• Four VCs on What’s Happening Now in On-Demand Startups

    Now ButtonLast week, at the On-Demand conference in San Francisco, StrictlyVC interviewed a panel of venture investors about the many companies they’re seeing – and funding — that deliver food, massages, and medical advice in real-time. We talked about the opportunity presented by these startups, as well as the many open questions that on-demand companies have created.

    The panelists – Patricia Nakache of Trinity Ventures, Satya Patel of Homebrew, Simon Rothman of Greylock Partners, and Steve Schlafman of RRE Ventures – each had thoughtful points of view. And while our recording of the event wasn’t crystal clear, owing to the room’s acoustics, we were able to piece together parts of that discussion below. Hope you enjoy it.

    So many on-demand companies have now been funded. How is that impacting what you’re seeing? Are there fewer on-demand startups knocking on your doors or more?

    SR: I actually counted. If you look at marketplaces, [we’ve been pitched] by about 1,000 of them in the last 18 months.

    SS: We’re seeing them every single day. It’s across the board: B2B, B2C, infrastructure, some more horizontal apps in platforms; we’re not seeing any let up at all.

    SP: We see 200 new companies each month and probably a quarter are related to the on-demand economy.

    What are they centered around? Anything really novel?

    PN: They come in cohorts, seemingly, so a couple of weeks ago, it was alcohol delivery on-demand and on-demand massage startups. But we’re also seeing more companies in transportation, in food delivery, in health and wellness and finance.

    SP: We’re not seeing any slowdown in transportation [and food delivery] companies. We’re kind of seeing things in every single vertical.

    Does that make sense? Is there enough untapped opportunity to support more food-delivery startups, for example? Where are we in the grand scheme of things?

    SR: There’s definitely too much money [funding these me-too startups]. The odds of five companies ahead of you falling apart is probably not a good business [strategy]. It’s okay not to be the first in a space, but once a space feels like [earlier companies are] approaching liquidity [meaning they’ve established both supply and demand], it’s probably time to move on to another space.

    How narrow can these startups go? Would you back a startup that’s say, delivering dairy products exclusively?

    PN: It’s the age-old debate from the software world: Do you invest in a platform or a best-of-breed solution, and I think it depends on how big the problem is that you’re solving. I think you can go too narrow to justify a standalone service, but does Uber eat the whole world? No, I don’t believe that.

    SS: It’s not just obvious industries like transportation and food. Pretty much every industry where there are service-based professionals is up for grabs. One of the craziest ideas [I’ve heard] is private investigators [which is] this weird market that exists probably on Craigslist and on the web and [a startup is now] taking it and making an experience out of it.

    Certain white collar professionals might argue that their industries can’t be too thoroughly disrupted because of their relationships with clients.

    SP: I don’t think there’s any professional service or product field that can’t benefit from improved efficiency.

    SR: It’s about quality. Take medicine, as an example. The outcome matters; it can mean the difference between life and death. Not everyone lives in a market where you can get a great doctor. Technology can remotely deliver that care, giving you truly efficient access to the world’s best [physicians], and I think that trumps anything having to do with your relationship with a mediocre doctor.

    Would you rather fund a telemedicine or other business that doesn’t require rolling out locally, versus startups that have to physically tackle city by city?

    SR: It’s a lot easier. Anyone who has tried to build a marketplace nationally will tell you [that] every local marketplace is almost like doing another startup. You [may have] a playbook, but you have to get supply and demand in every city over and over again, you have to customize it, sometimes you have to have a local team. The footprint may be smaller of [that distributed] team, and the demand may be centralized, but you still have decentralized supply.

    For companies that do go the city-by-city route, what are the top things they should have down before expanding into new markets?

    SR: Well here’s the one thing to avoid. I think everyone is trying to take Uber’s local rollout playbook and just copy it, but it doesn’t work.

    Why?

    SR: I don’t think local presence is mandatory. I see a lot of companies with a local presence in every city they’re operating in, without any good reason other than, that’s how it’s done. That’s actually not how it’s done. It’s how Uber did it and that’s fine and it works for them. But the default should always be to keep it in-house if possible.

    SP: You’re going to better understand where things are likely to break in remote cities if you take the time to understand your own operations.

    SR: The push right now is to get big fast in lots of markets. But if you haven’t unlocked the core market you’re in and really made your experience amazing, your chances of success declines with every city you expand into. Being first to the market isn’t winning. Being right is winning. It’s a race to liquidity; it is not a race to geography.

    Speaking of which, from a logistical standpoint, how do these on-demand startups address everyone who doesn’t live in an urban center? Would it make sense for more of these startups to launch early trials outside of major cities?

    SP: It’s more about more use that’s being addressed. If a company is solving a universal [problem] and its way of doing that is clean and focused, it doesn’t really matter where it starts. Operationally, it’s easier to build liquidity in more densely populated areas. There’s a question of whether some of these work in suburban areas, but operating early in urban environments gives you the flexibility to figure out suburban environments.

    What if they don’t work in suburban areas? Is there enough supply and demand in cities to justify these investments and valuations?

    SR: If you can get a meaningful percent [of the overall market] in those large areas, you can build a very large company.

    On-demand companies are dependent on contract workers. What happens if regulations change in such a way that companies have to treat them as full-time employees? Is that a concern, and either way, do you think these companies have a responsibility to turn these contract workers into full-time employees at some point?

    SR: I personally think the 1099 [tax classification] framework is broken. It existed in a world of monolithic, centralized corporations, not in a world of distributed companies, so I think there needs to be a third class of worker [and that we’ll eventually have one], though it will take a while.

    [I think these] decentralized environments are the future, and [that’s a good thing as] they enable assets to be decentralized, too. Uber doesn’t need to [own cars], for example, and that produces more money that can be pushed back to the company and customers and its employees [so that we’re eventually seeing] high-wage jobs with a lot of control.

    SP: I think regulation is going to change, but in the short term, as a business, you can decide your responsibilities will be dictated by a framework, or you can decide that your responsibilities are dictated by what’s right. And [these companies] need to do what’s right, which is to take care of workers and provide them not just with benefits and uniforms and living wages, but real career paths with the ability to grow their careers.

    SS: [Our portfolio company] Managed by Q [an on-demand office cleaning company], said early on that ‘We’re actually going to hire the workers and give them a great culture and train them and give them career advancement,’ and I think that’s brilliant . . . because at the end of the day, those employees are who your customers are interacting with, and you want to make sure they’re as good as your product.

    SP: When workers are getting all the [traditional benefits they’ve enjoyed], they’re likely to stick around longer, too.

    Connie

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  • Trusted Insight, the Social Network For LPs, Looks to Next Round

    Trusted Insight LogoTrusted Insight is a four-year-old, New York-based platform that has made itself valuable to institutional investors – 100,000 of them and counting – by giving them a place to research one another, scout out new deals and trends, and connect on due diligence — all with the help of advanced algorithms and semantic analysis.

    Now the 16-person company is gearing up for its next phase, suggests cofounder Alex Bangash, who previously founded Rumson Group, an advisory firm that specialized in private equity and venture investments.

    Most notably, the company will be unleashing some financial products of its own, though Bangash won’t be more specific than that today, citing competitors that are copying Trusted Insight down to “features we want to throw away.” He merely says to “think of us as the Netflix of investment management. Netflix can create ‘House of Cards.’ We can [create our own offerings] in this business, too.”

    Trusted Insight is also preparing to open its doors a bit wider to “different tribes,” says Bangash, who cites fund managers, companies, and “high net worths” who are accredited but don’t necessarily have a billion dollars behind them. (The platform will “still retain its exclusivity,” he insists.)

    Trusted Insight also has numerous new features up its sleeve, including “certifications” that help to highlight who is truly expert in what, regardless of their academic credentials.

    As for how it achieves what’s on its road map, Bangash says the company has three options, including organic growth. To wit, Bangash says Trusted Insight is poised to double or even triple its user base in the next year, as well as to increase the data it’s managing by five times. Considering that a “small but meaningful portion” of its 100,000 members already pay for one of Trusted Insight’s varying tiers of service, which range in price from $99 to $499 per month, the platform could “be a very large business on [its software-as-a-service fees] alone,” he says.

    A second option includes partnering with another outfit (Bangash says Trusted Insight is “talking with two or three players”) or raising a big fat round of funding, which seems like the most likely scenario. Already, Data Collective, Founders Fund, RRE Ventures, Morado Ventures, Real Ventures, and 500 Startups are among those that have invested an undisclosed amount of money in Trusted Insight. And Bangash says he’s been receiving “inbound interest from prestigious investors” anew.

    Either way, Bangash sounds confident in the network effects that Trusted Insight now enjoys, noting that “someone could develop a nicer LinkedIn, too, but people probably wouldn’t use it.” The trick going forward is turning Trusted Insight from a “transformational company,” as he calls it, into a transactional one.

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    Connie

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  • Betaworks Closes a New $20 Million Round

    betaworks logoBetaworks, the six-year-old, New York City-based holding company that has collectively created and invested in more than a dozen startups focused on the “real time Web,” has raised $20 million in new funding, says cofounder John Borthwick, who tweeted in the wee hours of Friday morning: “Excited to bring a few new investors into betaworks. Approx. 20m total capital. The first time in 3 yrs+ that we have have done a raise.”

    A new SEC filing shows a partial list of the firms to participate in Betaworks’s newest round, including Lerer Ventures, RRE Ventures and White Star Capital in the U.K., all of which are existing investors.

    Also listed on the Form D are John Drzik, president and CEO of the management consulting company Oliver Wyman; Michael Buckley, a longtime managing director at Intel Capital who is now the head of finance and strategy at Nike Digital; and Paul Cappuccio, the chief legal officer at Time Warner.

     

    RRE Ventures, Lerer Ventures and White Star Capital were among the first firms to provide Betaworks with its first, $7.5 million round, announced in early 2008.

    Two years later, in 2010, Betaworks closed on a $20 million Series B round that was led by RRE Ventures and then-new investor Intel Capital, and which included DFJ Growth, AOL Ventures, The New York Times, Softbank Japan and Softbank NY, and Founder Collective.

    Betaworks both invests in, acquires, and helps create real-time media startups. One of its first big wins was with Summize, a search engine that Twitter acquired in a mostly stock deal in 2008. Betaworks is also the company behind the link-tracking analytics company bit.ly, the Web site monitoring service Chartbeat, and numerous other products.

    Recently, the company has made a big push into social reading, including acquiring Digg, which it nabbed at a fire-sale price last year, and  purchasing the bookmarking tool Instapaper for an undisclosed amount in April. Betaworks has since relaunched both products.

    Reached for comment on Saturday, Borthwick (nicely) declined to comment further, saying only that money was raised “recently.”

    Earlier this month, Betaworks hired former Huffington Post Media Group publisher Janet Balis as its very first chief revenue officer, a sign that it’s looking for more ways to earn money off its portfolio. As Borthwick told AllThingsD of Balis’s appointment: “Phase one of Betaworks was building great companies. ” Phase two is “really building Betaworks as an operating media company.”

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  • Jim Robinson of RRE Ventures on Square, Bitcoin, and Its Sixth Fund

    privcap-deal-story-vocera-communicationsJim Robinson, cofounder of 19-year-old RRE Ventures, is a veritable sage of the New York venture scene, having arrived earlier — and stayed longer — than many of his industry peers.

    I caught up with Robinson yesterday to talk about what’s happening in New York, as well as to learn more about what’s happening specifically at RRE, a firm that now invests 75 percent of its capital in New York-based companies. Our conversation has been edited for length.

    RRE has raised five funds to date. Will you be raising a sixth soon and if so, how much will you be targeting?

    We’re still investing our fifth [$230 million] fund; we’re mostly through that. And we’ll raise a new fund shortly in the same, $250 million range.

    Would we ever see RRE raise a bigger fund?

    Fund sizes go in an out of vogue, but you go bigger either to do bigger deals or hire more people. Bigger deals have never been our business model, and we’ve always liked our size and shape: five or six partners, a couple of principals, a couple of associates. During the dot.com era, we’d gotten bigger and we sort of concluded that we didn’t want to grow our practice, [because] we felt a little more disconnected, both from our partners and the companies we were funding. When you have 10 VCs standing in a field, they’ll argue about the weather.

    There’s obviously a lot going on in New York. Is there too much going on?

    Are there too many startups right now? Probably. When you start hearing about whether you should bother with college or start a company instead, it’s probably [a bad sign], but these things [sort themselves out]. I think it’s probably more acute out there [in California]. Most people would rather do a little more following than leading in life, which is a normal human condition, and you don’t get to do that in a startup.

    RRE has enjoyed some nice exits, including, most recently, the sale of payments company Braintree to eBay for $800 million in cash last month. I understand you had a chance to invest in the seed round of Square, too, but didn’t. Is that your biggest miss?

    Hah, no, not even close. We’ve been around 20 years. We have a bunch of those. We didn’t do Priceline and should have. We didn’t do PayPal and should have. Long ago, we’d invested in Apriva [a point-of-sale dongle made to work with once-ubiquitous PalmPilot handhelds] and barely gotten our money back, so we were leery of incumbents in the payments processing world. We also worried about [Square’s] price. It seemed expensive to us at the time.

    Many VCs argue that it’s worth paying up for the right deal. How do you feel about being price sensitive?

    If you pay up and it works out great, you say, “Great, this was sensible.” If you pay up and it doesn’t work out, you don’t talk about it. If I had a growth fund here, there’s no question that I’d say on occasion, “This is too big an opportunity.” Then again, price is a function of supply and demand. We disregard it at our own peril.

    What do you think about the digital currency bitcoin?

    We’ve been looking at bitcoin technology for over a year. We’ve probably looked at 20 [bitcoin-related] companies seriously and we’ve made very small seed investments in two, but we’ve been reticent to place a major bet on one to date. It gets down to regulatory issues, which seem to indicate that if you’re an institutional investor in a digital currency company, there’s some legal liability. If there are problems in the system, [the liability] doesn’t just stop at the company but can go through investors and even, potentially, investors’ investors. It’s just not field-tested yet.

    No doubt we’ll have a major investment in a [bitcoin] company, whether it’s in one year or three years. But we’re watching what’s happening on the federal and state and international level right now. We’re still in studying mode.

    Photo courtesy of Privcap.

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