Daniel Lee Rust (a tech expert) and Mark Michael (a sales expert) through his assistant at Lehman, a childhood friend of theirs. Rust and Michael were running a Web development shop for startups, but together with Nuval, they conspired to make a Web platform for themselves—one that customers could use to create sites. “The chemistry was awesome, the idea was compelling enough,” Nuval says. “I threw as much stuff as I could into my SUV and drove up here.”

Schrock met the team in early 2008, and was duly impressed. “One of the investment themes of Monster Venture Partners was capital-efficient development of technology businesses,” he says. “The founders here, they had a lot of the attributes I really admire and look for in startups. They were young, aggressive, intelligent, hard-working, and they had this set of tools and a balanced skill set. They figured out a way to turn blank domains into real working websites.”

It was a way to lower the cost of creating websites and content, Schrock says. WordPress had done something similar for blogs, but there was still no built-in way to make money from those sites. So Nuval and his team focused on tools for building and managing commercial sites. They raised …Next Page »

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Worcester, MA-based RXi Pharmaceuticals (NASDAQ: RXII) said today it is raising $8.3 million in working capital through a stock offering that’s expected to close on August 4. The company, which is developing drugs based on RNA interference for the treatment of conditions such as rheumatoid arthritis, is selling about 2.4 million shares of common stock at $3.50 per share, as well as warrants for almost a million shares at $4.50 per share. It expects to realize about $7.8 million in net proceeds from the sale.

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Amid fresh signs of concern for venture capital in San Diego, we saw some local technology startups take big risks to push their business forward. Our wrap-up of the week’s innovation news begins now.

—The largest wireless communications provider in Japan, NTT DoCoMo, invested $45.5 million to acquire a 35 percent stake in PacketVideo, the last operating company remaining at San Diego’s NextWave Wireless (NASDAQ: WAVE). PacketVideo spokesman Neil Sharma told me the deal provides a key infusion of cash for NextWave, which intends to use the proceeds to pay down its debt and help fund its corporate restructuring.

—The Tech Coast Angels’ Ralph Mayer and Mike Elconin added some interesting perspective to our ongoing discussion concerning the evaporation of San Diego-based venture capital. In an Xconomy Q&A, Elconin observed that he’s seeing VCs throughout Southern California migrating to the San Francisco Bay area. He also says VC activity was trending down in San Diego even before the current recession hit.

—OK, the financials at San Diego’s Helix Wind look, uh, unfavorable. But the startup wind turbine maker is advancing its business on several fronts. The company signed a joint development agreement to create a wind turbine for an oil field injection system. Helix is acquiring Venco Power, a German maker of eggbeater wind turbines. And the company has introduced a “smart grid” wind turbine monitoring system.

—BakBone Software CEO Jim Johnson told me he’s continuing to look ahead for ways to broaden the company’s core business in data storage and recovery. The San Diego-based company made two acquisitions in May—but only after BakBone had emerged from a tunnel of accounting woes that lasted more than four years. BakBone shares trade on the Nasdaq bulletin board.

—A mid-year survey by Dow Jones Private Equity Analyst shows that fundraising by U.S. venture capital firms fell to its lowest level since 2003. The survey shows 51 venture firms have raised $5.1 billion nationwide during the first six months of 2009. That’s down by almost two-thirds from the first half of 2008, when 115 VC firms raised $13.6 billion.

—Under a contract awarded by the U.S. Navy last week, San Diego’s General Atomics will develop a prototype electric motor to be installed in a guided missile destroyer for use during low-speed operations. The Pentagon said the project to develop a hybrid-electric warship is intended to demonstrate significant fuel savings.

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According to report today by PE Hub’s Dan Primack, Highland Capital Partners of Lexington, MA, has postponed the close of its eighth venture fund until mid-July to allow more time for limited partners to pony up. Primack’s analysis, based on conversations with unnamed limited partners, is that lackluster venture returns (8 percent on Highland’s sixth fund, -16 percent on its seventh) are making it difficult for the firm to entice back existing LPs or bring in new ones, despite a fee reduction; he reports that the firm is still about $100 million short of its $400 million target for the fund, which was originally scheduled to close this week.

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Portland, OR-based SplashCast has been making news in the past day or so, after a report surfaced in TechCrunch that it has discontinued its original product—user-generated content software—and is looking for a buyer after failing to raise a Series B funding round. Rick Turoczy, of the Portland-based blog Silicon Florist, pointed out that when it comes to a startup being for sale, “Who isn’t?”

I caught up with SplashCast chief executive Michael Berkley this morning, and while the TechCrunch piece is essentially on target, he had some important clarifications to the broader story. For one thing, SplashCast is not going out of business—it is refocusing. “The real story was that the product we originally launched with in 2007 was a user-generated content system that we are taking offline, and we’re focusing all our resources on the product we’ve been developing in the past year,” Berkley says. “We took a shot at user-generated content. It’s a really difficult product. It’s a difficult play in general to monetize. Now we’ve found something really easy to monetize.”

That something is “social television”—software that syndicates TV shows directly to viewers’ social-network pages on the Internet. And the money comes from big advertisers. Back in December, we reported on SplashCast’s partnership with video service Hulu to distribute TV shows on Facebook and MySpace. “The value we’re giving advertisers is a way to get their branding and messaging into Facebook and MySpace in a really authentic way by using premium television content as the vehicle,” Berkley says. “For large brand advertisers like car manufacturers or cereal companies, they’re very concerned about what social network users will say about their brand. But they want to be part of Facebook and Myspace. So if there’s a way for them to do it by associating themselves with predictable content, in the context of Facebook and MySpace, that’s what we’re offering.”

As for the other half of the story—the part that has some observers worried about another startup going belly-up in Portland (Vidoop recently closed)—Berkley was reassuring. “We’ve been struggling with raising a series B round of funding,” he says. “In the meantime, we’ve been approached by a couple of larger companies looking to buy us, and we’re evaluating those opportunities. The truth is, we’re on the M&A market.” He adds that any acquisition will play out in the next two or three months.

SplashCast currently has eight employees. It was founded in 2006, and raised $4 million in first-round funding from angel investors. “That’s one of the reasons it’s been hard to raise the series B,” Berkley says. “We don’t have a VC in the Series A to help with the introductions and provide the validation a lot of series B investors would look for.” He adds that an ongoing discussion locally is that “it’s very hard to raise money in Portland. There isn’t the VC establishment here.”

(Sounds like an opportunity for Seattle and Silicon Valley to me.)

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Prism VentureWorks in Needham, MA, has given up for now on fundraising for its sixth venture fund, PE Hub reported this morning. The firm had hoped to raise $275 million for the fund, but expected commitments from large institutional investors such as the New York School Teachers’ Retirement System and the New York City pension fund haven’t materialized, according to the report. Prism told PE Hub it still has money to invest from its $250 million fifth fund.

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Boston- and San Francisco-based Sverica International, a private equity fund that invests in service-oriented businesses and light manufacturing companies, said today it surpassed its $250 million target for its third fund, closing the fund at $265 million last November. The company said its current areas of investment interest include wind energy, enterprise software, and healthcare services.

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First off, please don’t call it an eBay competitor. Sure, it’s in the online marketplace space, but it’s going after a specialized segment with a different approach. The startup is called Bonanzle, it’s based in Kirkland, WA, and it has one of the most promising trajectories of any young company in the Northwest. Bottom line: Bonanzle is already profitable, and has been turning away investors eager to get a piece of the action.

Founder Bill Harding got the idea about two years ago to build a website for people to buy and sell collectibles and niche items—things like old magazines, comic books, posters, and jewelry. Previously, Harding had studied software and physics at the University of Washington Bothell, and spent five years at Kirkland-based gaming firm Amaze Entertainment, where he was a lead developer. The idea for Bonanzle came to him when he was moving out of his last apartment and trying to sell off a bunch of his stuff. “My main criteria was to sell it fast, and to sell to people where if they saw one item, they’d see other items and potentially buy them in groups,” Harding says. It didn’t work out that way. After looking around online and not finding a suitable site, he held a garage sale in the pouring rain. Afterwards, Harding says, “I went in wet with most of my stuff, and $25 in my pocket. That was my pain story.”

So, in January 2007, Harding set out to create a site where people could sell a lot of items quickly, and give buyers combined offers and better deals. He quickly found the space was “as crowded as you can get,” and he needed to differentiate his site. “My mantra was to make it as dirt simple as possible,” Harding says. “Take away every link, every visual element that wasn’t necessary. I thought it would compete with Craigslist, but as many an entrepreneur has figured out, it’s not about the technology. I started going after eBay people instead. That’s where it started to turn around for us.”

After a year and a half of development, Bonanzle (”Bonanza.com was taken”) rolled out a beta site in June 2008 and went fully public in September. That month, the site had between 10,000 and 20,000 unique visitors. When all of the numbers are in for March, Harding says he expects to have hit 750,000 uniques. This explosive growth seems all the more remarkable given that there was no marketing—word spread solely through customers.

And that’s one of the keys to Bonanzle’s growth—the site is built to be social and interactive, so people can discuss what they’re buying and selling, and build communities around various hard-to-find collectibles. “Our niche is everything but the ordinary,” Harding says. “We want to build a …Next Page »

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First of all, the terms “downturn” and “recession” don’t do justice to the current climate, says early-stage tech investor Andy Sack. As he puts it, “This is the seminal event of our lifetimes. This is our World War II. I guarantee I’ll be talking to my grandchildren about the Depression of 2009-10: ‘Make sure you save.’”

Sack was speaking at the MIT Enterprise Forum Venture Lab event in downtown Seattle last night. He was joined by Michelle Jacobson Goldberg, a partner at Bellevue, WA-based Ignition Partners who is on the board of Mpire (maker of Widgetbucks), Visible Technologies, and SEOmoz. The room was packed with scores of entrepreneurs looking for financing advice. “It’s ugly out there, and raising money has never been f-ing harder,” Sack told them.

What’s interesting is that both Ignition and Founder’s Co-op, Sack’s seed-stage fund with Chris DeVore, have made investments in the past 90 days. Founder’s Co-op has made bets on Frugal Mechanic; LookStat, an analytics and workflow-automation startup focused on the microstock photography industry (this was news to me); and a new smartphone company that hasn’t been announced yet. Meanwhile, Ignition announced earlier this week that it has led a $10 million investment in Silicon Valley-based Zenprise, a mobile-management software firm.

Goldberg and Sack spoke for about an hour on their perspective as investors, what startups need to know to get funded these days, and what the hot (and not so hot) areas of investment are. Here’s my top 10 list of takeaways:

10. Valuations are way down. “Anything that’s early, if you used to raise $3 million, you might raise $1 million now,” Sack says. And count on a similar calculation for the valuation, he adds.

9. Investors are seeing more pitches than ever. “There’s been an incredible amount of deal flow,” Goldberg says. To which Sack adds, “Deals are getting done, but more slowly and with a higher bar…Deals getting done really have to resonate with a customer base.”

8. Your next financing is your last. “Everyone wants to see your break-even plan,” says Sack. “Financing risk is higher than technology risk.” And Goldberg adds, “Take the money …Next Page »

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What are the arguments for and against bootstrapping a tech startup? When should a company raise venture funding? And what have Seattle entrepreneurs experienced in taking various different paths? I interviewed three prominent local entrepreneurs in the past week to get their thoughts. Yesterday, in Part 1 of this story, I gave some context and a quick preview. Today, I’ll give some more background on each entrepreneur, and let them tell their remarkable (and sometimes surprising) stories in their own words.

—Steve McCracken of CultureMob has experience with venture and angel funding, as well as bootstrapping. In 2000, McCracken co-founded Seattle-based Serials Solutions and bootstrapped the library-software company to an $18 million acquisition in 2004. “We started the whole thing with $8,000,” he says. “Unlike Web publishing stuff, you’re selling and getting money from Day 1. The hurdle to clear to get to profitability was lower.”

“I’d been at a VC-backed startup, and I’d seen the time that went into fundraising,” McCracken says. “When I looked at the time and effort required, basically I thought, I need to develop domain expertise in fundraising. Or with that same time, I can develop expertise in developing and selling my product…That was the basic math. Also, secondarily, in an unsexy thing like library [software], I didn’t think I’d get the money.”

“As a result of that, we were obsessed with revenue, just obsessed with it,” he continues. “The next thing you’re obsessed with is A, making clients happy, and B, selling. When you get to business fundamentals, that was really powerful. The whole organization could say, ‘Listen people, your paycheck is coming from selling the product. We are earning our paychecks.’ There was absolute clarity of objective to the team. It highly encourages focus and discipline on the key metrics.”

On the flip side, McCracken says, “Good investors bring more than just money. They bring connections, and an outside perspective, sometimes a challenging perspective—is this the right course, and why? By reporting to an outside set of investors, it sets higher bar on reporting. It prepares you for presenting your business. More money gives you runway and resources, if time to market is key. Maybe the product can’t be built without outside cash.”

In early 2007, McCracken co-founded CultureMob and has been in the process of raising angel funding. “The difference is that Serials Solutions had revenue from Day 1. CultureMob is primarily ad-driven—it’s got to get to a lot of traffic to make a lot of money. [Angel] capital is allowing us to grow rapidly,” he says. “It’s about being super-efficient, and getting us across the chasm and over to profitability.”

McCracken sums it all up: “We try to do with the least amount of angel funding possible. What are the considerations? If nobody is investing, bootstrapped is the way to go. Or if you’ve got early revenue…My goal is not to walk around town saying, ‘I got X million from the coolest investor.’ I care about building a great business…I’m not knocking VCs, I think there’s absolutely a great role for VCs in the economy…Massive capital isn’t, in this industry, the defining factor. It may be in pharmaceuticals—I’m not going to launch a new drug with bootstrapping.”

—Josh Petersen is the co-founder of Seattle-based Robot Co-op, the developers of popular social websites like 43 Things (which was funded by Amazon). A veteran of Microsoft and Amazon himself, Petersen has a unique perspective on fundraising. “We decided not to pursue the VC route mostly out of disinterest in convincing anyone about our idea or our team,” he says via e-mail. “In our minds, the Robot Co-op is more like a band than a company and going to work each day is more like band practice than working in an office. We sit at one common table, riffing off ideas and trying to put something together that we can be proud of. There really is no room in this approach for a VC/record exec. And what is the point of trying to prove yourself to a bunch of record execs until you’ve had a chance to play some shows and write some good songs? Pitching the band before it is actually playing live is how boy bands (think N Sync) get assembled, really the creation of producers and record execs rather than talent that fronts the band. Funny, a lot of funded companies (not all, by any means) remind me of boy bands, where it is not too hard to see …Next Page »

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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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Waltham, MA-based Atlas Venture has embarked on fundraising for a new venture capital fund, and hopes to raise $500 million, according to reports today in VentureWire and PE Hub. It’s the eighth fund the firm has raised since its founding in 1980; the seventh fund, closed in 2006, totaled $385 million.

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Fairhaven Capital Partners announced today that it has closed its second investing fund—and its first since TD Capital spun out the firm in June 2007. Known for their earlier investments in companies with successful exits, including Third Screen Media, Softricity, and EqualLogic, the seven partners at Cambridge, MA-based Fairhaven say they’ll use the $250 million fund to continue investing in early-stage technologies.

“We are bullish on innovation,” even in the face of economic turmoil, Fairhaven managing director Paul Ciriello told me yesterday. “We think it drives the U.S. and the world economy, and technology is certainly one of the key factors in innovation.”

The institutions and individual investors who contributed to Fairhaven’s fund are evidently bullish as well: the firm says it raised $50 million more than its target number. It’s already put money from the fund into several startups, including speech-to-text company EveryZing and data warehouse appliance maker Dataupia, both located in Cambridge, as well as Boulder, CO-based Cocona, a maker of eco-friendly fabrics, and Montreal-based Xtranormal, which is developing some cool tools that consumers can use to create animated movies.

Ciriello says Fairhaven invests based on broad opinions its partners have formed about how market demand is likely to evolve in four “theme” areas: enterprise information technology (including security), consumer technology, high-performance materials, and digital media infrastructure. In enterprise technology, for example, the firm sees an ongoing demand for technologies such as server virtualization that make operating the IT backroom easier and cheaper. If there isn’t a company serving what the firm sees as a market need, says Ciriello, it will start one. (That’s how Third Screen Media, a mobile advertising company founded in 2004 and purchased last year by AOL/Time-Warner, got off the ground.)

Located in the Draper Laboratory building at One Hampshire Street, the firm is about to lose its sliver of a view of downtown Boston, thanks to construction on the eastern reaches of the MIT campus. But that’s okay—Ciriello and his colleagues will probably be too busy filling up their portfolio with startups that exemplify their themes to look outside.

Here’s a transcript of my brief interview with Ciriello yesterday.

Xconomy: Why did you spin out of TD Capital? What investing approach did you pitch to the prospective investors as you were raising the new fund?

Paul Ciriello: TD Capital had five investing groups; we were the fifth one. A few years ago, the bank decided it didn’t want to be in the direct investing game anymore, so it spun out three groups. We were the last in and the last out. They spun us out as Fairhaven Capital, and TD Capital is an investor. The entire team came over.

Under the TD Capital flag, we made 20 investments from 2001 to 2006, and we continue to manage those investments here. Of the 20 investments during that period we realized eight, including several interesting ones. Third Screen Media was acquired by Time Warner. EqualLogic was acquired by Dell. Softricity was acquired by Microsoft. IPhrase was acquired by IBM. And Cloakware was acquired by Irdeto, a Canadian division of a South African company.

So the platform we had built was a good platform. We have developed an approach to investing in early-stage companies which we would describe as ‘market-driven.’ All venture capital firms look at market dynamics, but we overweight that exercise. Before we develop a deal, we develop opinions about what are the dynamics of a market in an existing space. Then we find companies that are consistent with our view about how the dynamics of a given market will behave.

When it came time to start Fairhaven and raise the second fund, our limited partners, which include some very strong institutional investors from North America, Europe, and Asia, saw in Fairhaven an approach they believed was repeatable, that had produced good returns in a period without a lot of strong performers, and they liked the fact that we had demonstrated we could be good partners. So it was performance, plus the fact that we played well with others.

X: The technology areas where you’ve invested, like mobile advertising with Third Screen Media and storage hardware with EqualLogic, are pretty different. How do you master the ‘market dynamics’ in each separate area?

PC: We spend time up front developing specific themes and market opinions. If you remember the end of 2000, Time magazine was publishing a cover story called “Technology is Dead.” And most people didn’t know what the next best thing would be. We thought the enterprise market would continue to buy technology, but what would it buy, and why? Our view was that …Next Page »

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This is a revised version of an essay that Microsoft’s Don Dodge published today in his personal blog and contributed simultaneously to Xconomy.

Commonwealth Capital Ventures held their annual open house this week at their Winter Street offices on “VC Hill” in Waltham. VC Hill is to Boston/Waltham what Sand Hill Road is to Silicon Valley—the center of Venture Capital for the region.

Commonwealth Capital recently closed on a large new venture capital fund. Longworth Ventures, another Boston/Waltham based VC firm, also recently closed a new fund. In fact, over the past year or so, several Boston firms have raised over $2 billion in venture capital. While the financial markets on Wall Street are in a panic, the venture capital community in Boston is strong, with billions of dollars to invest in innovative startups.

Boston based VC firms that have raised funds over the last year or so include Flybridge Venture Capital, Spark Capital, Fairhaven Capital, Commonwealth Capital, Longworth Venture Partners, Battery Ventures, 406 Ventures, Ascent Venture Partners, and Staley Capital.

If you look over the past three years, with giant firms like Polaris Ventures, Highland Capital, and General Catalyst raising huge funds, the total funds raised in Boston exceed $10 billion.

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A couple weeks ago, we ran a story about the relationship between Seattle startups and San Francisco Bay Area VCs. We asked, what can Seattle entrepreneurs do to attract more attention from California investors? The responses I got from the tech-business community painted an interesting and complex picture of the local investment scene—but it was just a start. The piece also generated quite a bit of feedback on Seattle versus the Bay Area, which I’d like to follow up on here. (The 49ers’ improbable 33-30 overtime win over the Seahawks yesterday does not help the Northwest cause.)

For instance, Tony Wright of Seattle-based RescueTime wrote in about his most recent fundraising efforts. “If I had it to do over again, I’m sad to say that I’d probably avoid the Seattle investor scene unless a motivated investor fell in my lap,” he commented on the post. “If you’re buying a ‘product’ like investment, it pays to go where there’s a competitive market—you’ll get a faster deal with better terms.” In his latest round, which will be announced soon, Wright says that only one of his “gold-plated collection of seed-stage investors” (out of several, presumably) is from Seattle.

That sort of feedback makes me wonder whether there is, or will be, a brain drain of entrepreneurial talent to the Bay Area. I’ve heard that seed-stage deals can be slow going in Seattle, compared to how fast Bay Area investors move to close them. This also made me wonder if startups tend to stick around in Seattle while seeking capital from elsewhere.

The answers clearly depend on the individual startups, entrepreneurs, and their experience levels. LinkedIn originally started in Seattle but moved to the Bay Area early on. Farecast, which was backed by Madrona Venture Group and several Bay Area firms, stayed in the Seattle area before getting bought by Microsoft in April. In the past couple of months, Seattle-founded DocVerse, a maker of collaborative software for documents, has moved to San Francisco after closing a $1.3 million funding round there. “Our experience was materially different from most of the perspectives you captured in your previous article,” says DocVerse co-founder Shan Sinha. (I’m intrigued to hear more soon.)

Will others follow DocVerse’s lead? At least one experienced entrepreneur thinks the local investment and recruiting scene is just fine—but he acknowledges that there’s much less competition among investors to finance companies in Seattle. “It feels to me like the climate is good,” says T.A. McCann of Seattle-based Gist, which is backed by Vulcan Capital. “There probably needs to be more direct competition [between Seattle investors]. Most VCs here have a space carved out. They could lose a deal to someone in the Valley, but probably not to someone locally.”

McCann’s bottom line is simple. “If I went to the Valley and [a VC firm] said, ‘We’ll fund you, but you’ve got to move here,’ I’d say no. I have a life in Seattle, my developers have a life in Seattle,” he says. “There’s a benefit to knowing the space, knowing how to recruit, and there’s enough good talent in town. If you’ve been here long enough, the referrals come very quick.”

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Waltham, MA-based Longworth Venture Partners plans to raise $180 million for a new fund, its third, according to regulatory filings cited today by Private Equity Hub. The firm’s first fund of $20.5 million closed in 1999 and its second fund of $120 million closed in 2003; recent payoffs for the firm’s portfolio include Softricity (which was acquired by Microsoft in 2006) and Constant Contact (which went public last year).

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