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The past few years have been an incredibly exciting time to be an enterprise investor. We have seen the rise of the cloud, the shift away from PCs to new mobile computing platforms, and the emergence of Big Data and Analytics as a core enabler of business agility. With these trends as a backdrop, we are in the early innings of a massive redirection of enterprise IT budgets towards new technologies and architectures.

At Lightspeed we have been investing thematically in each of these trends, having led early investments in cloud companies like AppDynamics and Mulesoft, in Big Data Companies like DataStax and MapR Technologies, and in enterprise mobile companies like Rapsphere (acquired by AppSense) and Push Computing. What excites us the most about these trends is that together they are driving massive change in the way that enterprises have to think about their IT infrastructure.

One particularly interesting (to us!) side effect of enterprise cloud and mobile adoption has been the creation of a new set of security challenges. As application consumption has moved from behind the protected firewall to outside a company’s trusted perimeter (due to employees adopting SaaS and mobile applications), enterprises have lost visibility and control over their users’ actions. This creates not only a security headache, but also a compliance and auditability nightmare.

A quick background: In the legacy (pre-cloud) world, enterprise applications resided in a company datacenter and were accessed from PCs that were primarily on-premise. In this environment, IT managers could manage, monitor, and secure enterprise data by creating a secure perimeter inside the company’s four walls. All application actions were monitored and all internet traffic was funneled through an on-premise firewall appliance that watched for malicious files and bad employee behavior. This was the status quo for many years, and spawned the well-established $6B market for network security devices.

However, with the rapid adoption of both mobile BYOD (bring your own device) and SaaS application consumption, the world has changed. In this new world, employees, not the CIO, choose their applications, and these applications reside either directly on a mobile device or in the cloud. The result is the need for a new type of security paradigm – one that recognizes that employees are increasingly mobile, that they want to use non-IT approved applications, and that the cloud is here to stay. A typical reaction to this trend has been to either block cloud applications or to impose strict restrictions on which applications can be used. Unfortunately, this policy causes unnecessary friction between employees and IT.

There is a better way – and Netskope has built the right platform that works for both employees and enterprise IT. Netskope discovers cloud apps, provides complete visibility and actionable analytics on usage, and gives IT policy-based control over employee behavior. With Netskope, employees get their favorite apps and CIOs get peace of mind.

This new solution requires a team with extensive expertise in building world-class, enterprise-grade networking, security, and Big Data solutions. We are very excited to partner with Sanjay Beri, founder and CEO of Netskope. Sanjay was most recently the youngest to make VP at Juniper and is a fellow Canadian (although he’s a Maple Leafs fan which is unforgivable). Since founding Netskope, Sanjay has assembled an impressive cross-functional team of industry veterans. To name a few: Ravi Ithal was an early engineer at Palo Alto Networks (PANW), where he architected their database and analytics systems. Krishna Narayaswami was most recently a Sr. Distinguished Engineer of security at Juniper, where he specialized in behavioral analytics. And, Steve Malmskog has solved some of the world’s hardest networking scaling problems as the chief architect at Payfone and previously as a Distinguished Engineer at Juniper. All told, Netskope has assembled an impressive team of 50, including 10 Distinguished Engineers and Principal Architects from some of the most innovative security, networking, and analytics companies in the world.

Today, Netskope launched their company. At Lightspeed, we’re excited about our partnership with the Netskope team as they rethink security for the mobile and cloud era. For more information about Netskope’s launch, visit www.netskope.com.

 

You can also follow me on Twitter at @arifj and @lightspeedvp.

 

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Numerify announces $8 million in Series A financing to revolutionize business analytics in the cloud. Founded by the pioneers of the business intelligence industry from MicroStrategy, Hyperion and Oracle, the company aims to arm every decision maker with meaningful numbers to effectively manage their business.

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The past decade has witnessed the advent of cloud delivered operational applications driven largely by time-to-value, reduced maintenance, elastic scalability and cost. However, the cloud business analytic solutions have yet to cross the chasm. The ease of deployment and the ease of use are key barriers to the cloud business analytics adoption.

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Numerify’s ground breaking technology will change the game on both the ease of use and the ease of deployment, and herald a new era in business analytics in the cloud. The company will make cloud analytics as easy to deploy and use as operational cloud applications, provide end-to-end visibility to business users across multiple cloud sources, and eliminate the professional services burden that traditionally comes with such solutions.

At Lightspeed, we are excited about our partnership with the Numerify team and I am personally proud to be the founding board member of the company. We believe that the company will disrupt the economics of business analytics in the cloud. With 50 employees and growing, we can’t wait to see how the company dominates the cloud business analytics agenda in a very near future!

If you found this post interesting follow me on Twitter @bipulsinha

 

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Last year I recapped a few episodes of season 4 of Sharktank from a VC’s point of view. A few people have asked me to do the same, at least for the Season 5 premier. So here goes! (You can watch it here for a couple of weeks if you didn’t see it last night).

POSTCARDS ON THE RUN

The first pitch most closely resembled a company that I may actually see as a VC. Josh Brooks, who ran marketing for MySpace for three years, is the founder of a company that lets users take photos form their phones, and then use those photos to send postcards in the real world to their friends and family. The smartphone app that enables this is free but it costs $2.49 to send each postcard.

Brooks has previously raised $1.6M to fund the company at a $6M post money valuation from a number of investors including Selena Gomez. Despite having over 500k downloads and making $450k in revenue over the last 21 months, he had only $185k left in the bank, which meant that he would be out of business in 90 days if he didn’t raise more money. He was seeking $300k for 5% of the company, implying a $5.7M pre money valuation and planned to use the money to market the app.

Most of the sharks dropped out quickly, concerned about the short runway for the company, lack of any barriers to entry, lack of issued patents, missing product features and valuation expectations. Only one, Robert Herjavic, showed interest. He thought that the Selena Gomez connection could help motivate users like his daughters to use the product since they didn’t email or text him.

Herjavic made an offer to invest $300k for 10% (implying a $2.7M pre money valuation). After some back and forth, Herjavic and Brooks came to agreement on a $3.7M pre money valuation.

I think that most of the sharks were right to pass on this investment, but think that many of their reasons for passing were spurious. Lack of barriers to entry, unissued patents, and even missing product features are all red herrings that won’t affect whether or not this company will be successful. What is important is prior execution. This is a company that has failed to find product market fit over the last 21 months and after spending almost $2M (capital raised plus revenue). A cursory check of the iPhone app store shows that another app with the same functionality, Postagram, has more reviews and better ratings than Postcards on the Run, and achieved that without the benefit of a celebrity endorsement from Selena Gomez. It is hard to understand why $300k and a few more months would lead to a better outcome. The issue seems to be more about the team’s execution, and the team hasn’t changed.

Brooks was lucky to get an offer from Herjavic and came close to overplaying his hand on the valuation discussion. With his back to the wall and about to run out of money, his first priority should have been runway extension, not dilution from new capital. And although the headline difference between a $5.7M pre money valuation and a $2.7M pre money valuation seems big, the actual implication is only between 5% and 10% dilution since the round size is small. When the company’s survival is on the line, such details should pale into insignificance. While Brooks was able to improve the deal somewhat, I regard the risk he took in losing the deal over a couple of points of dilution as being a very poor decision. If that is indicative of his general decision making, it is not that surprising that the company has failed to gain meaningful traction over the last two years.

LYNNAE’S GOURMET PICKLES

The next company was a gourmet pickle business that launched in September 2011 and sold $144k worth of pickles in the last 12 months. They were seeking $125k for 20% of the company and intended to use the money to fund inventory growth.

None of the sharks were terribly interested. Some passed because they didn’t like the product personally, others because they thought the price was too high. Mark Cuban thought that if they were indeed successful, that it would only attract competitive from the bigger food companies who would crush them.

Barbara Corcoran passed in the most confusing manner, saying, “Your sales growth is tremendous, you don’t really need my money since you are so successful, so I’m out”. That is the equivalent of the “It’s not you, it’s me, I’m not good enough for you” break up line.

Of all the discussion, I thought that Cuban’s was the most instructive. There are definitely some industries where due to economies of scale (which can be on production costs or distribution reach) incumbents have enormous advantages. In these industries, even if startups are smart and nimble and innovate quickly, they can have a tough time creating long term enterprise value. If barriers to entry are low, all the startups do is serve as outsourced R&D for the big incumbents who can come in and use their scale to eventually recapture share from the startups who proved out a new market.

One example of this was the Flip video camera. The product was introduced in 2006 and created a whole new category of easy to use video cameras. Sales skyrocketed and the company was bought by  Cisco for $590M in 2009. But by this time, competition was already starting to flood in from big consumer electronics companies like Sony, as well as video cameras becoming standard in smartphones. These huge companies put pricing and margin pressure on the category, and about a year from the acquisition, Cisco shut down the Flip business altogether. On the one hand, Flip ended up being a good outcome for its founders and investors, but on the other hand, if they hadn’t sold when they did, they would likely have suffered the same fate and gone to zero. The startup did everything right (including selling at the right time fortunately!), but the long term winners in the category were the incumbent consumer electronics firms.

When Zynga was at its peak, social gaming showed the same characteristics. New startups would quickly innovate and create a new category of game (farming, city builder, organized crime etc), and Zynga would quickly build a game in the same category and become the market leader (Farmville, Cityville, Mafia Wars). Their superior ability to cross-distribute games when at their height enabled them to let startups do the innovation for them, and to rapidly follow the most successful models and dominate through better marketing and distribution.

I suspect pickles show the same market characteristics.

ROLODOC

Rolodoc was a train wreck of a presentation from start to finish. Two doctor brothers have an alpha version of a mobile app to allow patients and doctors to communicate with each other securely, and for patients to find doctors through search. About 50 of their friends were using it. They were trying to raise $50k for 20% of the company.

The founders did a terrible job of explaining what the product did and how it was differentiated, constantly falling back on calling it “social media” as though that would explain everything. They also had a wildly unrealistic plan for signing up doctors to build profiles on the app, expecting that they could do this part time by sending a few emails, without having to give up their day jobs.

The sharks quickly, and with great prejudice, passed on the company.

SWEETBALLZ

The last company to pitch in the Season 5 premier makes Cakeballs, cakepops minus the stick, in four packs that sell for between $1.99-$2.49 and cost $0.86 to make. The company was trying to raise $250k for 10% of the company  (implying a $2.25M pre money valuation) in order to fund inventory growth. They had done $700k in sales in the last 90 days, 95% of which had come from 7-11 convenience stores. The company has made $95k in profit so far, after the two founders paid themselves $3k/mth each in distributions.

All the sharks showed interest with the $250k being initially offered for 40% of the company. But eventually two syndicates emerged. Mark Cuban and Barbara Corcoran offered $250k for 25%, implying a $750k pre money valuation. O’Leary, Greiner and Herjavic offered $250k for 30%, implying a $507k pre money valuation. Both syndicates competed on the distribution and marketing that they could bring to the table. The founders ended up accepting the Cuban-Corcoran offer which had a substantially higher pre money value.

If the numbers represented are right, this represents a great deal for the sharks. If the company really did $95k in profit on $700k in sales in the last 90 days and this is sustainable, then it should be able to realize $380k in profit over the course of a year. Even a $750k pre money valuation would represent a less than 2x multiple of profit, which is a screamingly good deal for the investors.

One interesting element to the deal that eventually disappeared was that O’Leary at one stage asked for a matching cash distribution for all cash distributions made to founders. While the specifics of this don’t seem entirely fair, the concept here is an important one for minority investors if the founders control the company. The founders could conceivably decide to pay themselves above market salaries that artificially reduce the companies profitability, which would benefit them at the expense of the other shareholders. (At $3k/month, they don’t appear to be doing that here.) One way to handle this is to have founder compensation set by the board (including a representative of the minority investors). Another way is to have all cash distributions made to shareholders be made pro rata according to ownership. This isn’t what O’Leary proposed (his suggestion was more aggressive than that) but it does address an important area where founder who are majority owners can come into conflict with minority investors.

WRAPUP

Hopefully these breakdowns of the four pitches in last nights how give you some insight into how VCs think about investments in startups! If you find this interesting, follow us on Twitter at @lightspeedvp

 

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There’s nothing better as a Venture Capitalist than to meet an exceptional entrepreneur; one who is driven to impact the world for the better and often, at the same time, build a solution to a personal problem.  What I’ve realized …

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Last week, I wrote an article for AllthingD that talked about the shift if the ways that people are “sharing” online, mainly that niche social networks are giving people very targets, often private ways to share more freely.   This shift …

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Using Bitcoin for sending money between countries seems like a no brainer; because the costs are so low, there is the potential for huge savings for immigrants sending money home.  But, as I wrote about in GigaOm this past weekend, …

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In March 2013 we led the Series A of Whisper, an extraordinarily engaging smartphone app. The app allows users to anonymously share secrets, their text over arresting images. Other users can then read, heart and reply. Here is one …

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In our last post we noted that at least half of all Bitcoin transactions in June 2013 were for online gambling on the gambling site Satoshi Dice.  We were interested to see what has happened since Satoshi Dice was acquired …

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Recently we noted that illegal drug purchases are around half a percent of Bitcoin transactions, which is far from the existential threat that it has been made out to be. Instead, the most common usecase for Bitcoin is online …

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With the backdrop of both Congress and the NY Department of Financial Services launching investigations into Bitcoin, regulation is top of mind for everyone in the Bitcoin ecosystem.

So far the only definitive statement about how Bitcoin will be regulated …

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