Fred Wilson put up a post today that grabbed a slide from a recent presentation Mark Suster gave at a Founder Showcase event. The chart (and Fred’s post) back up with numbers the qualitative argument I was making in my recent post on Pattern Recognition (I wish I had these data when I wrote my original post!).

In my post I argued that while there is plenty of talk about a handful of high flying companies (Zynga, Twitter, Facebook, etc.) that vast majority of venture back companies can expect significantly more modest outcomes. In fact history suggests that a majority won’t even return invested capital to investors. All this talk about the stratospheric valuations of this small group of companies however has investors fundamentally misjudging the chance that their latest investment will do the same. As the chart from Mark’s presentation clearly shows, not only is it the extreme exception for a company to hit the kind of valuations that are getting all of the press attention but even hitting the $100M mark is rare. On some level I think we all know this, but seeing the numbers in black and white really puts a exclamation point on exactly how rare it is. And as Fred points out (as did I in my prior post), investing in early stage companies at the kind of valuations that are prevailing today is a losing bet…

VC’s love to talk about their pattern mapping abilities. “We add more value because we’ve seen so many companies go through all sorts of situations before and we can quickly map whatever’s happening at your business to what we’ve seen in the past and leverage this experience.” Or so the logic goes. But what’s going on right now with early stage company valuations suggests that VCs may be poor judges of at least some of these patterns. Or at least that they’re incredibly human when it comes to estimating the likelihood of certain events actually happening.

In 2002 a series of random shootings rocked the Washington DC area. For a period of about two weeks, an unknown assailant killed 10 people in a sniper like fashion. Many people in the area were panicked at the possibility of being subject to such a random act of violence and drastically altered their behavior to avoid putting themselves in situations that they perceived to be potentially dangerous. In reality, DC is a city of over 600,000 people. And while the events of those two weeks were certainly shocking, the average citizen was significantly more likely to be killed in an automobile accident than by the DC sniper. But that certainly wasn’t how serious most people perceived the risk to be. Because fundamentally humans are extremely poor judges at predicting the likelihood of outlier events.

Fast forward to today’s funding environment and I believe a similar mindset is taking place. Companies like Facebook, Twitter, Zynga and Groupon are attracting so much press that investors are misjudging the likelihood that their next investment will turn into something similar (or even into something in the next tier or two down in terms of outcome). In reality, since Facebook’s first venture round in 2005 over 10,000 different businesses have received venture funding. And history suggests that the vast majority of these companies will see outcomes of less than $1BN. Actually of less than even a few hundred million. And that’s the very best of this group. The majority will either fail completely or barely return capital.

Market deviations are driven by a fundamental imbalance between two sides of a marketplace. And we’re seeing a classic case of that now in the venture capital market. Unfortunately these market deviations tend to feed themselves – at least for a while. Company X raises money at a high valuation and the markets shift their perception of the clearing price for deals of that type. Perhaps the company raises another round at an even higher valuation, validating (at least temporarily) the first investment decision. Maybe there are a handful of high profile exits that, at least in those cases, justify the high valuations paid by their investors.

Eventually, however, the markets face their moment of truth. And there will be one (as there always has been) for the current venture climate. And while I’m sure that there will be some great businesses created in this market I think we’ll look back on this time period and again be reminded that the more things change in venture, the more they stay the same.

A few years ago I was talking to a fellow venture capitalist about an entrepreneur he had previously backed. “That guy should love me!” he exclaimed, “I made him 50 million bucks!” And then moved on to some other topic which I can’t remember because I was numb with disbelief at his previous statement. He backed an entrepreneur who built a business that after a number of years had a very nice exit and he made the entrepreneur money? Obviously his logic is completely backwards. And while I don’t know that many VCs would express such an extreme view of that sentiment I do think that most believe that not only is a healthy VC ecosystem important for entrepreneurship to flourish but that VCs create that ecosystem.

I disagree – Entrepreneurs come first. Not VCs.

Boulder is a great example of this. The local capital base is anemic, but the entrepreneurial ecosystem is flourishing (Boulder is the best city for start-ups, the happiest city in America, etc. – see here for some additional thoughts on why Boulder rocks for entrepreneurs and start-ups). And while one data point doesn’t prove a theory, Boulder is a pretty powerful argument for the notion that capital follows entrepreneurship and not the other way around. And while there were some VCs involved in helping shape the great start-up environment we have in Boulder, don’t mistake participation for causation.

Entrepreneurs are the lifeblood of Venture Capital, not the other way around.

Fred Wilson recently posted about his move to the cloud and the freedom that having his data always available has given him. More and more people and companies are freeing themselves from the constraints of desktop software and captive data stores in favor of cloud based applications and the freedom of readily (and always) available data. We recently went through a similar move at Foundry – although we haven’t completely moved to Google Apps for all of our documents and spreadsheets – and it’s been incredibly liberating. I blogged about my move to a Mac from a PC last year, but haven’t had a chance to follow that post up with a report on the more important move from a primarily client and desktop software based infrastructure to a cloud based one.

Simply put, my new set-up ROCKS!

For starters, I’m really loving my shift from PC to Mac. I have a MacBook Pro in my office (quad core, all the bells and whistles). It’s super fast (did I mention it’s a quad core?) and extremely reliable. No blue screens of death. No bizarre reboots. Just good, old fashioned, easy to work with Mac. For travel and home (the MacBook is too big to schlep around on a week of travel) I have an 11 inch Air. A tad bit underpowered (presumably to be fixed in the next rev due out in a few months) but since I’ve dumped most of my on-deck infrastructure (see below) that’s not a particularly big deal. It’s super light, boots extremely quickly and has enough battery power to get me from Denver to New York reliably.

Of course the real key to our new infrastructure was our move off of Exchange (don’t ask why it took so long…) and as a result off of Outlook and Mail. The trick was switching cold turkey one day and learning the shortcut keys. I was absolutely certain I would front end Gmail with Mail, but our IT guy Ross convinced me to try it first in a browser. And from there I’ve never looked back (and never worked on Gmail through Mail – I use Chrome for online access and Firefox for offline). I can’t overemphasize how much more efficient Gmail has made me. It’s a bit hard to describe why the workflow is so much better, but it’s been a game changer in terms of getting through the hundreds of emails that I run through every day. I use the Gist plug-in to get information on people I’m emailing with (highly recommended) and Unsubscribe to cut down on the clutter more permanently (also highly recommended). More recently I’ve been playing around with SaneBox to better segment my email traffic into what’s important and what’s not (I tried Priority Inbox but didn’t find it worked that well for me).

We’re using more and more Google docs, spreadsheets, etc. as well. And we’re moving files around primarily with Dropbox (which works seamlessly to keep my various machines in sync). All good stuff.

One thing that we’ve done that’s been key is backing up our data. Fred mentioned this in another post on his shift to the cloud and referenced one of our portfolio companies in doing so – Spanning Cloud. While Google itself is extremely reliable in terms of their own backup and recovery, it’s still important to back up your data since there’s no “recovery” feature in Google and if for whatever reason you or someone else drops your data, deletes a file, etc. you’re completely out of luck. We clearly believe strongly in the work Spanning is doing to help companies big and small keep their data safe and using them was a key enabler in our feeling safe about our shift to the cloud.

I searched the app store recently for an app I was sure someone had come up with. But alas, no one had. So I thought I’d throw it out there in the hopes that someone wanted to take it on.

Like many people I maintain a “to call” list. I do a lot of work over email, but I’m also on the phone anywhere between 5 and 12 hours a day and at any given moment I have a healthy list of people to get back to. I’ve tried different ways of managing this list – from putting them in as calendar reminders (works to create the list, but it’s not persistent enough) to using tasks (this has been the best option, although still lacking) to writing myself emails with lists of people I need to call back (this works for specific situations, but I need to refresh the email once I’ve actually connected with a portion of my list; plus its kluge). Add to this that I’m often running through calls while driving, which brings with it its own challenges of accessing these lists and their associated numbers (and what if I need to remind myself of context and have to look through emails or a calendar entry to find it?). Like everyone reading this, I’m an above average driver, but despite that it’s still not the best way to work while getting from point to point.

My app idea is pretty simple – a Call List Manager application (ideas on a better name?). There’d be a web version of it as well which would connect to the app and let me input people, numbers and context that would load to the phone app (and vice versa so I could use the web app for calls while at my desk). I could easily add people to the call list, assign a priority level, the number I needed to call them on and any other information I thought might be helpful at the time of the call. I’d connect the calls from within the app itself and once done with the click of a button should be able to mark the call as complete, tag for followup (with notes if I felt like it), or mark it to try back later or forward to another Call List Manager user to add to their call list.

Someone was telling me about a service like this (I think it was an idea, not a product yet), but the way it was describe to me – which admittedly was 3rd or 4th hand – didn’t fulfill the most basic “management” of the list that I was looking for.

What do you think? Any app developers out there want to take it on? (I’m in iPhone user, so that would be my first choice of platforms!)

You already know a lot about you. But I don’t. I sit at this end of the internets and type our posts on topics that I hope you’ll find interesting. And some portion of you tweet out links to posts that you like. And a smaller portion of you either comment on a post I’ve written or send me an email with your thoughts (all of these things – from just reading to any level of engagement – I appreciate!). But I don’t know a whole lot about you in aggregate. I use Google Analytics on the site which lets me see a little bit about where you come from to get to my site (and where you go after you’re done) but the information available is pretty basic.

That is until now.

Today Lijit announced the release of their enhanced audience analytics tool which gives publishers some pretty interesting insights into who is visiting their site. It’s free and you don’t have to sign up for either the Lijit search widget or the Lijit ad network to run Lijit analytics on your site (as an aside, I love that Lijit has structured its suite of services to be completely independent, but additive to each other – you get more out of using Lijit the more of their services you adopt, but if all you want is one, that’s ok too).

Lijit’s publisher network has grown significantly over the past year and now numbers 17,000. These publishers generate over 1.5 Billion monthly pageviews and the Lijit network sees over 100M unique users each month. At peak times the Lijit backend is adding over 1M reader and advertiser transactions per second. That’s a lot of data that helps Lijit better monitize traffic for their publishers and is now powering their enhanced analytics product.

Now back to you. So it turns out that your’e likely caucasian. And male. And don’t have kids. You’ve probably been to college and you’re reasonably affluent. Sound like you? Sounds to me like it’s time to diversify a bit (not just my readers, but entrepreneurs in general – where are the female, minority founders?!?).

I’m not going to rehash the “why I don’t sign NDAs” stuff that I’ve written about in the past (here it is if you want to see it), but being asked a few times this week to sign NDAs has gotten me thinking about the value of ideas.

Actually, this is something I’ve recently been noodling on and my conclusion is that people 1) overvalue their idea on the front end of a project and 2) once something has become successful undervalue the day-to-day tactical execution that made the idea successful.

Ideas are great. But they’re not as valuable as most people make them out to be.

and by correlation,

Execution is almost universally underrated and in hindsight taken for granted as a given once a company has become successful (and rarely given the credit it deserves).

History shows that this is generally the case. The vast majority of companies that we consider to be the lions of the internet had plenty of competitors. In fact many weren’t the first or only ones to come up with the idea that made their company. What separated them from their competitors was their ability to out execute everyone else in a way that took a good idea and made it a great company. Often, in fact, another company was the early market leader only to have their leading position overtaken by an upstart who was hungrier, more nimble, and more focused on the basics of executing a great business.

The examples are legion. In our own portfolio everyone talks about how great Zynga is. And indeed it is. But so was Playdom. A few years ago it wasn’t at all clear who would end up emerging as the market leader. The idea of social gaming didn’t make Zynga. Outstanding execution around that idea did. In the online advertising “yield optimization” market Rubicon Project was the early leader. AdMeld – at least in my opinion – simply out executed them and moved past (as has PubMatic – that market continues to be very competitive). Famously, Overature’s performance based keyword buying market idea was perfected by Google. Back in the day, Microsoft wasn’t the first company to come up with an OS. Or business software. And, of course, Facebook moved past MySpace even after it seemed like MySpace had gained enough momentum to keep it’s market leading position (and before both was Friendster, Tribe, etc.).

My point isn’t that ideas aren’t important. It’s just that execution of those ideas is far more critical. And it’s worth thinking about that as you consider the operations of your own business.

I was thinking about the evolution of our Glue conference as I drove into work this morning. It’s pretty remarkable how much the infrastructure ecosystem – and therefore our little conference that focuses on it – has changed since we ran our first Gluecon in 2009. The initial premise for Glue was to get together to have a detailed conversation about the technologies that were underlying the trend of the web as a platform (web-as-a-service). And while there was plenty of talk about “cloud” at the time we were talking about it as somewhat of a parallel universe to “web” that connected at very specific end points. And when it came to applications, since “web” was the end point when we said “application” we meant “web application”. And it was pretty clear what was a business application and what was a consumer application and the venn diagram intersection between the two wasn’t particularly meaningful.

Today’s “glue” is very different than it’s predecessors (both the conference and the underlying infrastructure technologies that are at the heart of the conversation at Glue). The discussion at Gluecon has moved well beyond the web as the primary platform and centers instead around the intersection of cloud, web, mobile, tablet and a more generalized concept of “app”. APIs are the stars of the show and help bring together an ecosystem approach to the dissemination of technology that no longer views the web as having primacy over other points of application consumption. And, importantly, enterprise applications have taken on many of the attributes of their consumer cousins (not to mention in some cases the apps themselves) – and as a result are more apt to share the look, feel and underlying technologies of what had been solely the domain of consumer apps a few years ago.

And if you think about the conferences that create all the buzz, they’re for the most part either company specific (Google I/O, Dreamforce, Chirp) or startup celebrity focused (DEMO, TC50, etc.). There are a sparse few that are developer focused (Qcon, MySQL, OSCON) – which makes Glue that much more important. So whether you’re an enterprise developer (staying current on technologies, checking out what start-ups can help accelerate your own businesses and internal development initiatives), a start-up developer (all of the above plus looking for a chance to interface, recruit and push the envelope with the next generation of technologists) or a C-level exec (in particular looking to see what’s 3-6 months out on the horizon) Gluecon is for you.

A few other notes about this year’s Glue.

I’ve written in the past about our partnership with Alcatel Lucent. It’s a big deal to us and it’s a big deal to the 15 companies that were given demo space at the conference because of ALU. These companies didn’t participate in a “sponsorship contest” where those that could pay the table fee could come demo. They were selected by a committee of judges (myself included) entirely based on merit. And the result is a pretty fantastic showcase of technologies in a way that you won’t see at any other conference. (the winning companies are Big Door, ReportGrid, StreamStep, Wanderfly, Proxomo Software, LocVox, Sing.ly, Eclipse Foundation, Standing Cloud, Flomio, Jexy, Axiomatics, Whosent.it, Statsmix and Tendril Networks).

You still have a few days to qualify for the early bird pricing ($170 off the full admission price), which expires at the end of this week (meaning April 22nd). Register here.

The agenda is mostly filled out now and it looks absolutely fantastic. Whether you want to hear how to make money with your API strategy, commiserate on the failure of SOAP adoption, geek out on AWS strategies or just lurk the hallways to jump into interesting conversations, there’s something at Glue for you!

See you there.

For about the past year my partners have been pushing me to write up some thoughts on AdTech investing. “We’re not AdTech investors,” I’d push back, “we just have a bunch of companies in the portfolio that are working in and around online advertising.” And for a while that worked pretty well. Most of our AdTech investments would be labeled “glue” (they were all connecting or intermediary technologies – just applied to online advertising). Then Jason came up with the name “Adhesive” which seemed to stick (that was bad, wasn’t it) and after a few months procrastinating I ended up writing up our thoughts on AdTech investing and posted them today over on the Foundry blog. And while I really don’t consider myself and “AdTech” investor, I suppose that thee who protests too much…

We’ve written extensively about our thematic investment approach and a handful of our active themes, most recently our Distribution theme which we’ve been working on for several years but had yet to formalize and discuss publicly.

Over the past few quarters, we’ve been thinking more about the online advertising investments that we’ve made over the last three years, which include AdMeld, Lijit, Trada, Medialets, Mandelbrot Project, Triggit and Integrate. While this is about 20% of our active portfolio, we’ve never considered AdTech a theme. Instead, we have included these companies in our Glue theme since each company is an intermediary technology – although in each case applied to AdTech.

While this underlying “glue” to our AdTech investing has served us well, we’ve decided to formalize this and introduce a new theme (or really sub-theme) that we are calling Adhesive, which for us is the guiding set of principles behind our investments in online advertising. To be clear, we’re not breaking out online advertising as a theme of its own – we still think of it as a subset of our Glue investing. Like all of our themes, Adhesive isn’t meant to be a rigid description of our investment in a discipline, but rather a guide to our thinking and a set of overarching concepts that drive our investment in a particular area.

The landscape of online advertising is a confusing one. Many people have seen the well traveled “Display Advertising Technology Landscape” slide prepared by Terry Kawaja (originally of SGA Savvian and now his own firm, Luma Partners) that is essentially a mess of company logos, somewhat loosely arranged by the broad categories which most easily label what each is doing. You’ll notice a handful of Foundry companies on the slide below, along with all of the major online agencies and platforms as well as hundreds of other companies that you’ve probably never heard of. Online advertising is a cluttered landscape and, from an investment perspective, picking out those companies that we believe have real potential vs. those that are simply interesting (or not so interesting) point solutions can be a challenge.

There are several key attributes we look for in our search for great Adhesive companies. They are:

• Scale. Scale is key to many of the companies we invest in across the portfolio, but scale in Adhesive is at once more massive and more important. As such it is one of the first filters we apply when looking at potential advertising investments. In a business that makes money pennies at a time, you need to have the ability to quickly generate a lot of pennies.
• Inertia. Related to scale is the ability of a company to quickly gain uptake in the online advertising ecosystem. The ability of Adhesive companies to insert themselves into the data stream, which existing marketplace players will enable and encourage this, and exactly who the ultimate beneficiaries are (not to mention who is being disintermediated) are key components to a company’s ability to gain rapid market share and scale.
• Margin Dynamics. Everyone who plays in and around AdTech understands the concept of gross vs net revenue. And while many Adhesive businesses trade margin for scale, we pay close attention to the ultimate margin dynamics of the businesses in AdTech in which we look to invest. We’re particularly sensitive to customer concentration issues related to margin – aggregating demand from a small number of sources, for example, which may lead to significant margin pressure.
• Performance. While a large amount of online advertising continues to be purchased on an impression basis, we believe that ultimately the success of advertising campaigns – and as a result the technologies that are implemented to enable those campaigns – is measured in terms of performance. Everyone contributing to the chain of events that result in an ad being served is ultimately at the mercy of the effectiveness of their product.
• Technology Innovation. The pace of technology innovation in AdTech is startling and the ability of a company to stay ahead of this innovation curve is an important consideration in how we think about Adhesive companies. Many of the companies in which we’ve invested were pioneering new technologies into this market and as a result became market leaders in their segments. But even these initial leaders need to have the ability to continually innovate and push their products and markets forward. Today’s latest technology in AdTech is tomorrow’s legacy — often without a path to whatever is next. We try hard to find companies with the staying power to remain in front of the market.

In a future post we’ll talk in more detail about how some of our existing Adhesive investments have met the challenges above, and some of the more specific attributes of their businesses which originally drew us to them.

I’m sure you’ve read David Cohen and Brad Feld’s book Do More Faster. And while I thought the book was full of great advice for entrepreneurs (and I’m incredibly proud of David and Brad for writing it, if admittedly, having heard the moniker of the title oft repeated a few too many times – see here for my partner Jason’s clever tease of them with some help of Xtranormal) I actually think sometimes the best thing a startup can do is to do the opposite of what the book’s title suggests (although some of the inside chapters do not) and Do Less Slower instead.

I’m quite serious about this. While early stage companies are always trying to squeeze just a bit more out of each product release, or streamline this process or that, or expand their product vision; sometimes slowing up a bit, refocusing on the core of the problem you are solving and taking a deep breath is exactly what’s needed. Most companies overcomplicate the product they put out, take too little time to allow for testing before product releases, focus on the next thing rather than making the current thing better and or often overly distracted with things that just don’t matter.

So the next time you get overwhelmed at work, take a step back, see what you can drop off your plate and Do Less Slower instead.