StrictlyVC: March 14, 2014

Top News in the A.M.

Almost a week after a Malaysia Airlines jet disappeared with 239 passengers and crew members on board, there’s no firm evidence to suggest where it could be.


The Analyst: Talking with Azure Capital’s Mike Kwatinetz

Mike Kwatinetz is old school. The cofounder of Azure Capital in San Francisco isn’t likely to call himself a “an artisan” or “venture assistant.” He’s no great fan of networking. And Kwatinetz co-manages the firm with three people he has worked alongside for 20 years, a rarity in the venture world. (The firm’s GPs all spun out together from Credit Suisse First Boston.)

Azure emerged on the scene in 2000, just as the market was going into Internet Bubble free fall. Bolstered by early wins like VMWare, which EMC acquired for $675 million in 2003; and BillMeLater, which eBay purchased in 2008 for $945 million, Azure survived, but it had to significantly reconstitute itself in the process. Although Azure raised $540 million in its 2000 debut fund, its second fund (vintage year 2006) was only $127 million, and Kwatinetz says the firm’s third fund, closed in 2011 is “smaller,” on the scale of its immediate predecessor.

Today Azure focuses on post-seed-stage investments. The other day, StrictlyVC caught up with Kwatinetz, an amiable straight-talker with a PhD in mathematical modeling, to talk about that shift — and what’s next. Our chat has been shortened for length.

Azure’s team is like a band. How would its four GPs characterize one other? Who plays drums?

Hah. I’m probably the most analytic, though Paul Weinstein is pretty similar. Cameron [Lester] is probably the best one at networking. And Paul Ferris has some very deep relationships with real superstars in his area. He’s also probably the nicest of the four of us.

Azure had some big exits in the aughts. What are some of your most recent exits?

Cyan, [a computer network gear company] went public last year. We also had a relatively fast exit with [travel app] TripIt [acquired by the expense and travel management company Concur for $120 million in 2011].

We completed our distribution of stock last year of Concur, which was an unusual deal but worked out well. When Concur came to the table, it as offering much less. We said no, so Concur wound up guaranteeing us its stock would be worth a certain amount two-and-a-half years later. We had to hold on to the stock [for the duration] but it made it possible for them to give us a lot less stock, while we locked in the price we wanted.

I’ve read about these ratchet provisions, which sound incredibly risky. Are you seeing more of them?

Not first-hand, though I’ve heard other instances of them. This was a pretty big payday for key members of the TripIt team, though, and taking cash right away [versus agreeing to this stock deal] would have significantly reduced their payday.

Where’s your investment sweet spot right now?

We tend to come in at around a $10 million [pre-money valuation], so we call ourselves post-seed — that’s how we think of ourselves. We’re aiming to have three-quarters of our startups in that category and one or two earlier and one or two later.

It seems like that stage is getting crowded all of a sudden.

Post seed is still the least crowded. About 40 percent of seed-funded companies can’t get to their next round, so we have a tremendous volume of opportunity, though, again, we’ll make exceptions and go even earlier. We’ve already invested in the new company of TripIt’s founders, Chairish, an online consignment marketplace for furniture. It’s now reaching that post-seed stage and they’ll have to decide if they raise another round; from our view, I’d be happy if we could lead it.

Having experienced the late ’90s dot com bubble, how are you feeling about the market right now?

It’s wide open but the requirements are much higher than they were in the mid ‘90s, even pre-bubble. What’s interesting to us: the Toronto Stock Exchange and the London Stock Exchange are trying to fill the gap that Nasdaq has created by moving up market, so we’re looking at them. We want as many options as possible for our companies.

What are the advantages and disadvantages of going abroad?

There are lots of pros and cons to Toronto. The pros: you need a minimum of $10 million in [annual] revenue, not $100 million. Of course, you don’t want the to be orphaned afterward, where there’s no constituency of buyers and your company becomes a penny stock. So we’re trying to understand all of that better before we do anything in that arena.

We’ve been studying London longer. The [revenue] threshold is higher, but there are restrictions about how you can exit that make it trickier.

Do you think the U.S. is anti- small companies?

I think startups that get acquired before going public cut off job creation and that the government should pay attention to that.


New Fundings

EnEvolv, a three-year-old Boston-based company that’s engineering microorganisms to make chemicals, enzymes and small molecules for variety of industries, has raised $1.7 million in Series A funding led by Cultivian Sandbox Venture Partners of Chicago.

Coull, a 5.5-year-old, Bristol, England-based ad tech company whose technology allows advertisers to tag individual products within videos that can be clicked on for purchase, has raised $4 million from angel investors, says TechCrunch. The company has raised $16 million to date, all from wealthy individuals, including John Greathouse, a partner with Rincon Venture Partners, and Paul Fraser, a founder of PFC Auctions.

Kineta, a six-year-old, Seattle-based company that’s developing drugs to treat RNA viruses like hepatitis C, influenza, and the common cold, has raised an undisclosed amount of investment from angelMD, a crowd-funding platform that connects physician investors with medical startups seeking capital investments, advisors, and users.

Mubi, a six-year-old, Palo Alto, Ca.-based online movie website that integrates elements of social networking with on-demand video streaming, has raised $7.5 million in Series D funding, including from FloreatMMC Ventures and White Star Capital. Mubi has raised $15.7 million to date, according to Crunchbase.

ownCloud, a three-year-old, Lexington, Ma.-based company behind the ownCloud Project, a popular file sync and share open source project, has raised $6.3 million in Series A funding led by Devonshire Investors and earlier backer General Catalyst Partners, with participation from existing angel investors. The company has raised roughly $9.6 million altogether, shows Crunchbase.

Premise, two-year-old, San Francisco-based company that’s building a network to track macroeconomic data in real time, has raised $11 million in Series B funding led by The Social+Capital Partnership. Earlier investors Google VenturesHarrison MetalAndreessen Horowitz and Bowery Capital also participated in the round, which brings the company’s total funding to $16.5 million. TechCrunch takes a look at the company here.

Sage Therapeutics, a two-year-old, Cambridge, Ma.-based company that’s developing medicines for central nervous system disorders, has raised $38 million in Series C financing from OrbiMed AdvisorsEcoR1 Capital ManagementForesite Capital ManagementThird Rock Ventures and ARCH Venture Partners. The funding comes just five months after the company closed on a $20 million Series B round led by ARCH Venture Partners and Third Rock Ventures. The company has raised roughly $95 million to date.

SiNode Systems, two-year-old, Chicago-based materials startup developed at Northwestern University, has raised an undisclosed amount of seed funding from Energy Foundry, an impact venture capital fund created out of the Illinois Energy Infrastructure Modernization Act.

Smart Sparrow, a three-year-old, Sydney, Australia-based ed-tech start-up, has raised $10 million in funding led by London-based Yellow Brick Capital. Earlier investors OneVentures and Uniseed — which had given the company $2 million last year — also participated in the round.

SteelBrick, a four-year-old, Palo Alto, Ca.based maker of easy-to-use apps for customers, has raised $5 million backing from SteelBrick CEO Godard Abel, and Matt Gorniak, former global SVP sales/alliances from BigMachines (Abel’s last company), who will serve as a senior advisor to SteelBrick.

Xapo, a two-year-old, Palo Alto, Ca.-based company that’s building bank vaults deep in the earth to store millions of dollars worth of bitcoin code on computer drives, has raised $20 million in first-round funding led by Benchmark. Other investors include Fortress Investment Group and payment-focused VC firm Ribbit Captial. It’s the brainchild of Wences Casares, former CEO of digital wallet company Lemon (acquired by Lifelock last December). The WSJ has much more on the company here.


New Funds

Binary, a new San Francisco-based, consumer-focused, early-stage venture fund, is emerging on the scene, reports Fortune. The firm, which isn’t talking yet with reporters, was founded by two VCs of other firms who’ve joined forces: Jonathan Teo and Justin Caldbeck. Teo comes to Binary after two years as a managing director at General Catalyst Partners, whose investment in Snapchat Teo reportedly led. (He also reportedly owns a personal stake in the company.) Teo was previously a principal at Benchmark Capital, where he says he originated its investments in Instagram and Twitter. (So Teo, who also logged four years as an engineering manager at Google, is a superstar, basically.) Caldbeck has meanwhile spent the last three years as a managing director at Lightspeed Venture Partners and had spent the previous six years working his way up to partner at Bain Capital Ventures. The one-time McKinsey & Company analyst has led high-profile deals for Lightspeed in numerous consumer startups, including GrubHub and TaskRabbit.

Maiden Lane, a new, San Francisco-based firm is “expected to close its debut fund within the next week on between $20 million and $25 million,”reports Fortune. The fund’s LPs include traditional sorts, such as Top Tier Capital Partners and Venture Investment Associates. Half of the firm’s capital will be designated for AngelList syndicates, says Fortune, while the other half will flow to direct investment opportunities (or co-investments) offered via AngelList’s deal platform.



Appixia, a young Tel Aviv, Israel-based startup — incubated through the Microsoft Ventures Israel Accelerator program — has been acquired by the publicly traded Israeli company Wix, a cloud-based Web development platform. Terms for the deal were not disclosed. Appixia’s platform promises to make it easy for retailers to take their stores mobile and build their own native commerce apps.

Katech, a 37-year-old, Clinton Township, Mi.-based company that specializes in the design, prototyping, testing, research and development, and making of engines, has been acquired by six-year-old EcoMotors, the venture-backed maker of advanced engines and power trains. Terms of the deal weren’t disclosed. EcoMotors has raised roughly $60 million from investors, including Khosla VenturesBill Gates, and Braemar Energy Ventures.

LaunchRock, a three-year-old, Walnut, Ca.-based company that helps startups set up viral “launching soon” pages in minutes, has been acquired by Fundable, a business crowdfunding platform. Terms of the deal weren’t disclosed. LaunchRock had raised $800,000 in seed funding from 500 StartupsWhite Star CapitalVenture51Quotidian Ventures andTrinity Ventures, among others.

Zuuka, a five-year-old, Santa Barbara, Ca.-based children’s media company, has been acquired by New York-based mobile games and app developer Cupcake Digital for undisclosed terms. Zuuka had raised an undisclosed amount of funding from CFP Investments.



Bill Gates sits down with Rolling Stone for extraordinarily wide-ranging interview that’s well worth reading. Among his many keen observations, Gates says, “We take things like TV or Internet or a microwave or a refrigerator for granted, but moving people from basic lives to decent lives requires a lot less than that. You know, development sometimes is viewed as a project in which you give people things and nothing much happens, which is perfectly valid, but if you just focus on that, then you’d also have to say that venture capital is pretty stupid, too. Its hit rate is pathetic. But occasionally, you get successes, you fund a Google or something, and suddenly venture capital is vaunted as the most amazing field of all time. Our hit rate in development is better than theirs, but we should strive to make it better.”

Serial entrepreneur Max Levchin sat down for a fireside chat with PandoDaily founder Sarah Lacy last night. Among other things, he said that his social apps company Slide “drained the crap out of me.”

Oh, boy. Barry McCarthy is out the door of Clinklereports Re/code. The longtime Netflix CEO joined the stealth payments startup last fall in a move that signaled the still-stealth company was ready for prime time. In fact, McCarthy was led to believe the company’s app would launch in November. Instead, the app has only gone live in a limited beta test. “They’re not nearly as close to scaling the businesses as I thought they were when I came in the door,” McCarthy tells Re/code. “And that’s what I do.” In related, terrible news for the startup that raised what was infamously billed as the “largest seed round in Silicon Valley history,” former Twitter designer Josh Brewer has reportedly walked away from Clinkle, too, after less than a week’s time. (That’s probably some kind of record.)

Pamela Rice has joined the alternative lending company OnDeck as its senior vice president of technology. Rice worked as a hiring manager at PayPal for nearly eight years, as a credit and payments product leader. OnDeck, in New York, just last week announced a whopping $77 million round led by Tiger Management, with earlier investors Institutional Venture Partners, RRE Ventures, SAP Ventures, Google Ventures, First Round Capital, Industry Ventures, and Peter Thiel participating.

David Zhu, former COO of Chinese search giant Baidu, has joined GGV Capital as a venture partner in Singapore. According to his bio, he was in “charge of [Baidu’s] overall operations” from 2002 until 2007, when he left. Before joining Baidu, he was VP of one of what was one of country’s largest consulting companies, Han Consulting.



It’s a couple of months away, but knowing some of you like to plan ahead: The National Venture Capital Association is hosting one of its biggest yearly events, VentureScape, on May 14 at the Westin San Francisco. The two-day event will feature GE chairman and CEO Jeff Immelt, Workday cofounder and CEO Aneel Bhusri, and former Secretary of State Condoleezza Rice, among other speakers. Learn more here.


Job Listings

Looks like Andreessen Horowitz is still in the market for both consumer and enterprise deal partners to help the firm’s GPs find and assess deals. (H/T: Dan Primack)



A chart, care of CB Insights, of the top 10 (in terms of fundraising) tech companies backed by Goldman Sachs.


Essential Reads

Facebook CEO Mark Zuckerberg says he has called President Barack Obama to express his frustration over the government’s spying. “The U.S. government should be the champion for the Internet, not a threat,” he wrote in a post on his Facebook page yesterday.

Leaked photos claim to show Amazon‘s new games controller, and it is ugly.

Oops. Phone call metadata does betray sensitive details about your life, says a new study.



To keep teens alert, a growing number of high schools is letting them sleep in.

Former Secretary of State Colin Powell posts a 60-year-old selfie to Facebook.

Two guys, singing Bey’s newest album, “Beyonce,” in five minutes.


Retail Therapy

You have to admire creative, high-end retailers. In today’s news, Harrys of London is selling $1,500 socks crafted from deer hair. Deer hair! Says the Daily Mail, “Harrys of London claim the grey-colored fashion accessories are the ‘most exclusive in the world’ because they are crafted out of ‘light’ and ‘soft’ down hair harvested from New Zealand Red Deer.” Before readers race to the store’s site, you should know the report goes on to say that “the Today show managed to get hold of a pair and after giving them to various people to touch concluded the high price tag is ‘not justifiable.’”


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