This Week in VC with Jim Armstrong of Clearstone

Posted on May 4, 2010 | 16 comments


Had a great chat with Jim Armstrong who is a General Partner at Clearstone Venture Partners today on TWiVC.  You can watch the TWiVC episode with Jim Armstrong here.

It was especially fun for me because we got the chance to talk about the VC industry and how entrepreneurs should think about the VC industry in addition to discussing deals.  Clearstone currently invests out of a $200 million fund based in LA with offices in Menlo Park and in India.  They were started in affiliation with IdeaLab and were the first-round lead in PayPal.  They’ve had a total of 12 deals that have IPO’d.

In the video we talk about how a fund manages multiple geography fund, whether entrepreneurs should take money from only local sources, the structural problems with VC’s needing to put money to work, the “lemming effect” of venture capital and the oxymoron of “strategic capital.”  What I enjoyed most is that Jim was willing to take strong positions and ones I mostly agreed with.  I think you’ll enjoy watching.

Some summary notes are below.  If you want to watch just parts of the video we went exactly in this order so you can more easily orient yourself to what you want to hear.

Segment One: Jim’s background and Clearstone’s investment strategy.

Segment Two: “Deal of the Week”

Palm (acquired by HP) – In our interview we talked about how transformational mobile computing is and why it’s different than web computing (e.g. location aware, always with me, smaller form factor, multiple devices, camera ready, shorter battery life, more connectivity issues, accelerometer).

We talked about how the metaphor for finding information might be changing and why large companies such as HP and Microsoft are betting so big on this industry.  We shared our disappointment at Blackberry even though we’re both faithful users.  And I made the prediction that within the next 2 years RIM (the parent company of Blackberry) will not be independent.

We also talked a lot about Geodelic, a portfolio company of Clearstone, who is trying to change the metaphor of how people discover location based information by partnering with large companies and brands.

We also talked about Elevation Partners who invested in Palm and how this deal really salvaged their investment, which was a VERY big bet on Palm.

Palm is a maker of mobile computing devices, including the Pixi and Pixi Plus;  HP: “Our intent is to double down on WebOS”; helps HP compete in mobile computing with Apple, RIM, Google, and MSFT

$1.2 billion

Read more:  HP Press Release, VentureBeat on P&L Sponsor Todd Bradley, TechCrunch follow-up

Segment Three: “VC Deals Funded this Week”

1. LivingSocial

Hyper-local, flash marketing platform connecting consumers with local business offers; super majority of offers are restaurant and personal services; competitor to Groupon.

What is interesting about this deal is that LivingSocial took in $14 million in VC just 6 weeks after they announced a $25 million round and the money came from Jeremy Liew, who is a well respected venture capitalist who just completed a similar type investment in ShoeDazzle.  eCommerce is hot again!  We discussed whether investing in the second largest player in a category makes sense given that Groupon is 10x the revenue, 3.5x the funding and market coverage.  But LivingSocial is reportedly doing around $180,000 per day in gross revenue.  Yes, that’s right.  Per day!  If this figure is accurate – it’s certainly a very large business even when you look at net revenues.

$14mm in Series C; $25mm in Series B raised in March 2010; $44mm raised in total

Investors: Lightspeed Venture Partners (Jeremy Liew)(lead), with existing investors: U.S. Venture Partners, Grotech Ventures, Revolution LLC (Steve Case)

Read more: peHUB, TechCrunch industry analysis

2. AppDynamics

Provides application performance management (APM) software solution that helps web sites manage distributed applications in high-volume production environments; features include: application mapping, transaction flow monitoring, code-level diagnostics, and cloud orchestration

Jim was really hot on this space.  Managing computing resources in the cloud is a big challenge at scale and there are several businesses targeting different components of this value chain including players like RightScale and Eucalyptus, who different things than AppDynamics but are addressing “cloud management.”  AppDynamics seems to be already servicing large customers including NetFlix and Priceline.

$11mm in Series B (oversubscribed); raised $16.5mm total

Investors:  Greylock (Asheem Chandna) (lead), LightSpeed (Ravi Mhatre) (lead)

Read more: peHUB

3. Corduro

Provides broad alternative payment platform, including payment services for online, mobile, and traditional retail payments; supports legacy features such as gateway and POS support, as well as, new features such as recurring payments and lower cost transaction processing methods; founded in 2010; widely suspected that Corduro could help power mobile and online payments for Google Android platform.

There weren’t enough details to know whether Corduro was trying to build a mobile payments company like Zong or a retail merchant processing solution like Square.  If anybody knows please add in the comments.  But Google’s investment seems to be focused on supporting a payment platform that can support the Android ecosystem.

Terms not disclosed

Investors: Google Ventures

Read more: TechCrunch

4. Klout

Klout measures influence on topics across the social web to find the people the world listens to; assigns a Klout score to Twitter members.  I really like the Klout team and the problem they’re solving.  The biggest question I had was whether this was a feature or a company.  It’s clear that many companies are going to need to understand “authority” in the social media era.  If you want to run marketing campaigns you need to know who influences whom and in which product categories and geographies

If Klout can become an embedded solution in every marketing software companies’ toolkits then they could be a valuable company.  If these software companies each build this authority algorithm in-house then they may become a product.  Luckily they didn’t raise too much money so if they are more of a feature they can still get a nice return if they’re a successful feature.  The race is on!  I wish the team well and I’ll certainly be watching actively on the sidelines.

$1.5mm in Series A

Investors: Allen Morgan of Mayfield Fund, ff Asset Management, Bobby Yazdani, Nova Spivack of Lucid Ventures, Zelkova Ventures, Paige Craig, Tom McInerney, Michael Yavonditte of Quigo Technologies, Ofer Ronan

Read more: TechCrunch

Segment Four, “VC Discussion – How Should Entrepreneurs Think about ‘Strategic’ Investors?”

We had a long discussion about “strategic” investment, which basically means you have a corporate investor.  I’ve already written about this topic.  I believe that “strategic” money is an oxymoron.  If you raise strategic money raise it in your B or C round not your A.  If you raise it make sure that you raise money from 3-4 strategic investors rather than one.  Make sure you understand the limitations, which we discussed in depth in the video.  I gave carve outs for Steamboat, Intel and Comcast Interactive Capital, all of whom I believe are more like VCs than strategic money and can be great to work with.

Now Google is a VC.  It would be hard to turn down their money if offered.  Let’s see how the do over time in navigating the complicated world of “am I like a VC in it for returns or like a corporation in it to support my core business.”

Google Ventures, Team, Portfolio Venture arm of Google, targeting to invest approximately $100mm in 2010; staff includes 1 Managing Partner (Bill Maris), 7 partners, 4 associates, 2 venture partners and 1 fund CFO; portfolio companies: 10; broad investment focus including: consumer Internet, software, hardware, clean-tech, biotechnology, and healthcare; investment sizes range from hundreds of thousands to tens of millions; will leverage the technical expertise of 20,000 Googlers and help all companies understand how to work with Google

Read more:  TechCrunch

Segment Five, “Notable Exits”

IPO

ReachLocal – we discussed this deal at length including what amount of revenue does it take to get to an IPO (Jim’s view, sub $100 million in fine as long as you have good margins and a strong growth rate).  We also discussed the fact that an IPO often doesn’t mean the founders or investors can take too much money off the table.  If you don’t have knowledge of why this is the video is pretty instructive.  We also talked a lot about whether founder liquidity is a good idea.  We both agreed it was.  I have written on this topic before.  We talked about ReachLocal and how we think they’ll be a great channel for any software company wanting to sell online services to local businesses (they have a nationwide salesforce).  And we shared our love for Zorik Gordon.

Online advertising platform for local businesses; ReachLocal reported over $203 million in revenue for 2009, compared to around $146 million in 2008. Its net income for the 2009 period is $11.66 million, compared to a $4.47 million loss in 2008. Net income was around $1.4 million, compared to a $7 million net loss in 2008.  ReachLocal raised around $68 million in VC funding, from VantagePoint Venture Partners (53.22% pre-IPO stake), Rho Ventures (12.94%) and Galleon Group (6.76%).

Raising $75mm in IPO, values company at $515mm

Read more:  SEC S1 Filing (amended 05-03-2010), peHUB

M&A

ICQ (sold by AOL to Digital Sky Technologies)

One of the first consumer instant messaging platforms; acquired by AOL to augment user base of AOL Instant Messenger.  It was bought for around $470 million and sold for $187 million.  That seems to be the case for lots of AOL / Yahoo! businesses.  It seems like M&A ebbs and flows through periods of rapid acquisition followed by years of divestitures.  It’s weird to me that corporate memory can be so short.

$187.5mm

Read more: DST Press Release

  • http://www.domainnoob.com John Humphrey

    Another great episode. Thanks!
    'Strategic Investors'– this was new to me but I got it right away thanks to your insights. The discussion around what ingredients make for a successful IPO were also very interesting.
    Jim mentioned 'vulture capital' and 'founderitis'– would like to hear more about that at some point.
    And a question (perhaps for another show).
    So much of what is going these days is in the local/location space. As a VC, valuating a company implies you understand their assets. I am curious to know how VCs think about all the local data being collected. Is it assumed to be the property of the company collecting it? I'm beginning to see an elephant in the room that is going to make Facebook privacy issues seem trivial. Am I just being paranoid?

  • http://www.domainnoob.com John Humphrey

    Another great episode. Thanks!
    'Strategic Investors'– this was new to me but I got it right away thanks to your insights. The discussion around what ingredients make for a successful IPO were also very interesting.
    Jim mentioned 'vulture capital' and 'founderitis'– would like to hear more about that at some point.
    And a question (perhaps for another show).
    So much of what is going these days is in the local/location space. As a VC, valuating a company implies you understand their assets. I am curious to know how VCs think about all the local data being collected. Is it assumed to be the property of the company collecting it? I'm beginning to see an elephant in the room that is going to make Facebook privacy issues seem trivial. Am I just being paranoid?

  • http://twitter.com/L1AD LIAD

    first week i missed watching the show live.

    such a comprehensive write up nearly as good as watching the show itself

  • http://twitter.com/L1AD LIAD

    first week i missed watching the show live.

    such a comprehensive write up nearly as good as watching the show itself

  • http://twitter.com/LadaRasochova Lada Rasochova

    Great episode and write-up!

  • http://twitter.com/LadaRasochova Lada Rasochova

    Great episode and write-up!

  • http://pupeno.com J. Pablo Fernández

    Great show! Interesting conversation on strategy money. I'm learning a lot with your show, thank you!

  • http://pupeno.com J. Pablo Fernández

    Great show! Interesting conversation on strategy money. I'm learning a lot with your show, thank you!

  • Alex_Binkley

    Mark – This show is great. I have been reading through the content on your site the last few months and am blown away by how much you have put out there.

    The case of a company like Klout is an interesting one. So they come up with a great idea for what you describe as a cool “feature”, but if it is not the base of a company what would you suggest they do with it? My inclination is either (1) to build the feature and sell it to someone else who can integrate it better into a complete solution or (2) to spend more time at the drawing board figuring out what that complete solution is. It sounds like you lean more towards (2) than (1). Is this just because as an investor there's limited upside for you? Or am I missing the point? Thanks again for all the great content!

  • Alex_Binkley

    Mark – This show is great. I have been reading through the content on your site the last few months and am blown away by how much you have put out there.

    The case of a company like Klout is an interesting one. So they come up with a great idea for what you describe as a cool “feature”, but if it is not the base of a company what would you suggest they do with it? My inclination is either (1) to build the feature and sell it to someone else who can integrate it better into a complete solution or (2) to spend more time at the drawing board figuring out what that complete solution is. It sounds like you lean more towards (2) than (1). Is this just because as an investor there's limited upside for you? Or am I missing the point? Thanks again for all the great content!

  • http://twitter.com/aumg Gregg Borodaty

    Mark – great show, really enjoyed the discussion on mobile and the bold, ballsy prediction on RIM. I completely agree that RIM has fallen asleep at the switch. I was at CTIA recently and going to their booth was like walking into a time machine. The devices haven't changed in five years, and they weren't showing anything new! Going into the Samsung and HTC booths, and even Microsoft, was like looking into the future. If RIM doesn't do something fast, and I mean real fast, they are sitting ducks. I'm a classic example of what is happening to them. I use my BlackBerry for e-mail only now (just like you and Jim), but I carry a NexusOne to consume mobile content. If the NexusOne had a keyboard, my BlackBerry would become an instant paperweight.

    The piece I disagree with you on the mobile discussion is that there is only one web, there are just different means of viewing it – desktop, mobile, tablet/slate, etc. The content needs to exist in a central place, but the user experience needs to be customized based on how the user is consuming the content. Each device has a different UI, and the consumer behavior is different for each scenario. The big mistake is that people are forcing content management on a per environment basis – this is too much overhead. The better answer is to manage the content in one place, the web, and then tailor the delivery of the content based on the device and usage scenario.

  • http://twitter.com/aumg Gregg Borodaty

    Mark – great show, really enjoyed the discussion on mobile and the bold, ballsy prediction on RIM. I completely agree that RIM has fallen asleep at the switch. I was at CTIA recently and going to their booth was like walking into a time machine. The devices haven't changed in five years, and they weren't showing anything new! Going into the Samsung and HTC booths, and even Microsoft, was like looking into the future. If RIM doesn't do something fast, and I mean real fast, they are sitting ducks. I'm a classic example of what is happening to them. I use my BlackBerry for e-mail only now (just like you and Jim), but I carry a NexusOne to consume mobile content. If the NexusOne had a keyboard, my BlackBerry would become an instant paperweight.

    The piece I disagree with you on the mobile discussion is that there is only one web, there are just different means of viewing it – desktop, mobile, tablet/slate, etc. The content needs to exist in a central place, but the user experience needs to be customized based on how the user is consuming the content. Each device has a different UI, and the consumer behavior is different for each scenario. The big mistake is that people are forcing content management on a per environment basis – this is too much overhead. The better answer is to manage the content in one place, the web, and then tailor the delivery of the content based on the device and usage scenario.

  • http://arnoldwaldstein.com awaldstein

    Mark…great show and thanks for the notes for those of us with little time.

    The LivingSocial revenue numbers are astounding..much larger than I would have thought.

    Social buying landscape seems to be getting overcrowded already. Yesterday in NYC, Yipit (aggregator of social buying deals) pushed out the exact same deal, from same merchant, but from two discount services but with a different price. The land grab is obviously well underway.

    My take on the social buying phenomenon @ http://bt.io/F6og.

    Thnx–heading over to watch that section of the show and the one on IPOs now that rumors are confirming that REAL D is filing.

  • http://arnoldwaldstein.com awaldstein

    Mark…great show and thanks for the notes for those of us with little time.

    The LivingSocial revenue numbers are astounding..much larger than I would have thought.

    Social buying landscape seems to be getting overcrowded already. Yesterday in NYC, Yipit (aggregator of social buying deals) pushed out the exact same deal, from same merchant, but from two discount services but with a different price. The land grab is obviously well underway.

    Thnx–heading over to watch that section of the show and the one on IPOs now that rumors are confirming that REAL D is filing.

  • http://www.kidmercuryblog.com kidmercury

    disappointed that there was not ongoing coverage of dodd's fed empowerment act, the act that will reduce the number of eligible angel investors. of course its really just a power grab on the part of the international banking cartel and another example of class warfare.

    here is some recent coverage on this matter: http://www.pehub.com/71242/up-the-bracket-dodds

    the greater requirements for angel investors that dodd wants is part of a larger bill that gives more power to the federal reserve. senator david vitter proposed a counter bill meant to make federal reserve operations more transparent. this is important, because countering federal reserve power is ultimately about leveling the playing field in the finance industry; the less power that is given to the fed, the less tehy will be able to force through legislation that empowers them at the expense of startups/angels/VCs.

    the vitter bill was rejected.

    i find the lack of coverage regarding these matters to be disappointing and irresponsible. i hope others will join me in demanding more coverage of these issues from the VC media industry.

  • http://www.kidmercuryblog.com kidmercury

    disappointed that there was not ongoing coverage of dodd's fed empowerment act, the act that will reduce the number of eligible angel investors. of course its really just a power grab on the part of the international banking cartel and another example of class warfare.

    here is some recent coverage on this matter: http://www.pehub.com/71242/up-the-bracket-dodds

    the greater requirements for angel investors that dodd wants is part of a larger bill that gives more power to the federal reserve. senator david vitter proposed a counter bill meant to make federal reserve operations more transparent. this is important, because countering federal reserve power is ultimately about leveling the playing field in the finance industry; the less power that is given to the fed, the less tehy will be able to force through legislation that empowers them at the expense of startups/angels/VCs.

    the vitter bill was rejected.

    i find the lack of coverage regarding these matters to be disappointing and irresponsible. i hope others will join me in demanding more coverage of these issues from the VC media industry.