• CircleUp Carves Out a Niche, as the AngelList of Private Equity

    Rory-Eakin-CircleUpCircleUp isn’t a household name. But the three-year-old, San Francisco-based crowdfunding site has become well-known to consumer and retail companies that are too small to interest private equity firms yet growing too fast for a bank loan. So far, 70 businesses with yearly revenue of between $1 million and $10 million have raised an average of $1 million from CircleUp investors, all of whom are “accredited,” and who, on average, write checks in the neighborhood of $30,000.

    Many of those backers — and there are more than 10,000 of them — are high-net-worth entrepreneurs or executives who’ve been in or around the consumer space, says CircleUp cofounder Rory Eakin. But the next largest group isn’t wealthy dentists looking to play venture capitalist, he says. It’s financial services pros. “We’re seeing hedge fund [investors], VCs, and other investment professionals who like making direct investments without the typical fund structure,” he says. “More family offices and [registered investment advisors] are coming on to the platform, too.”

    It’s a little like AngelList — though less risky, suggests Eakin, citing Kauffman Foundation findings that smaller consumer and retail product companies return 3.5x within four-and-a-half years on average. Eakin, whose company now employs 40 people, told us more last week in a conversation that’s been edited for length.

    You work with companies with at least $1 million in revenue. Why is that threshold meaningful?

    It means these companies have an established product in the market, with suppliers, distribution and customers — data [that] can help put CircleUp’s investors in a position to succeed.

    The companies offer investors equity in return for their capital. How much, typically?

    A company typically sells 10 to 30 percent in a round on CircleUp. Investors can own all or a portion of that amount based on how much they invest.

    How do you assess the companies that are applying for funding on your platform?

    We [pore over] proprietary data about the more than 6,000 companies that have applied, as well as look at third party data, to score a company on how it has performed relative to its category. For example, if your natural shampoo is growing at 100 percent a year, that’s interesting, but if the category is growing at 200 percent per year, you’re losing market share.

    If more than 6,000 companies have applied for funding on the platform, yet 70 have completed a round, you must be turning away most applicants. Why?

    We’ll pass for two or three reasons. The first is valuation. Consumer goods tend to be valued off revenue multiples, so it’s a cleaner metric than you see in tech, and it gives us [information] to pass on to companies that aren’t priced appropriately based on risk. We also look at the experience and background of the management team, as well as the brand itself. Assessing the latter is more art than science, but we’re doing things with data now that helps us screen for it more efficiently.

    Are you actively seeking out companies or is your deal flow mostly inbound?

    A lot of great companies apply, but we’ve also done a lot of work to expand our partnerships. We get a lot of companies from PE firms with nowhere to send smaller companies. We’re also networking actively with bankers, brokers, and lawyers to ensure that we have quality companies.

    We’ve also announced partnerships with General Mills, Proctor & Gamble, and Johnson & Johnson that are designed to help companies thrive after they raise money.

    How so?

    Largely, they meet with founders in an informal mentorship program where they talk about distribution and key functions of helping companies scale. It’s a win-win, because these strategics get to see what’s happening in the early stage of the market and they get exposure to these new products, while the [smaller] companies form relationships with [these potential investors, who might also acquire them].

    CircleUp is a broker-dealer, meaning you accept a commission for facilitating the transactions on your platform. Do you share publicly what that percentage is?

    It’s a small amount that’s competitively priced.

    What about fundraising? CircleUp announced its last round nearly a year ago. Are you talking with investors again?

    A [new round] isn’t on the roadmap. Our focus right now is on continuing to see opportunities and to reduce friction in the market. We knew the market wasn’t functioning as well as it could, but we didn’t appreciate just how painful things had been for these companies and investors.

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    Connie

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  • Ready to Go Public? Really? You’re Sure?

    20140630_ipo-calendar-2014By Lise Buyer and Leslie Pfrang

    It’s been a pretty terrific time in the IPO market this past year. According to Renaissance Capital, through December 15, there have been 271 IPOs in the U.S. in 2014, compared with 221 IPOs a year ago at this time, a volume increase of 23 percent. Thanks to Alibaba’s thunderlizard of a deal, the dollars raised by IPOs this year, $84.2 billion, exceeds last year’s total of $ 54.6 billion by 54 percent. Not bad.

    Ah, but look deeper and you will see that actually, roses weren’t coming up everywhere. While 271 IPOs have been completed so far this year, conservative estimates suggest that more than 350 companies filed S-1s, a difference of nearly 30 percent. For every 3 deals that filed and went public this year, at least one did the training, filed an S-1 and didn’t make it to the starting line. Of course, we need to back out those companies that filed late in the year, targeting a 2015 transaction. If we aggressively estimate that 20 fit that pattern, we still have more than 50 that didn’t get the job done as planned. When you consider the time and expense required for an initial filing, that is a big number.

    What’s the difference and what price “optionality”?

    Bankers and others can be convincing when suggesting companies take advantage of the relatively new option to file confidentially: “Get on file now, then choose your timing later, but you’ll be ready.” Factually correct? Yes. Good for your business, your P&L, your employees or your IPO? Not so fast. Preparing for an IPO too soon is neither a cost free nor risk free option.

    The ongoing and elevated expense, distraction, loss of momentum and sometimes embarrassment (Box anyone?) that accompany a premature “go” decision can easily outweigh any timing flexibility benefits.

    OK, but IPOs do take a long time. How do we know when to start?

    At January board meetings, following the “year in review” appraisals, many private company boards will have the “Is this the year to go?” conversation. (By “go,” we mean schedule a bake-off and hire bankers.) In advance of those meetings, we offer five questions every board should ponder before dropping the green flag:

    1) Can your sales and financial teams accurately forecast results for the next few quarters? Did you nail your forecasts last quarter? If answering either of these is anything other than a rock solid “yes”, then take your time. Public investors show no mercy to companies that miss an early quarter. Worse still, the brickbats courtesy of angry investors will be but mere annoyances relative to the grenades your employees, customers and partners may lob through your door if you miss an early public quarter.

    2) Do you have the right team in place? No really, are you sure you have the right team in place, not just for the IPO but also for the long term? Step back and take a cold, clear look. The team that helped you get this far may be gifted, battle-tested and composed of friends. That doesn’t mean it’s the team for a fast-growing public company. Public investors want to know that the C-suite in place for the IPO can scale the organization. Newly public companies juggle enough knives when adjusting to the market’s spotlight. There’s little bandwidth for concurrently integrating new senior leaders.

    3) Is your business model stable and ready for public scrutiny? Admittedly, there are companies (like Twitter) where even 12 months post-IPO the model remain an enigma. We grant that if your business has north of 200 million active users, investors may cut you some slack. However, for most, a more stable model correlates to a larger crowd of investors rallying around your IPO’s order book. Are you hoping to migrate to a subscription model? Do you see significant price changes or regulatory updates on the near-term horizon? Launch that new model or absorb the changes before you step on the IPO court. In the eyes of investors, a foot-fault of your own making — or because someone else moved the lines in a way you could have predicted — will cripple your stock’s performance.

    4) Are you ready for an intense audit? The reason most companies on the IPO trail get thrown off course is because their audits aren’t ready on schedule. Audits won’t be rushed. The drill-down scrutiny on every last decimal point is much more intense when your auditors know you’re preparing for an IPO. The size of your audit team and number of questions will often triple during this process.

    5) Is your company really strong enough to support the valuation you expect? For this point, we will excuse readers at health-science companies, but for those selling products and services, size matters. Management teams tend to be optimistic. Bankers, reflecting experience, tend to be conservative. Your finance team may produce a model projecting revenues over the next two years of $X and $Y. By the time bankers have helped you “refine” them, your forecasts (for the sell side analysts) will likely be closer $.7X and $.8Y. Expect similar treatment (in the opposite direction) for your expense projections. It is those banker-adjusted numbers from which your initial valuation range will be determined. Do the exercise in-house to be sure the projected valuation, based off a hacked-up model, will be acceptable before hiring banks and kicking off a process. The more directly you face the conservative forecast reality, the better prepared you will be for the go/no go decision.

    Lise Buyer and Leslie Pfrang are partners at Class V Group, a consultancy for firms looking to go public

    Connie

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  • Erin Glenn, Alphaworks’s New CEO, on Waiting for the SEC

    Erin-GlennAny new CEO has a lot to contend with, like getting to know employees and clarifying the business’s strategy. Erin Glenn, who recently joined the New York-based crowdfunding platform Alphaworks, has to worry about something else, too: the SEC.

    Launched by Betaworks in February of this year, Alphaworks is a white label platform that obtains stakes in companies via seven venture “sponsors” that leave open between $100,000 and $250,000 of certain startups’ rounds. The companies then sell the equity directly to their own “communities,” in turn making those customers even more loyal.

    Glenn — who spent the previous four years as CFO of the gaming company Kixeye — sees a day when the model is used across numerous industries, though Alphaworks’s clients so far have been consumer-facing Internet companies with impassioned members.

    Gimlet Media, a New York-based podcasting company, is a prime example. Earlier this fall, when the company was looking to top off roughly $1 million in venture funding, it agreed to crowdsource some of the round to its listeners. Alphaworks’s nine employees sprang into action, posting a deal page for Gimlet, reformatting its pitch deck, helping gather audio testimonials and, not last, helping coordinate media coverage to drive interest in the campaign.

    The plan worked. Gimlet’s $200,000 crowdfunding campaign was fully subscribed within three hours. (In fact, the company wound up accepting $275,000.) Alphaworks is now represented on Gimlet’s cap table as a special purpose vehicle whose investors have delegated their voting, follow-on, and information rights to Alphaworks.

    Still, not everyone who wanted to back Gimlet could — not even close, says Glenn, who estimates that just 25 percent of those who began the registration process were able to complete it. The others didn’t qualify as accredited investors. And until the SEC finalizes a key rule in the now two-year-old JOBS Act that was designed to let small businesses raise money from virtually anyone over the Internet, the non-accredited will remain locked out of the process. (As recently as last week, the agency’s chair, Mary Jo White, suggested it’s in no rush to make binding decisions about the rule, called Title III.)

    “It’s frustrating,” says Glenn of the continued delays. “There’s a concern about ‘frothiness’ in the market right now. But in a hot market or a down market, the timing is always going to be difficult.”

    Alphaworks has a uniquely challenging mandate, too. While other crowdfunding platforms cater to wealthy investors in search of investment opportunities, Alphaworks’s focus on turning a company’s fans into owners means it’s catering to very different end users. Not only do many of them lack the financial muscle required currently by the SEC, but some need to be educated on startup investing. (Indeed, Alphaworks, which is backed by $1.5 million from Betaworks, SV Angel, and Lerer Hippeau Ventures, has organized just four campaigns to date.)

    Glenn — who says that Alphaworks is sticking to its original mission — isn’t discouraged. As far as she’s concerned, its patience today will pay big dividends later.

    She notes that Gimlet saw nearly triple the demand for what it raised, taking into account the roughly 75 percent of registrants who were forced to abandon the process along the way. “That kind of demand is a strong signal for Gimlet to talk about,” says Glenn. “But it should also be a signal to the SEC. People want to participate in the growth of their favorite companies. They also want to be responsible for their own financial destiny.”

    And Alphaworks, she suggests, will be waiting to help them.

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    Connie

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  • How Are You Really? TinyPulse Wants to Know

    TinyPulseThere it is, in your Twitter feed. Another acquaintance reporting “some personal news” that you learn in subsequent tweets is a new job.

    It’s not just your friends who are bounding from role to role. According to the Labor Department, 5.1 million people began a new job in October, the highest hiring level recorded since 2007.

    The shift is great for employees, for whom it’s become easier to escape lousy managers. It’s also giving rise to numerous new startups whose “pulse surveys” — – frequent, anonymous employee polls — are helping bosses understand who is happy, who isn’t, and what they can do about it.

    Yesterday, we talked about the trend with David Niu, the founder of TinyPulse, a two-year-old, 20-person, Seattle-based startup that says 500 customers are using its app already, including Microsoft and GlaxoSmithKline. Our chat has been edited for length.

    You’re a serial entrepreneur who sold your first company, NetConversions, to aQuantive in 2004. You also cofounded the mobile TV guide app BuddyTV, which remains privately held. Why start TinyPulse?

    I was getting a little burned out at work a few years ago, and after getting married and having a baby daughter, I convinced my wife to sell most of what we own, put the rest in storage, and buy one-way tickets to New Zealand with our then two-month-old. I needed to recharge. I also wanted to better understand how founders burn out at their own companies. So after six months, I started interviewing entrepreneurs and CEOs — including outside of tech — to ask what their biggest pain point is. Almost everyone named [employee retention] and the fear that once one employee goes, there could be a stampede for the exits.

    I thought: if we flip annual employee satisfaction surveys on their head — make them bite-size and easy for employees to fill out frequently, managers can make small, incremental changes that make a difference.

    How often are these polls typically administered, and how much do your customers pay for them?

    We charge $3 per employee per month. Most clients use them weekly or every other week, though employees can use a “cheers for peers” feature as often as they like. They can also submit virtual suggestions any time.

    Are they prompting real change at organizations? What are some of the stories you’ve heard?

    At one startup, the CEO received feedback that one microwave isn’t enough for 200 people. He was like, “I get it, people. Why did it take TinyPulse for you to tell me?” Meanwhile, another customer, Hubspot, had let go of a few people for performance and fit and people were getting antsy, which the [department head] was able to capture via TinyPulse. So he held an all-hands with the sales and marketing team. He told them, “We love you guys. Your job isn’t in danger. We aren’t in a risky financial situation. Let me explain what happened.”

    It was a little pothole, but it could have become a crater. People bring fear and uncertainty home with them, and they look at other opportunities.

    Can you predict if a stock will go up or down based on TinyPulse ratings?

    It’s been proven that companies that are considered good places to work and that take care of their employees outperform their peers, especially in down years. In good and bad markets, smart companies realize that if their employees aren’t happy, they aren’t as engaged. A good culture is the ultimate competitive advantage.

    There are a handful of other startups in your market, including15Five, Niko Niko and BlackbookHR. Which is your strongest competitor?

    It’s usually nothing — we’re competing with inertia — or Survey Monkey, which is free and easy to use but is a broad-based survey tool. We’re solely focused on helping customers create a happier, more engaged workforce.

    You’ve bootstrapped the business so far. What’s on your road map, and will you look to raise money from investors?

    We plan to launch other offerings. Fans of TinyPulse sometimes ask: Do you do onboarding, exit surveys, time clocks? We think that anything that makes employee engagement easier is possible. As for funding, there’s always a time and place for it, but right now, any minute I spend on fundraising is time not spent on the core business.

    We are humbled that a lot of VCs contact us, often because they see our data in board decks [of their portfolio companies]. They’re like, “What’s TinyPulse?”

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    Connie

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  • The “15” Meme Fallacy

    magic-numberBy Greg Gretsch

    StrictlyVC recently observed that a 10-year-old study has done much to inform how venture capitalists now behave. That data found that between the mid ‘80s and mid 2000s, about 15 tech companies are founded each year that account for 97 percent of all public returns. It was popularized around 2009, when Marc Andreessen and Ben Horowitz – who were launching their venture firm at the time — began discussing it widely with reporters.

    Yet the idea that only 15 tech companies each year go on to produce $100 million in revenue and therefore “matter,” has never sounded right to me. It doesn’t square with my own experience, having led Sigma’s investment in three companies that reached more than $100 million in revenue per year: EqualLogic, which sold to Dell for $1.4 billion; Responsys, which went public, then sold to Oracle for $1.6 billion; and oDesk, which recently merged with Elance and remains private. I’m working with several more companies now that I’m confident will reach that very important milestone.

    So what? Well, the problem isn’t the belief that a small number of companies generate the lion’s share of venture returns in any given year. That’s been the conventional wisdom for years. The problem arises when this belief is taken the next few steps. In other words: If there are only 15 companies founded each year that matter, then in order to be a good firm you have to be an investor in those 15 companies (or many of them), then therefore (and this is where many firms go off the rails), it doesn’t matter what you pay for them.

    Overlooked in this march toward the “winner’s circle” is the time required to build a company to $100 million in revenue. It took EqualLogic roughly 6 years, Responsys roughly 12 years, and oDesk a decade. The aforementioned research covered a span of time through the mid 2000s. All of my $100 million companies were founded in those cohort years but reached the magical $100 million mark in more recent years, meaning they wouldn’t have been in that 15-per-companies-per-year estimate.

    To believe that such a narrow number of companies is all that matters doesn’t make intuitive sense, either. According to Morgan Stanley, there were more than 20 venture-backed tech IPOs each year between 2001 and 2014. It’s safe to assume the vast majority of those companies mattered to their investors. The same is surely true of the countless great M&A transactions we’ve seen over the same period, like WhatsApp, Nicira, Instagram, and YouTube.

    Worth noting: None of the aforementioned M&A deals got to $100 million in revenue on their own.

    This brings me to another point. While it’s true that venture investing follows a power law — meaning that a small percentage of companies each year represent the overwhelming percentage of gains from that year — you can still generate fantastic returns without being in those monster hits.

    Even if you take out the “15”, there will still be many 10x exits that are just making up for the companies that lost everything for that vintage year. And any venture investor would be happy to invest in a 10x company whether or not it was among those that generated the bulk of the returns in venture for its vintage.

    The biggest problem in investors’ religious adherence to the 15/$100 million meme is that it causes bad behavior. When every investor is chasing that mythical yearly batch of 15 companies, the resulting competition causes valuations for those anointed companies to skyrocket. That’s bad for investors who often end up investing at valuations greater than the public market is willing to give these companies (see Groupon, Zynga, et al.). It’s also bad for companies. Those for which capital is cheap and easily accessed are at greater risk of making non-economical business decisions that create business models that rely on increasing amounts of cheap capital (see Fab, Box.net, et al).

    Bill Gurley put it best when he told the WSJ: “Excessive amounts of capital lead to a lower average fitness because fitness, from a business standpoint, has to be cash-flow profitability or the ability to generate cash flow. That’s the essence of equity value . . . [and] we get further and further away from that in the headiest of times.”

    At some point someone will do the definitive piece of academic research on the topic. Unfortunately, given the long time required to scale most companies to $100 million in revenue, the mature cohorts will be so far out of date that they won’t be relevant to the then-current investing climate.

    Greg Gretsch is a managing director at Sigma West.  Follow him @greggretsch

    Related articles

    Connie

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  • How Many Tech Companies Break Out Each Year? And Where?

    breakout cosIn recent years, it’s become the conventional wisdom that roughly 15 companies each year go on to produce all the returns in venture capital. Marc Andreessen was the first to make a very public case for the approach, citing the research of Andy Rachleff, who cofounded the venture firm Benchmark and who today teaches at Stanford and is the executive chairman of the investment firm Wealthfront.

    “Basically, between roughly the mid-‘80s and the mid-2000s—a good cross-section of time across a couple of different cycles—what [Rachleff] found is that there are about 15 companies a year that are founded in the tech industry that will eventually get to $100 million in annual revenue,” Andreessen told me when Andreessen Horowitz was closing its first fund in 2009. “His data show that they [account for] 97 percent of all public returns, which is a good proxy for all returns. So those are the companies that matter.”

    Rachleff’s reasoning explains much about how Andreessen Horowitz has operated from the start. Persuaded by the rise of Andreessen Horowitz, Rachleff’s research has also found its way into the thinking of every other top and second-tier venture firm (not to mention many hedge funds and mutual funds).

    Interestingly, it’s hard to prove whether or not Rachleff’s findings still apply to today’s market. He never published the research, which he’d prepared for a speech. And he lost all of the data when his computer’s hard disk crashed in 2006, he once told me. When earlier this month, I asked him if he thinks today’s winner’s circle has changed in size, given falling startup costs and more ubiquitous broadband penetration (among other factors), Rachleff politely offered that he didn’t have time to explore the topic.

    There is, of course, the oft-cited research of Aileen Lee of Cowboy Ventures, who looked at breakout companies last year and concluded that just four “unicorns” — or tech companies that go on to be valued at $1 billion or more — are founded each year. But Lee’s much newer dataset centered on U.S.-based tech companies that were launched in January 2003 and afterward. And comparing “unicorns” to tech companies that produce at least $100 million in revenue isn’t necessarily an apples-to-apples comparison.

    Unfortunately, Lee didn’t respond to a recent request to discuss whether her findings and those of Rachleff are complementary or at odds. More recent research suggests that Rachleff’s research holds up, though. In an 11-page paper written last year, economist Paul Kedrosky found “there are there are, on average, fifteen to twenty technology companies founded per year in the United States that one day get to $100 million in revenues.” He added that the “pace at which the United States produces $100-million companies has been surprisingly stable over time, despite changes in the nature of the U.S. economy.” (It’s highly remarkable, in our opinion.)

    Kedrosky added that the biggest “hidden changes” in the way U.S. tech giants are created is where they are founded, suggesting that if investors with big funds are going to chase after breakout companies, they’d be smart to cast a net far beyond Silicon Valley. Indeed, according to him, of the 15 to 20 tech companies to break out each year, just four, or 20 percent, are now founded in California, “usually.” In the 1990s, meanwhile, California’s share of $100-million technology companies was roughly 35 percent.

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    Connie

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  • Same-Day Delivery Takes One On the Chin

    oofOver the weekend, eBay took down a standalone app for its $5 same-day delivery service “eBay Now.” The company, which continues to make the service available online, is “rethinking how it wants to handle the high costs associated with running same-day delivery services,” reported TechCrunch.

    It would be a mistake to declare same-day delivery economically unfeasible because of eBay’s sudden ambivalence about it. It’s tempting, though.

    Despite the glut of same-day delivery services to materialize in recent years – from Google and Amazon to Deliv and PostMates – same day delivery services continue to face major challenges.

    The biggest hitch appears to be the limited base of customers who are willing to pay more for faster service. Bargain hunters on eBay may be especially averse to additional fees. (Only a fraction of a small retailer’s sales come from customers who also opt for same-day delivery, as Reuters noted last week.) The same seems true of Walmart, which launched its same-day delivery pilot program in 2011 and is still testing it in just three markets.

    But they’re hardly alone. According to a recent business intelligence report by Business Insider, only 2 percent of all shoppers living in cities where same-day delivery is offered have availed themselves of the services. Meanwhile, 92 percent say they’re willing to wait four days or longer for their e-commerce packages to arrive.

    Very possibly, not all of these consumers have been educated about the new offerings they could be using — dazzling applications through which workforces are now mobilized with a few taps of a smart phone. And same-day delivery margins are surely better than during the dot.com era, when companies like Webvan invested heavily in infrastructure.

    Whether they’re good enough appears to be an open question. For example, even with an extremely efficient fulfillment system, the same-day delivery company Instacart marks up its goods meaningfully over standard grocery store prices.

    Someone seems likely to figure out how to bring the various pieces together at scale. Uber, whose logistics system grows more sophisticated by the day, may be the strongest candidate for the job.

    EBay has piles of data at its fingertips, too, though. That it’s cooling to same-day delivery after two years of experimentation — and planning to focus more on helping shoppers buy items online that can be picked up in stores — is worth slowing down to consider.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Connie

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  • A Former Mercedes Exec Tries Bypassing the Auto Industry

    Large Image (optional)No one paid much attention when last week, a 15-person company called Apio Systems in Crystal City, Virginia, announced that it had raised $5 million in funding. Mercedes-Benz was probably watching, though.

    In fact, Apio’s founder, Sascha Simon, spent nearly a decade at the company, including as head of its Advanced Planning Group, the same unit that launched Mercedes’s connected car system. But in 2012, Simon began thinking the technologies he was developing could live outside of Mercedes and every other car maker, so he left. We talked yesterday about that decision and what he’s trying to accomplish at his new company. Our conversation has been edited for length.

    You had a big role at Mercedes. Why leave?

    I felt the benefits of the connected car shouldn’t [accrue] just to Mercedes drivers but to everyone. Everyone carries a smart phone, so the idea was: Let’s use smart phones to bring safety benefits to drivers worldwide. I also thought I could do this faster outside of the car industry.

    You’ve created a “situational awareness” technology that provides safety alerts and monitoring tools that help make drivers safer. How does it work, exactly?

    The technology utilizes all the sensors in the smart phone that are there already — the gyroscope, accelerometer, audio and video sensors, barometric pressure [sensors] — and uses them to enable your phone or tablet to sense everything around it. [The smart device then] communicates with our cloud to make a determination about what’s happening. It’s almost like having an extra driver or passenger looking out for you.

    So this is sort of tech for the here and now, until advanced car technologies are more ubiquitous.

    If we had fully autonomous cars, no one would need what I’m doing, but they won’t come that fast. I think if we wait until car companies get there, it will be another 15 years. In the meantime, I believe that we’re building something that can be incredibly helpful in [hastening] that day. If everyone experiences [the advantages of the connected car], then everyone will want it.

    How far along is your tech? And how – or to whom – are you selling it?

    We have a functioning prototype and customers who are waiting, including Transdev, an international, multimodal transportation company that’s both a customer and an investor. It runs everything from trains to trucks and basically, what it will be buying is features and functionalities that will be packaged in the smart phones or apps it already has. [The technology] will allow it to be in constant communication with its vehicles to sense what its drivers are doing, if a vehicle is in trouble, how well a vehicle is performing. It’s a complete feed management platform.

    It’s a subscription model?

    Yes.

    What does Mercedes think about what you’re doing?

    I have communications with former colleagues all the time. That’s about all I can say at this point.

    You just announced $5 million in funding. I don’t suppose you’re thinking about your next round?

    Certainly we’re not ready to announce new funding plans yet, but you can imagine it’s all planned out. Our job right now is to take the money we’ve raised, get product to our customers and take it from there. I can tell you smart devices will continue to take over more functionalities from cars, and I plan to be a part of it.

    Connie

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  • Mithril Capital Bets Big on Diabetes

    Diabetes wordcloudMithril Capital Management prides itself on funding unique “growth companies regardless of sector or geography,” says Ajay Royan, who founded the San Francisco-based venture firm with investor Peter Thiel in 2012. Last month, for example, it backed a Berlin-based, publicly traded company with an approved treatment for brain cancer.

    Fractyl, a company aiming to better control type 2 diabetes, also fits the bill. In fact, Mithril — which has just led a $40 million financing for the three-year-old, Waltham, Ma., company – thinks Fractyl might become the “single most impactful company in our portfolio,” says Royan.

    Certainly, the market opportunity Fractyl is chasing is enormous. More than 350 million people around the world suffer from type 2 diabetes, and as many as one in three U.S. adults could have diabetes by 2050 if current trends continue, according to the Centers for Disease Control and Prevention.

    While the disease is usually managed through exercise regimens, oral medications, and insulin shots, in more extreme cases, bariatric (weight loss) surgery is recommended, and it’s here where things get interesting.

    Bariatric surgery has been shown to return a person’s blood sugar levels to normal roughly six months after the procedure. Traditionally, it was believed the surgery is effective because the size of the stomach is reduced, but researchers and doctors have begun to believe it owes to a change in gut metabolism.

    “The [first section of the small intestine] contains cells that function as chemical sensors,” explains Royan. “As you eat food, a portion of your small intestine anticipates the food’s composition and signals a hormonal response to start preparing insulin or whatever is appropriate for that food.” In diabetics, that portion of the gut is scarred, so the body’s response is off.

    The big idea of Fractyl cofounder and CEO Harith Rajagopalan — a cardiologist and medical device entrepreneur — was to address the issue by altering the physiology of the gut. Specifically, Fractyl has created a device that’s inserted into the small intestine using an endoscope; after expanding and smoothing out the targeted part of the tract, it applies heat via a catheter balloon filled with hot water that kills the surrounding layer of skin. If all goes correctly, the old cells slough off and new cells with hormone receptors are generated in their place.

    So far, the idea is looking spot on. Thirty-five patients have participated in trials, with the results validating the company’s approach. Still, it’s early days. The trials began just eight months ago, meaning no one yet knows how effective the treatment will be over a longer period of time.

    There’s also competition to consider. Though Fractyl has some deep-pocketed venture firms, including earlier investors General Catalyst Partners, Bessemer Venture Partners and Domain Associates, the kind of skin ablation done by Fractyl’s device isn’t unique, even if no one is doing it precisely the same way.

    Royan says he isn’t concerned about potential copycats, pointing to Fractyl’s “significant IP filings.” More, he insists, Fractyl’s design will be very hard to beat. Asks Royan,“Were there cell phones before and after the iPhone? Yes.” But the iPhone’s design has kept it at the fore. For his money, so will Fractyl’s specific approach to fighting diabetes.

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  • After Onavo

    flying blindEarlier this week, The Information published a piece about mobile software makers who are flying blind following Facebook’s acquisition last year of Onavo, an app analytics startup, even as consumers spend more time inside apps than ever before. In fact, according to a new Comscore report, activity on smartphones and tablets has grown to 60 percent of our digital media time, driven predominately by apps.

    On the desktop, of course, Comscore, Nielsen and SEO companies can learn a lot about site referrals based on URL tracking, and for the most part, everyone has access to the same data. By contrast, the mobile ecosystem offers no such visibility. Aside from tracking how may times an app has been downloaded, says Keval Desai of Interwest Partners, “There’s no true visibility into the traffic of top sites, no visibility into app discovery.”

    Desai compares the dearth of mobile analytics to the old days of the Internet, when there were “these closed islands, like AOL and CompuServe, before the web came along and opened everything up.” Today’s “islands” are Google and Apple and, increasingly, Facebook, which control most of the mobile app market and thus can see what others cannot, including how often particular apps are used.

    Things don’t look to change any time soon, either, despite the growing number of companies attempting to make money off of mobile analytics. These companies range from four-year-old, San Francisco-based App Annie, which tracks downloads, to Singular.net, also in San Francisco, a new company in the broader mobile-usage-tracking space that was founded by ex-Onavo employees and raised $5 million in seed funding from General Catalyst Partners this summer.

    Other analytics startups trying to figure out mobile analytics include Mobileaction, Sensor Tower, MixPanel, Amplitude, AppGenius, and Mobiledevhq, a Seattle-based company that was acquired earlier this month for undisclosed terms.

    The question is whether the absence of a mobile analytics standard will stunt the development of new mobile apps. Desai, for one, isn’t ready to toss in the towel.

    While a lack of transparency into the ecosystem may frustrate reporters and venture capitalists looking for the Next Mobile Trend, the rest of the world may wonder, “Who cares?” suggests Desai. Consumers can visit an app store to get an idea of what’s new and exciting, he notes. VCs employ people to write scripts to figure out what’s hot and what’s trending. Meanwhile, “If you’re a large advertiser and want to know what are the most frequently used apps by a particular demographic, you can get that data through your ad agencies or through the publishers themselves. App publishers have an incentive to voluntarily disclose that information – in private. It’s like with TV and radio and print, where you have publishers who, for the right reasons, aren’t interesting in [publicly] disclosing their viewership data.”

    Desai — whose firm was an investor in the mobile analytics firm Flurry, which sold to Yahoo earlier this summer in a reported $200 million deal — adds that he “isn’t saying that [mobile analytics is] not important.” Better insight into how applications are performing would be great. “But people who really care about this stuff have a way of finding it out.”

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