Few VCs would describe one of their main responsibilities as saying “No,” but in reality it is.In 2012 I reckon I officially said “No” to entrepreneurs about 99.8% of the time that they asked me for money (according to our internal deal log). And this doesn’t count the times at conferences, weddings, bar mitzvahs, soccer games and yes, sadly, even funerals, that I received informal pitches and wafted an air-biscuit of rejection in the idea’s general direction. I don’t want anyone to lament for me; as I know I have one of the best jobs on the planet, because everyday I get to meet with amazing people who seek to change the world, and I get to listen to their stories and plans. So in saying “No” so often, I want to make sure I say it well.

I think there are two critical elements to saying “No” well, while doing my job well:

1. Being right most of the time when I say it, and more importantly when I don’t;
2. Saying it in such a way that I show the respect due the receiving party.

First the easy part. As far as “No’s” go, it’s been a while since I looked at my own antiportfolio, but suffice it to say I have made some spectacular mistakes in “No’s” over the years. For the sake of illustration, I’d probably bookend my career at this point with Akamai and MakerBot as chief blunders. Saying “Yes” is harder than saying “No,” and for sure I have made a few mistakes on this dimension. (I’ll spare  the details). Ultimately, Venture Capital is a game of numbers, and a VC’s performance – the right “No’s” and right “Yes’s” –  needs to solve positively, or a VC no longer gets money to invest.

In part no doubt due to natural conflict aversion, the harder part for VCs appears to be saying “No” in a way that shows respect to an entrepreneur. The old way in VC was to never really say “No” at all, for fear of the repercussions: the entrepreneurs would become successful and hold the “No” against you in the future, or would tell their friends bad things about you. While I am sure there are many others, I have noticed two common strategies for delivering the “Soft No”:

• “the phone-tag game” – never actually connecting to deliver the news,
• “Dorothy and the Wizard of Oz” – creating a set of unattainable milestones only after which we’ll fund you,

What ever the meme, many VCs seem to do everything possible to avoid giving entrepreneurs the real reasons they’re turning them down. The rationale I have heard most often is that this avoids getting into a prolonged argument with the entrepreneur that could deteriorate and leave really hard feelings. I think this is baloney.

Personally, I feel that any entrepreneur who has the guts to present their idea out loud, whether primordial or well-formed, is taking the ultimate risk in putting themselves out there and deserves open feedback . I strive to respond to every single business idea pitched to me –  with honest reasons for saying “No” if that’s the outcome.  The feedback varies from the very light (“not a sector in which I am interested), to much more in-depth and specific to the particular business. It gets trickier when we pass on an investment because of unambiguous and confirmed negative feedback on personnel, as it is generally given under guarantee of non-attribution. Providing meaningful feedback without betraying confidential sources is quite difficult, especially if one doesn’t really know the entrepreneur well.

No one likes getting turned down.

At 5pm ET today, Crashlytics announced they had been acquired by Twitter. The entire Crashlytics team will remain intact and the Crashlytics product will continue to be developed. The founders will have significant roles within Twitter as well. While the purchase price was not disclosed, this was a tremendous outcome for the employees and investors.

There’s an old saying that great companies are bought and not sold. Crashlytics is a case in point. As a great example of a lean startup, they raised a $1M seed financing and a $5M Series A – and spent only 1/3 of it all by the time of the acquisition. On this funding, Wayne and Jeff built an amazing team, a revolutionary platform, a vibrant and addicted customer base of thousands and virally scaled their way onto hundreds of millions of mobile devices. In a little over a year.

When Twitter came knocking, we discovered that the teams and cultures matched remarkably well. It was clear that Twitter shared our vision for the future and together the opportunity to grow was just too good to pass up. I am very optimistic about the future of Crashlytics as part of Twitter, and grateful to work with this amazing team.

But it’s also bittersweet. We are fortunate to work with world-class entrepreneurs on a daily basis. Startups, like Crashlytics, that take off with ferocious acceleration and trajectory are rare indeed, and selling always begs the question of what could have been on a standalone basis? I am not a big “regrets” guy, so I will forgo the opportunity to wax prophetically. I know big things are in store for this team and I look forward to working with them again down the road.

We wish the entire team and the whole of Twitter the best of luck!

BetterCloud announced its Series A financing led by Flybridge today and I couldn’t be more pleased to join their board of directors. We met BetterCloud in late 2012 through one of their seed investors who was a friend of my partner Chip Hazard’s. The stars seemed aligned and we quickly dove into diligence and worked to close the investment within a few weeks.

BetterCloud is the leading cloud app management platform with an initial focus on Google Apps. In the six months since their launch into Beta, they’ve grown from zero to more than 5.5 million user accounts under management and continue to grow at a feverish pace.

At the macro level the thesis for an investment in BetterCloud is simple: we are convinced the Cloud is the next inflection point for computing; the inevitable move has begun and it’s only a matter of time until it dominates all IT solutions from small to large enterprises. Several business-focused Cloud apps & platforms are growing explosively and have already taken great market share, including :

• Google Apps – leading cloud-based productivity suite estimated to be servicing 5M businesses / 50M users
• Salesforce.com – $2.5B rev run-rate, 100K+ customers, 2K partners, 150B transactions
• Workday – more than 325 enterprise customers, $134M in ‘12 rev, growing at 170% YoY
• Amazon Web Services – leading PaaS, $1B rev (est). 1TB objects, 100K’s customers

Historically, significant value has been created by developing complementary products that support and enhance new application platforms, and we have little doubt that the Cloud will provide the next big opportunity.

At the company level, as always, it’s all about the team. BetterCloud’s founders (David Politis and David Hardwick) are pioneers in the sector, having been early employees at CloudSherpas, the leading Google Apps services provider and reseller to small and medium sized businesses worldwide. They have worked closely with the early adopters of Google Apps and developed a great appreciation for the demands and challenges faced as enterprises migrate to the Cloud. One of the most important elements to me is their commitment to community engagement – BetterCloud has built an enthusiastic user community –  and this community has become a great source of feedback and inspiration for future features and products, as well as a great platform for viral spread of their services.

Over the long-term, the big-picture goal is for BetterCloud to help accelerate the adoption of cloud technology and platforms by giving businesses the tools they need to manage cloud migration and ongoing administration of cloud apps.

We are excited to welcome BetterCloud to the Flybridge family – it’s a great way to start 2013!

A popular approach to seed investing, and one that I followed for some time, is what I call the “Foothills” philosophy. Invest a small amount in a team that is focused on a defined niche – with expectations that with hard work, nurturing and good fortune, the team will conquer the niche – climb that first hill. And with luck, once that first hill has been scaled, another bigger one will lie in clear view, and maybe another bigger one beyond that, and so on. In this model, the thought is that a collection of more modest hills (niche markets) will sum to equal a big opportunity, or maybe, just maybe, a mountain (massive market) will reveal itself to yield a homerun.

The problem is that many times – ok, to be really cynical, most times – there are no more hills beyond the first, let alone any mountains in the distance. This results in many small seed startups pursuing market opportunities that will never be big enough to justify the so-called “Venture Capital Return” – markets that are sizable enough to grow standalone public companies, $B outcomes, revenues in the 100’s of $M, etc. etc.

Please don’t interpret this as an indictment of seed investing. Not at all. This is a VC-only perspective and mine to boot – and doesn’t necessarily apply to the lenses of angel investors, seed funds and micro-VCs, whose models are fundamentally different than ours. More “modest” outcomes ($10-50M in an acquisition) may work well for founders and these types of investors, where modest capital has been raised and ownership has not been diluted. But this approach doesn’t scale well and therefore doesn’t work for larger VC funds. The data show that the best VC returns are driven by investments in massive opportunities. You can’t hit a homerun unless you swing the bat at homerun pitches; “small ball” – walks, bunts, singles and doubles – usually lead to small outcomes. This is why I think the Foothills approach for VC seed investing doesn’t work.

But clearly seed investing is working across the industry, turning out some great companies and great outcomes – so what’s different in our approach? Continuing the hiking meme, I refer to our strategy as seeking “Basecamps.”

I’m looking for seed-stage startups that seek to conquer Mt. Everest – targeting a massive market they seek to own or disrupt, with conviction about where to setup their initial basecamp, and a set of plans/hypotheses on the routes to ascend – recognizing they may have to adjust or abandon paths based on the obstacles they encounter.

Knowing the giant goal looms in the distance helps nascent companies balance short-term tactical decisions with the longer-term strategic impact. For example, a decision about pricing structure for a first product may not seem too cataclysmic, but if it sets rock-bottom price expectations for all future releases, including ones with true value-added proprietary advantage, you may have inadvertently sunk the ship.

A huge market opportunity provides the basis for growing huge revenues, but also affords startups the latitude to make mistakes, without any single one likely to cripple the company. In today’s hyper competitive markets, when executing in a small sector, even small errors in execution can be fatal.

And finally, being able to articulate a view of a very large market opportunity becomes a competitive advantage in recruiting and retaining talent to a team. Charisma and passion are requisite skills for any successful startup, but world-class entrepreneurs of any genre (engineering, marketing, sales, etc) want to take on big challenges with the potential to change the world and make fortunes along the way. It’s hard enough to compete against incumbents with history and demonstrable momentum. It’s infinitely harder when there are obvious questions about a startup’s “nichiness.”

So as you are forging your plans for world domination, while focus is critical to maintain, keep Everest in your sights.

So, when we made the commitment to open a Flybridge NYC office at the beginning of this year, it was only fitting that I would help lead the effort. This decision was an easy one given the exploding local tech community, the rise in our NYC deal flow, and the growing number of great Manhattan-based early stage companies in our portfolio.

We see NYC as a bona-fide startup center in its own right – for a number of core reasons:

1. Startup success stories – look to DoubleClick, Admeld, Right Media and Buddy Media  as examples of great venture returns that have and continue to spawn new startups.
2. Emerging leaders – companies like 10gen, Fab.com, FourSquare and Tumblr are industry leading category killers.
3.  Magnet for talent – NYC has always been a melting pot and a global magnet, and in the market for startups, new grads, immigrants and Wall St. defectors alike have joined the ranks.
4. Access to customers and partners – Manhattan is home to more Fortune 500 headquarters than any other city in the US in a variety of industries.
5. Community support  – Quintessentially NY is the extent and level of support in the tech community, with such groups as the NY Tech Meetup, NYC Entrepreneurial Fund, HackNY and a number of city-wide initiatives like the Academy for Software Engineering.
6. World class academia – Nearly 600 thousand students in more than sixty universities call NYC home – and more are moving in, such as Cornell, Technion, Carnegie Mellon and IIT.

Add to this mix a host of incubators and accelerators, and ample seed capital – all within 10 square miles on an Island – and NYC is poised to continue its growth. To support our own growth in NYC, we’ve built out our team. My colleague, Matt Witheiler, has moved to the city with his wife and I am very pleased to announce that we have hired our first associate in NY – Caitlin Strandberg, who joined us from LearnVest and previously Behance. We hope to contribute to the community in NYC by offering our experience as both entrepreneurs and investors through multiple cycles – to help the next crop of founders build great companies.

So while Boston continues to be an important center of gravity for Flybridge and the rest of our team remains in the Back Bay, I am looking forward to our adventures in Manhattan!

I am attending the SocialTV Summit in NYC today.

Social TV is a generic term that describes solutions for social interaction related to live or pre-recorded television. The idea of Social TV is one I first heard about 4 or 5 years ago from my friend Marie-Jose Montpetit who has been researching the implications at MIT for quite some time. I have been tracking this area since Marie first mentioned it to me, but as she just mentioned at the conference, it really started taking off with the introduction of the iPad.

As some may know, I’m not a fan of conferences generally, especially ones that cost a lot that I can’t get into for free. But I have to admit that I am enjoying this one and actually paying attention. Here’s why.

It’s clear this is still an early market, and perhaps most of the world’s ecosystem for Social TV is in attendance. Though one presenter estimated 2011 revenues on the $150-200M range, it’s hard to see whose taking a big chunk of that dough, other than Twitter and maybe Facebook. Most of the companies presenting today showed one of two business models – (1) a TV companion service table or web app that automatically figures out what you are watching and provides additional content and ability to interact (i.e. tweet with others watching at the same content live or delayed) – allowing brands to advertise, or (2) a TV analytics platform, that aggregates and reconciles trending feeds about TV (i.e. the Twitter feed or public Facebook posts) to help brands understand where to advertise.

I have to admit that I’m a fan of the two screen experience, but maybe it’s because I have ADD. Will there be a single platform that becomes the SocialTV companion app? It would stand to reason, but it’s not clear there is a leading contender right now, and I think it’s because there’s very little differentiation (and utility). Right now the real SocialTV companion is obviously Twitter. Maybe it continues to be?

What about the analytics piece? Clearly analytics and metrics are the foundation for advertising, and as TV evolves, it’s reasonable to expect that like other Internet platforms, advertising will change as well. Personally, I don’t think we’re going to see a separate Social TV advertising network or analytics platform for long. The major players online and in mobile already have the sector in their sites, and if the Social TV sector takes a while to take off, it will likely be harder for a distinct advertising solution to take flight.

Characteristic of an early hot and hyped market, there appears to be far more venture money invested than revenue. That will change, but I fear that many (most) of the companies that I saw today wont be around to see it. But I’m sure there will be plenty of unique opportunities around the sector to provide great investment opportunities, which is why I’m spending time to continue my education.

It’s rare to see sectors in the early stages of formation, and I’m pretty sure this is one of those times. Television, unlike traditional newspapers, is not going away. But it needs to change, and I think Social TV is the right evolutionary stage. I’m encouraged that the old will have to meld with the new world, because innovation will come from startups.

I received a few requests to post the “Mr. Bill Raises Venture Capital” segment from my Flybridge Summer Party 2011 Video.

I was flattered to be asked to present at Scott Kirsner’s Future Forward 2011 conference yesterday at Wellesley College. My talk was on the future of Cloud Computing and I presented a context and set of investment themes that my partner Chip Hazard and I have put together on what we’re calling “Dynamic Computing.” The entire slide deck can be found here on Slideshare, and the gist of my voice-over from the conference is as follows.

At Flybridge, the two dominant sectors we target are enterprise IT and consumer infrastructure. Over the years, venture capitalists have seen and invested in several inflection-point changes in these sectors – changes that have brought with them tremendous opportunities for new companies and innovation – such as the move from mainframes to minicomputers, minicomputers to PCs, then networked PCs, the client-server, ultimately leading to the web. We’re convinced we’re in the midst of another such inflection point moment right now; but it’s more profound than simply jumping on the cloud-computing or mobile app bandwagons. While these are important elements for certain, we see them as part of a larger shift we’re calling “Dynamic Computing”

Legacy Platforms are Monolithic

Looking at the evolution of computing, from the nexus with mainframes in the 1960s, through the Minicomputer, the PC revolution and into the advent of the commercial Internet in 1990’s, remarkably all these paradigms relied upon a relatively homogenous and monolithic architecture. This made sense at the start, because ubiquitous adoption of computing required establishment of a uniform standard platform that everyone could write to with confidence. And this uniformity, in part, it gave rise to the generation of tech behemoths that persist today, such as Microsoft, Intel, Oracle, SAP, et al. But the strengths of this ecosystem, namely uniformity and backward compatibility have become their Achilles heels in the expanding world of the Internet – as these architectures have become bloated, expensive and energy hogs. Combined with the intense industry consolidation that followed with the Internet bubble bursting at the turn of the 20th century, innovation and new startup activity in the sector languished.

Change is Here

But more recently, the confluence of several core technology developments have exploded the traditional monolithic platform creating a fundamental revolution in how computing solutions are created and delivered. This is what we call Dynamic Computing, and it comprises the following components:

Open Source – the movement that began with Linux in the 1990s was the initial catalyst, bringing low cost, high quality software – and most importantly – CHOICE. No longer are individuals or companies bound to the limited menu provided by the usual suspects. And the FUD spread in the early days of open source – that open source applications would be buggier, less secure, unsupported – long ago faded.

Cloud Computing – though the press has forgotten, what really began as ASPs, MSPs and SSPs, a decade ago, has lowered the cost of development and deployment infrastructure by orders of magnitude creating costs that scale with usage, which is critical to capital-constrained startups.

Dynamic Scripting Languages – such as python and Ruby – have made development faster, portable and scalable.

Virtualization – originally conceived to get performance boosts from underutilized Intel chips, set the foundation for scalability and migration well beyond a single rack within one data center.

And Finally, public APIs have permitted two fundamental and ground-breaking changes:

• They allow applications to be dynamically assembled from best of breed providers, irrespective of geographic proximity
• They provide the opportunity for unfettered access to previously unavailable data, the so-called “Big Data” firehoses.

Add global affordable broadband, and the result is a set Dynamic Computing solutions that can be seamlessly split over great distances with no visible performance degradation.

Investment Themes

• Developer Driven Business Models– really a basis for adapting the low-cost distribution model similar to consumer Internet applications like Facebook and LinkedIn. These can provide a low-cost method for customer acquisition by getting developers to embed solutions within their own applications, then they talk about it with their cohort, and so-on and s0-on. News spreads quickly within these circles – which has both plusses and minuses. It can become a great wedge for upselling future features and solutions.

• Legacy Applications Don’t Translate Well – We will see situations where traditional issues persist, but the traditional solutions just don’t work given the disaggregation of the platform – meaning that new solutions will be needed. Such areas include storage, management and security. Consider security; in the past if you were the Chief Security Officer for a mid-sized corporation, you bought an array of gear to cover your hindside, including firewalls, intrusion detection devices, data-leakage protection, virus-scanners, and others. You installed these solutions in your data center and dealt with issues when they arose. But what happens to that CSO when his company has moved to a distributed cloud-environment, with various applications running at several different service providers. That CSO still has all the responsibility she had in the past, but none of the authority; she cannot put a fancy data-leakage prevention solution at Amazon EC2. Thus the opportunity for a new take on the old problems exists.

• Big Data Analytics – Pulling apart the architecture and publishing APIs creates a firehose of data flows that were not available in the past, and the analysis of these flows is creating entirely new product opportunities across all the sectors we cover. And creating new business models as companies can charge for access to their data – which they hadn’t contemplated in the past. A burgeoning set of problems are brewing around big data access, including cost, proprietary access and security of the flows.

• New Opportunities Emerge – the corollary to legacy applications no longer working, is that entirely unforeseen problems & opportunities will emerge because of the exploded platforms. My current favorite is to consider what happens when we get to real-time bidding for the different elements of a distributed stack – imagine an exchange where computes are “traded” based on cost, performance, availability, etc – like commodities. 

• Purposeful Built Foundation Technologies – the innovators dilemma for incumbents is that as these new dynamic computing offerings are still nascent, their willingness to cannibalize themselves is nil, which opens the window wide for some massive market potential – but these tend to be more capital intensive as they are foundational. These opportunities should largely be seen in semiconductors and systems. This is a pattern that has repeated itself with every new platform shift – things tend to start with applications built on whatever is generically available, and as popularity increase, new more specific solutions tend to arise. The worry in this area is that if you invest too early – for example in a Hadoop hardware acceleration platform – and scalability never rises to need such performance, the company will starve.

Companies

I have mapped some companies to the different investment themes. Notice that Most of them are based in the Northeast – which is simulatenously very encouraging and not at all surprising, given the enterprise IT heritage in the region. I ran out of space, but would love to hear suggestions of others to add to this budding market map.

Conclusions

The reason I chose WordPress was near-ubiquity; there is a full featured web-app, iPad and iPhone apps – and the user support and documentation is terrific. They made it very simple for me to move geekvc.com to their platform. The downsides – (1) no automated method for ingesting my existing blog posts, so it will take a while for me to recover all I had done.  (2) no thick Mac app, so no easy offline batch posting while I am traveling without connectivity. (3) not nearly as easy or cheap for customization as I have been used to having with iWeb.

I’ll live …

This year’s event was epic – the theme of the Saturday night costume party was Saturday Night Live, and our guests came out strong. A special shout out to John Belizaire of our portfolio company FirstBest Systems and his wife Nilda, who came as Buckwheat and Alfalfa. And my personal newbie award to Bill Simmons and his wife who dressed as Admiral Spaceship and Nitro of Laser Cats fame. Personally, I went for the ensemble approach with my colleagues Kate Castle, Matt Withelier and their significant others Amanda and Dan as the cast from “I’m on a Boat” – complete with a water entrance to the party as we motored along the bay toward the venue with the eponymous song blaring. Matt and Amanda dressed as mermaids and they were spectacular.

I look forward to this weekend each year because it’s a unique chance for our work friends to get together socially with their families; to kick back for a weekend away from the hard duty of building companies in the current environment and to get to play with their kids, while seeing old friends and making new ones.

I make a movie each year for the event and given SNL as a topic, I had a blast with my homage to the old and new. Click below to watch the whole video …