David Shirmacher has joined one of SJF’s portfolio companies, FieldView Solutions.  FieldView provides a Web-based interface for branch circuit monitoring in data centers.  The solution helps to reduce energy costs in data centers.  My colleague, Arrun, has written about the investment on SJF’s cleantech blog.

As global head of engineering and critical systems for Goldman Sachs, David designed and operated Goldman’s data centers.

When looking at investment opportunities, SJF looks for enthusiastic customer validation from authoritative sources.  David’s joining FieldView is about as good as it gets in satisfying that criterion.  We are very excited that he is joining FieldView.

A few years ago I heard of an interesting concept:   hyper-localized manufacturing.  The idea goes something like this:  One day, individuals will have highly sophisticated tools that can build almost any type of item by downloading instructions that are then used to “print” an object.  The concept is analogous to the transition from using FedEx to recipients’ printers.  Whereas in the old days a company would print a document and then then ship it via FedEx to a recipient, today the company can email the document and it will be printed by the recipient.  As a result, the hard document is created by the recipient.  Similarly, a table designer in the future industry could send instructions to a recipient’s tool, which would be capable of “printing” a table — or a chair, a shoe, or automobile, etc.

The idea is way out there, but supposedly Jeff Bezos and others have been very excited about the idea.

It’s hard to know if this concept will ever develop as envisioned, but I think one can make a bet that directionally the trend will be towards do-it-yourself manufacturing of some type.  The original author of “the long tail,” Chris Anderson, has laid out a pretty interesting map for how DIY manufacturing might unfold.  See the story here.

Excerpt:

Here’s the history of two decades in one sentence: If the past 10 years have been about discovering post-institutional social models on the Web, then the next 10 years will be about applying them to the real world.

This story is about the next 10 years.

Transformative change happens when industries democratize, when they’re ripped from the sole domain of companies, governments, and other institutions and handed over to regular folks. The Internet democratized publishing, broadcasting, and communications, and the consequence was a massive increase in the range of both participation and participants in everything digital — the long tail of bits.

Now the same is happening to manufacturing — the long tail of things.

The tools of factory production, from electronics assembly to 3-D printing, are now available to individuals, in batches as small as a single unit. Anybody with an idea and a little expertise can set assembly lines in China into motion with nothing more than some keystrokes on their laptop. A few days later, a prototype will be at their door, and once it all checks out, they can push a few more buttons and be in full production, making hundreds, thousands, or more. They can become a virtual micro-factory, able to design and sell goods without any infrastructure or even inventory; products can be assembled and drop-shipped by contractors who serve hundreds of such customers simultaneously.

Today, micro-factories make everything from cars to bike components to bespoke furniture in any design you can imagine. The collective potential of a million garage tinkerers is about to be unleashed on the global markets, as ideas go straight into production, no financing or tooling required. “Three guys with laptops” used to describe a Web startup. Now it describes a hardware company, too.

WIRED Magazine has been covering the “tablet revolution” very well.  Today, it summarized early reviews on the iPad.  More importantly, however, WIRED has some very interesting thoughts on why tablet computing has the power to be truly revolutionary.  It gathered views from 13 writers.  See the full story here. Not surprisingly, Kevin Kelly and Nicholas Negroponte have some of the most expansive visions for the impact of the tablet.  Some excerpts provided below:

Don’t think of them as tablets….  Think of them as windows that you carry.  This portable portal will peer into anything visible. You’ll be able to see into movies, pictures, rooms, Web pages, places, and books seamlessly. Many people think of this sheet as a full-color, hi-res, super ebook reader, but this viewer will be about moving images as much as text. Not just watching video but making it. It will have a built-in camera and idiot-proof video-editing tools, and it will also serve as a portble movie screen, eventually enabled for 3-D. You’ll “film” with the screen! It will remake both book publishing and Hollywood, because it creates a transmedia that conflates books and video. You get TV you read, books you watch, movies you touch. Kevin Kelly

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And it’s not just for bed. Would you have ever imagined how many people walk around looking at one hand? Texting is replacing talking, and thumbs are replacing lips. Laptops, meanwhile, are not mobile. They are nomadic. You have to sit down to use one and do battle for a connection. Standing with a laptop is entirely unsatisfactory.

Tablets are therefore the new frontier. They are the new book, the new newspaper, the new magazine, the new TV screen, and potentially the new laptop. Something you carry — and, yes, something you can lose.

The real beneficiaries, however, are not you and me or the thousands who will soon queue up to buy the iPad. The undeniable beneficiaries of tablets will be those who have no alternative, those who have no books, no libraries, and in many cases no schools or electricity. I mean the nearly 2 billion kids in the developing world. Nicholas Negroponte

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The iPhone shows that loads of people want rich-media networked devices with them everywhere. Like a tablet, the iPhone is a one-app-at-a-time full-screen experience, where the interface is determined as much by the apps and the device itself as it is by the OS. By dint of its bigger screen, a tablet is immersive enough to spend hours with — and yet it’s still intimate. A laptop is a work device, an arm’s-length, lean-forward experience. A tablet, in contrast, is a personal device, something you cradle and lean back with. Chris Anderson

Google’s recent comments about doing business in China are extraordinary.  I have found the story fascinating for many reasons.

Fred Wilson made some great points yesterday in a post named The Founder Factor.  He noted that Google’s bold move to possibly leave China is probably influenced heavily by co-founder Sergey Brin.  Google’s action is indeed a great example of the positive influence that engaged founders can have in guiding a firm to look beyond short-term profits in order to consider  broader concerns and/or long-term profitability.

When I managed a long-short fund and other products that traded in public securities, my conversations with analysts and other investors often revolved around market inefficiencies. Most investors believe that the stock market is highly efficient, meaning that expectations and associated public information are quickly discounted in stock prices. As such, investors tend to ignore obvious information and instead focus on insights and data that are not already widely known by others. It is joked that a trader on the New York Stock Exchange would not stop to pick up a $20 bill if he were to stumble across it on the floor of the exchange. He would reason that the $20 bill could not be real, because a real $20 bill would have been snapped up already by other traders.

The online advertising market is pretty much the opposite of the stock market when it comes to market efficiency. Matching advertisements with reader interest and pricing advertisements are highly inefficient practices. Advertisers often spend far too much money placing advertisements in front of the wrong audience. Think of how many times each day you see a banner ad that is of no interest to you. Furthermore, both advertisers and online publishers use fairly imprecise techniques tools to determine appropriate advertisement prices.

The tremendous inefficiency in the online advertising market is a big reason why we are excited about our MediaMath investment. MediaMath is a demand platform that helps advertising agencies and their brand customers place online display advertisements in front of individuals who are more likely to be interested in those advertisements. In addition, MediaMath helps ad agencies price advertisements effectively, such that an advertiser can know when to pay up because a particular a reader is more likely to purchase an advertised product and when to pay less because a different reader is very unlikely to buy that same advertised product.

In recent years much of the attention around display advertising has centered on advertising exchanges and other market infrastructure. Google has purchased DoubleClick, Yahoo has acquired Right Media, and Microsoft has scooped up AdECN. But the advertising industry has lacked an ability to use these market mechanisms effectively. That’s where MediaMath comes in. It helps ad agencies make sense of display ad markets and bid through ad exchanges intelligently.
MediaMath is led by Joe Zawadzki, who is an extremely smart serial entrepreneur with deep expertise in this space. Joe has assembled an impressive team to not only deliver leading technology solutions but also provide exceptional customer service. We have been talking with Joe for more than a year. Along the way, we have been impressed with his tendency to make smart, mature decisions to manage the company’s rapid growth and position the firm for where the industry is heading.

I think of Joe and the rest of the MediaMath team somewhat like an extremely smart (and ethical) stock market trader that makes great trades and provides outstanding customer service. And what gets me even more excited is the fact that the online display advertising market in which the group operates is the type of inefficient market that stock market traders dream of.

Alan

A lot has been written about the virtues of a capital efficient business model during the past several years.   Capital efficiency became a popular topic when exit valuations dropped significantly from levels that were achieved in the bubble.  Despite the large amount of commentary on capital efficiency, both investors and entrepreneurs tend to focus on pre-money valuation during discussion of the merits of an investment and deal terms.  A look at the math, however, shows that capital efficiency is often more important than pre-money valuation.

First, let me offer an explanation of capital efficiency for the purpose of this exercise.  A capital efficient company is one that needs a relatively small amount of equity and debt in order to achieve attractive revenue and profitability, which in turn drive a good exit for investors.

So, let’s look at two possible scenarios for investors.

Scenario #1:  An investor places $2 million in a Series A financing at a $10 million pre-money valuation.

Scenario #2:   An investor places $5 million in a Series A financing at a $5 million pre-money valuation.  The company performs well and the company raises an additional $5 million at a $20 million pre-money valuation in a Series B financing.

It would appear on the surface that scenario #2 is better than scenario #1 for a Series A investor if one focuses on pre-money valuation.  The pre-money valuation for the Series A investor is much better in scenario #2, and the company is able to raise additional capital at a big valuation step up during the Series B financing.  When one runs the math, however, the outcome actually favors the investor in scenario #1.  Assuming customary Series A terms, the Series A investment in scenario #1 would achieve a 3.3x return at a $25 million exit and a 9.5x return at a $100 million exit.  The Series A investment in scenario #2 would achieve a 2.3x return at a $25 million exit and a 7.8x return at a $100 million exit.  (The Series B investment would perform even worse.)  So, despite the much lower pre-money valuation, the Series A investment in scenario #2 is worse off because the capital needs of the company eat up returns and more than offset the lower valuation.

A capital inefficient company will also hurt founders and other common shareholders.  Let’s compare a situation in which a founder raises $10 million at a $25 million pre-money valuation in a Series A financing to a situation in which a founder raises $2 million at a $5 million valuation.  The $25 million pre-money valuation seems much better, but one would be surprised at the outcome.  In both of these cases, the founder has given away 26% of the company, but the impact of capital intensity goes beyond that.  After going through the the math using customary investment terms, one can see that the founder is left with $64 million at a $100 million exit and $16 million at a $25 million exit if the founder opts for the $2 million raise at a $5 million exit.  Alternatively, the investor is left with $61 million at a $100 million exit and only $8 million at a $25 million exit if the investor opts for the $10 million raise at a $25 million pre-money valuation.

I am not saying that venture investors should accept high pre-money valuations.  Rather, I am pointing out that capital inefficient businesses can be surprisingly unattractive to both investors and entrepreneurs.  Both would do well to discuss and think through the capital needs of a company.

Alan

Welcome to SJF Ventures’ “Web-Enhanced Services” blog. This site will focus on sectors that tap into the power of the Web to connect businesses and consumers, producing an immense set of opportunities to transform old markets and provide real value and, in many cases, to create a positive impact on individuals and the environment. We will report on industry research and trends we observe in this sector, and will sometimes profile interesting companies.

First, a little about us: SJF Ventures     is a venture capital fund headquartered in Durham, NC and with offices in New York and San Francisco. We invest in areas such as digital media and marketing services, renewable energy and efficiency, organic and healthy consumer products, and electronics recycling.

SJF Advisory Services is an affiliated nonprofit firm that offers entrepreneurial, workforce and sustainability assistance services to SJF prospect and portfolio companies. SJF seeks to rapidly diffuse those entrepreneurial strategies to help build a more sustainable economy. SJF Advisory Services has helped 1,500 entrepreneurial companies to date through workshops and direct advisory services.

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