Longworth Venture Partners Blog

Carlos Garcia is CEO of Scrapblog, the first Web-based service for creating and sharing multimedia scrapbooks. As one of the pioneers in the Web 2.0 space, I asked Carlos to share some thoughts on the trails that Scrapblog has blazed and what the future of Web 2.0 social media holds.

Q: Scrapblog utilizes a variety of innovative Web 2.0 concepts, including merging multimedia, social networking and extreme personalization. These concepts are just taking off today. What gave you the idea to create Scrapblog two years ago?

Carlos: Back in October 2004, my wife and I were at the first Web2.0 Conference in San Francisco. We started a conversation about how social media would evolve. We made an analogy to the traditional photo album and how it had evolved into the richer, more creative experience that traditional scrapbooks have. We concluded that a similar evolution would happen online.

Q: When you first conceptualized Scrapblog, did you imagine that these customizable online tools would flourish as quickly as they did?

Carlos: Yes. The Web is constantly changing and most of those changes are related to improvements in user experience and participatory media. I know, and knew back then, that we are not the only ones trying to innovate by allowing users to express themselves in a creative and personal way.

Q: Scrapblog appeals to a wide variety of age groups – from college students to newlyweds to grandparents – for a variety of reasons. Which demographic is the most frequent user of Scrapblog? For which user set was the technology originally created?

Carlos: We created Scrapblog for everyday people who want to express themselves in a creative way and tell better stories online and in the real world. That said, Scrapblog appeals to a broad and diverse group of people. Nevertheless, women are the majority of our users. Young mothers and teenage girls make up the most visible groups within our community. It is very interesting to create a product that is inviting to a large group of people and let the community define the product from that point on.

Q: What is the most creative use of Scrapblog that you have observed?

Carlos: There are many, but I was recently surprised to see non-profit organizations and political campaigns using Scrapblog to spread their message and raise funds. Teachers are also using Scrapblog to document field trips and engage students to participate in educational assignments by creating their own scrapblogs.

Q: In the next five years, how do you see the multimedia convergence industry evolving?

Carlos: Five years is a long time in this industry. I would predict that in less than two years we will see wide spread adoption of home entertainment systems that are fully dependent of the Web.

Q: Lately, there has been talk about Web 3.0. What does that term mean to you and what is Scrapblog’s position in a Web 3.0 world?

Carlos: I doubt that the term Web 3.0 will be adopted. Web 2.0 marked the revival of the Web after the burst of the bubble. The Web is now in a state of constant evolution, so I do not see the need to mark another dot in the Web’s history just yet (at least not as relevant as Web2.0 has been). The important aspect about the future of the Internet is that the user is at the driver’s seat now. At Scrapblog, we will continue to listen to our community as the primary ingredient for “what’s next.”

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With all of the buzz about the upcoming VMware IPO and the money the business unit is generating for EMC, virtualization has lately been one of the hottest topics on finance and tech media outlets everywhere. At Longworth, we have been actively searching for new investments in this market, and the success of VMware underscores the market opportunity that we see for startups. Indeed, while VMware and others have snapped up many small companies to cover more ground in the expansive periphery of the core VM technology, we still see many nascent areas of the market that VMware, Microsoft, and XenSource haven’t fully covered yet. In addition we expect the infrastructure giants like IBM, HP, BMC and CA to beef up their infrastructure and management product lines to cover virtualization.

First, some Longworth history. As virtualization began to ramp back in the early part of this decade, we recognized application virtualization and server-based application streaming as an attractive, adjacent market opportunity that would ease the application management and delivery headaches of IT organizations. In 2002, we backed portfolio company Softricity to enter this market. Softricity was eventually acquired by Microsoft in 2006. In 2004, we invested in Marathon on the basis of its innovative use of virtualization to present multiple synchronous physical servers as a single fault-tolerant asset.

Back to the present, it’s now clear that the use of virtualization within the enterprise has become widespread though largely dominated by VMWare to date. As XenSource and Microsoft ramp up their hypervisor implementations, and IBM and HP enter the fray, we expect the VM market to become highly competitive. Therefore, the large infrastructure vendors will be forced to compete on value added features above and adjacent to the VM layer such as management, high availability, interoperability etc. In addition, competition should lead to more heterogeneity in the market as VMWare’s dominance diminishes. These two factors create a unique opportunity for smaller vendors to extract value by developing tools and applications above and around the VM stack.

Indeed, our research shows that IT will demand robust ancillary software for handling everything from planning to migration, monitoring to auditing, and provisioning to workload optimization. With so many management areas to cover and so many potential acquirors, we expect the acquisition transaction flow to be healthy as the market consolidates over the next 5 years. We are already seeing dozens of startups stepping up to the plate to fill that void, and we’re looking forward to continuing to play our role in the evolution of the virtualization market.

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Gary Phillips is CEO of Marathon Technologies, a leading provider of high availability software and service solutions focused on keeping critical business process applications running. With virtualization becoming an increasingly hot topic in the high availability space, I asked Gary to share Marathon’s take. Virtualization is a market we continue to invest in and follow closely.

Q: What opportunities did Marathon identify for its high availability solutions in the manufacturing, financial services, media and broadcast, gaming, healthcare, government, and IT infrastructure industries? Which industry has proved to be the most receptive to Marathon’s offering?

Gary: All the of these industries place a significant value on insuring that their business critical applications are continuously available for their customers, employee’s and partners. Our software is used by over 1,500 companies in over 30 countries. Each industry has a number of applications that must be able to “compute-thru” any fault or failure to insure continuity of operations, no disruption to the applications and no loss of data. Common applications that Marathon software protects include process control systems, production manufacturing, financial transactions, compliance, on-air broadcasting, slot machine – player bonusing, building access & security system, call centers and hospital care systems. We have a large installed base and market acceptance in manufacturing, in particular process manufacturing where we insure continuity of their production operations. We also have a lot of momentum in building access and security applications, as well core IT infrastructure systems such as Exchange, SQL, Oracle, File & Print, etc.

Q: In the near future, which additional industries do you see Marathon targeting?

Gary: Over the last year we have greatly expanded our customer base in the Gaming industry through our partnership with two of the industry’s leading application vendors. These vendors provides solutions servicing the casino market. The cost of downtime in this market is extremely high and they expect “low touch” technology solutions deployed on the gaming floor. Marathon provide a completely integrated solution with these ISV’s that assures the uptime and availability of slot machines for customers - without the traditional complexity and maintenance associated with traditional HA alternatives.

Q: How has high availibity been a strong market driver in infrastructure software?

Gary: We have seen significant growth in the area’s of email and database protection for higher availability. Because the productivity impact of email downtime can be so crippling, Exchange has become a business critical application for most companies. Another factor that works in our favor, more and more companies are demanding high availability solutions that are easy to install and maintain, and compliment their existing infrastructure. Marathon’s software requires no modification of the applications and therefore the IT costs to implement and maintain are dramatically reduced. Many customers turn to us because they want turnkey solutions that don’t require integrating multiple HA technologies or dealing with the time consuming set-up, policy management and ongoing administration of traditional HA solutions, such as Clustering technologies.

Q: How has the need for high availability solutions developed since you were founded in 1993?

Gary: The need for high availability solutions has dramatically increased as professionals across all industries have become increasingly dependent on their IT infrastructure. For example in Healthcare, Primary Care Physicians are now utilizing 100% digital offices. Everything from the patient’s records to x-rays to prescriptions are generated, accessed and acted upon digitally. The underlying IT infrastructure cannot experience “unplanned downtime”; if so, patient care would be directly affected. We talked earlier about how even email has become business critical, and therefore has to be highly available.

Also, over the past decade Microsoft Windows has been pervasively deployed for running business-critical applications. When we made the bet on Windows in the data center, we made a big gamble that is now really paying off. Of course, along with Windows in the data center comes a new set of expectations regarding price, ease of implementation and ongoing management.

Q: What are some of the present challenges in your industry? How is Marathon prepared to address those issues?

Gary: Virtualization is a hot topic in our industry today, and for good reason. Virtualization brings many benefits: better server utilization, lower capital and operating expenses, and greater flexibility to meet business needs. But virtualization also brings unintended consequences. One of the unintended consequences is that virtualization dramatically increases the need for rock-solid availability. Because server consolidation can result in the server becoming the single point of failure for multiple applications, the implications of downtime are much greater. We refer to this as the “all eggs in one basket syndrome.”

The current availability solutions don’t provide the rock-solid availability and simplicity of management that is needed to bring the benefits of virtualization to a much larger market. To address this challenge, we have launched our v-Available initiative to bridge today’s gap between virtualization and availability. Combined with XenSource’s hypervisor, our next generation everRun software will provide an ideal combination of price/performance, ease of use, and fault-tolerant class availability for mid-sized and smaller enterprises.

Q: Recently there has been a lot of talk about “Virtualization 2.0.” How does Virtualization 2.0 impact Marathon?

Gary: John Humphreys, a senior analyst at IDC, was one of the first to coin the term “Virtualization 2.0”. In summary, John is saying that the next wave of server virtualization adoption will be driven by virtualization management, high availability and disaster recovery. To that end, we are in the center of Virtualization 2.0. Our value proposition is to deliver fault-tolerant class availability and disaster recovery solutions for applications that may or may not be residing in a virtual environment. Over the past 14 years, we developed our own virtualization layer that is a core technology in the everRun product line. Given our years of experience in both availability/disaster recovery solutions and virtualization, we are uniquely qualified to help drive this next wave of virtualization adoption.

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A recent column in the Boston Globe by Steve Syre highlights how the IPO market, particularly for technology companies, is enjoying its best year since 2000. The facts are the facts. There have been more IPOs so far this year than in any year since 2000. We’re pleased that one of our companies, Constant Contact, just filed for its IPO.

Also, it’s no surprise technology companies are experiencing the most momentum in the IPO market. Technology hot beds such as Massachusetts and Silicon Valley are feeling this growth first-hand. In Massachusetts alone, ten venture-backed technology companies filed for or completed IPO since New Years Day. These local companies include data warehousing appliances (Netezza), mobile broadband solutions (Airvana), e-mail marketing and survey solutions for small businesses, non-profits and associations (Constant Contact), data center configuration management (BladeLogic), IT consulting and outsourcing (Virtusa), compensation management (Salary.com), as well as IT media (TechTarget).

The VentureXpert database shows that each of these companies raised their first round of venture funding at least six years ago and some attracted their initial capital more than eight years ago. Today’s IPO companies are most often profitable and have a different profile than those of the pre-1998 boom. The average length of time between funding and IPO today is six years, pre-1998 it was three. Companies today are incredibly diverse in the markets that they serve as well as in their product offerings and business models.

Though we agree the IPO window is opening, I’m not so sure we’d say it is wide open (though we certainly hope it moves in that direction). The reality is that there remains a significant level of venture capital available to fund a significant number of portfolio companies. The IPO or the major M&A event will always be the big driver of top venture returns. However, let’s ensure our memories bring us back to 2001, 2002, 2003 or 2004 when there were few IPOs or major M&A events. Venture firms need to deliver top quartile returns in all exit environments. In January 2007, we wrote a blog post on this topic.

The key is balancing the big opportunity with the reality of the exit environment – optimizing around making meaningful returns at modest exits, thus having that IPO or big M&A event lock in a top decile fund.

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Two seemingly contradictory news items caught my eye yesterday. A Boston Globe article cited research showing that VCs are moving cautiously on investing in “cleantech.” Meanwhile, a second item announced that prominent Silicon Valley VC, Kleiner Perkins had just invested in Verdiem, a software company with an application that helps large corporations reduce their energy bills by managing the power consumption of desktop computers across the enterprise.

While Longworth doesn’t invest in cleantech, we do invest in innovative software companies and we actually considered investing in Verdiem a couple years ago. We declined because they are Seattle-based and we believe that our style of active early-stage investing is best done closer to home. Having met the team and used their products, we were happy to introduce the company to our friends at Catamount Ventures who led a round of funding in 2005. We are excited to see that the company has made good progress since and has attracted interest from strong new investors. Whether you call it innovative software or cleantech we think that this will become an increasingly interesting market opportunity.

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With all the news about iPhones and mobile content lately we thought we’d check in with Cellufun CEO Arthur Goikhman. Arthur heads up an ad-sponsored mobile gaming company that provides free games and content for web-enabled mobile phones. It’s a market segment that is growing rapidly, which is one reason why we decided to invest in the Company. Last month, Cellufun had 3 million unique visitors and more than 22 million page views. The Company continues to experience success with plans to launch new games in the near future. Arthur agreed to answer our questions about Cellufun and the dynamics of the mobile market

Q: Since Cellufun was founded in 2005 what changes have you witnessed in the mobile market?

Arthur: Major changes have occurred in several areas. First, the walled garden has continued eroding with many carriers offering all you can eat data plans and Google and Paypal taking significant steps towards mobile transaction processing. Second, there has been tremendous growth in the importance of, if not yet the dollars spent on, mobile advertising and the creation of a number of startups in the space. And lastly, with companies such as ESPN, Amp’d and Disney, the rise and fall of the Mobile Virtual Network Operator (MVNO) model is a significant factor in the space.

Q: Cellfun is based on a social networking business model. What was behind this decision?

Arthur: From the beginning we were about multiplayer and connected games. League and team formation occur naturally in that kind of gaming environment. From that to social networking is in fact a quick leap, one that we made as soon as we started shipping product and observing user behavior.

Q: In the age of social networking mobile phones are a viable option for social networking and the potential is really just being tapped. How has the response been from users?

Arthur: One of the most popular features we have in our new MobilePet myPhone game is having your friends visit and play with your pet. This kind of interaction tends to take off like wildfire on the phone.

Q: Have the most popular games been mind games such as Chess or Sudoku or the interactive games such as MobilePet? Has this surprised you at all?

Arthur: They have somewhat different profiles and audiences. In terms of overall numbers, MobilePet has been by far the most popular game.

Q: On Cellufun’s Web site you offer ratings and high scores. Do you find the mobile games are directing people back to your Web site? Can users interact over Cellufun’s Web site or just through the games?

Arthur: Users interact primarily over Cellufun’s WAP site and directly within certain games, like Chess. Our Web site has been less of a factor, but we expect that to change with the launch of The Mobile Ring, our new game.

Q: For the MobilePet games you offer a penguin and even myphone, a pet phone to help those with gadget envy who don’t have the iPhone. Which one is more popular?

Arthur: Perhaps unsurprisingly, MobilePet Dog is by far the most popular overall. Of course since the launch, MobilePet myPhone has been getting all the attention. We had kids begging parents for their phones during company parties last week.

Q: Lastly, if mobile social networking is now what is next?

Arthur: On the technology side, I find expanding WiFi support for phones to be really exciting. I am very happy to see both the iPhone and T-Mobile’s recent offerings emphasize that. This kind of hybrid network should help speed up interactive content. I think expanding GPS/location options can play a significant role in entertainment as well. The carriers are also talking up video (both calling and entertainment content). And of course we’d all love to be able to use a mobile phone to pay for products.

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At Longworth, all our investment decisions begin with a thorough analysis of market opportunity. Our enthusiasm for Constant Contact is driven by the fact that Constant Contact’s team identified a real business need, at the intersection of two very large and dynamic markets – small businesses and customer relationship management (CRM) software.

Constant Contact provides on-demand e-mail marketing solutions to small businesses, associations and non-profits. Since 1998, when Constant Contact began operations (Longworth invested in 1999), the company has been committed to providing affordable solutions that help small businesses develop successful lasting customer relationships. With more than 20 million small businesses in the United States alone, Constant Contact’s market opportunity is enormous. Yet, despite the size of the market and fact that small business is the primary driver of employment and GDP growth in the US economy, it remains under served by technology companies.

Constant Contact’s 120,000-plus customers and 80% annual growth make them a clear leader. It makes sense for them to tap the public markets to further fuel their growth (read more about it here) and capitalize on the substantial market opportunity that exists.

Meanwhile, we remain enthusiastic about the small business technology market. Please let us know about any innovative, early-stage companies that are pursuing that market opportunity.

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The iPhone – even with the reports of minor glitches and troubles with purchasing the phone on its debut weekend – has already been an enormous success for Apple. Since the Company announced the iPhone in January, Apple’s shares have increased by more than 40 percent. Clearly, investors are interested in investing in mobile technology.

The hype around the iPhone has brought even more attention to mobile phone use in the United States. As mobile technology continues to improve, users will demand more content for their cell phones. The iPhone has been so popular because it offers more mobile content capabilities than ever before — users can store photos, listen to music and play video content (like TV shows and movies). And, believe it or not, you can even make phone calls on it.

But as the hype around the iPhone begins to wane, we expect to see more articles like this one at the Informationweek blog “Over the Air.” Reporter Elena Malykhina recently mused about her adventures buying an iPhone and poses an interesting question in her headline: “I bought an iPhone… now what?”

We have one answer: Play games.

That’s one reason why Longworth recently invested in Cellufun, an ad-sponsored mobile gaming company that provides free games and content for web-enabled mobile phones. As more users buy iPhones and other next-generation mobile devices, our research indicates a surge in demand for mobile content – especially games designed specifically for the mobile format.

Cellufun is an attractive investment for several reasons:

• The games and content are free – sponsored by the growing market for mobile advertising. Free is an enormous attraction to young people, the largest users of mobile devices and the demographic most desired by advertisers.
• Cellufun offers multiplayer games so that friends can play games like “Battle for Orion’s Belt” and “Video Poker” together – as long as they are connected to the mobile network. So a college student in San Francisco can play “Saturday Night Bowling” with a friend in Boston.
• Cellufun’s platform – Smooth Move™ — enables a true arcade style experience for users no matter the carrier.
• Cellufun not only provides cutting-edge mobile games, but the community experience so that users can interact with one another to share hints and high scores and to meet other gamers.

The rapidly increasing interest in mobile games is one reason why Cellufun had more than 3 million unique visitors and more than 22 million page views last month alone.

As mobile phones get more sophisticated so will the content and services used on them. That’s why the hype around the iPhone is real. The mobile revolution that has already happened in Japan and Europe is about to become very real in the United States.

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The web and blogosphere are great in many ways. Immediate access to information, communities providing depth and breadth of information, everyone having a voice… You know all the benefits. The web also allows us to perform due diligence on people, places and things. Whether the positions of a political candidate, buying a new plasma television or doing diligence on a VC, you can find it on the web.

I’m not sure how successful The Funded will be (it’s not a Longworth portfolio company), but I think the concept is interesting (in terms of the content they provide and not necessarily from an investment perspective). What are management teams or existing/prospective portfolio companies saying about the venture firms that they work with? Great question. Hopefully, The Funded will help provide some of the answers.

Ideally, a venture firm will provide much more than just capital. Whether it’s market intelligence, relationships with prospective management team members or board members, contacts with prospective customers or the know-how to navigate the very critical path to success, venture firms should hopefully be offering and providing this type of value add. It is even more critical with early stage companies.

I’d like to think that Longworth does.

We recently engaged the Racepoint Group to help us perform some market analytics. As part of their study, they interviewed executives from our existing porfolio companies. The interview questions ranged from how the companies found us (or more likley how we found them) to how they perceived that we’ve helped them to whether or not we are adding some of the above mentioned intangible value.

I wanted to share the results from two specific questions.

I am sharing this data not to brag but to stress the importance of these attributes. Building new companies is very very hard and there are inevitable bumps in the road. Lots of tough decisions will be made along the way and there are several points of potential misalignment between entrepreneurs and investors. We understand all this and work very hard to add value and optimize the outcome for all shareholders. This philosophy and approach doesn’t guarantee success but it certainly enhances the prospect that we’re all working toward a common goal — success — and not pulling in opposite directions. I am very pleased that our portfolio companies feel the same way.

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