Software is eating the world, but hardware is hard to chew

My favorite piece of VC news in 2015 – Formation 8 launches a new fund dedicated to hardware and rebrands it as Eclipse.vc(http://techcrunch.com/2015/11/04/de-formation-8/). The second best is Peter Diamandis announcing Bold Capital Partners. We don’t officially know their portfolio yet, but with Peter in action I’d expect more Hyperloop / X Prize kind of stuff. I’m just missing an Elon Musk VC vehicle here.

Now, with my background in science and physics, I love hardware innovations, and I’ve been a fan of F8 since Oculus and, of course, Hyperloop Tech, a hyper-ambitious startup inspired by Elon Musk’s white paper that suggests sending humans and cargo at almost the speed of sound through an empty tube from LA to SF. But being a realist, I can’t help to ask: if software is eating the world, why bother with hardware? what value can hardware provide to a VC that software can't?

It’s no secret that the vast majority of VCs shy away from investing in hardware, and for well-known reasons. Hardware is capital-heavy and slow; hardware doesn’t forgive mistakes and ‘pivot’ is a curse word; incremental opportunities in software are just so much more abundant; finally, you’ve got to understand technical details, and that’s quite a barrier. So where’s the upside?

The first guess could be that F8 is just really, really inspired by their killer of an exit with Oculus and want to do more of that. A decent reason, but I believe there’s more to it.

The latest wave of software innovations is enabled at least equally by hardware. The dot-com wave came when the world got broadband – fiber optics, routers, and IEEE_802.11. The post-2008 growth is fueled by mobile – smartphones and cell towers. These are transformative changes, in Peter Thiel’s language, that enable huge numbers of valuable incrementals. And we’re clearly looking at a few coming soon: AR/VR, IoT, smart cars, smart grids – to name the obvious.

So is Eclipse aiming to dominate these platforms before they arise as the new realities? If so, is this the right time? Which one will change the world first? And how does Hyperloop fit into that? Or, perhaps, it is a conscious shift towards transformation, not purely driven by financial expectations?

Luckily, I don’t have to guess – I’ll have Eclipse’s partner Seth Winterroth to answer my questions at the Hardware Investing panel at MIT VC & Innovation Conference next Friday. Better yet, he’ll be accompanied by Maria Thomas, formerly Chief Consumer Officer at SmartThings, an IoT company, and Nikhil Garg, a Partner with Black Coral Capital, a Boston energy VC, both of whom know how hard, slow, and capital-intensive hardware still is.

By Aleksandr Rakitin - Managing Director of MIT VC & Innovation Conference and MBA 2016 candidate at MIT Sloan

Supporting Innovation: Interview with Dave Fleischer from Business Resource Services

Innovation and Disruption starts with the correct concept and market timing. However, it cannot happen without many things falling into place – one of them is having sufficient capital to support its success. Capital can come from internal cash flow, outside investment, commercial banks, or unique avenues such as tax credits when applicable. Dave Fleischer, of Business Resource Services (BRS), details how BRS helps companies that are investing in innovation.

BRS helps quantify and attain a Federal R&D tax credit that companies may be eligible for. Introduced in 1981, the tax credit is intended to incentivize companies to develop new and improved products and processes. Companies ranging from $3M-$100M in sales that have invested in new products or improvement of old products or internal processes will qualify. Traditionally, this is an underserved market, as many companies are unaware of the extent to which they are involved with R&D activities as defined under IRS regulations, and most CPA firms don’t focus on it. Thus, BRS is able to save companies hundreds of thousands of dollars through this process. It is a way to infuse capital into qualified companies without a significant drain on internal resources, and it is money they are eligible for but don’t know about.

Typical customers hail from verticals such as biotech, pharma, manufacturing, engineering, food and beverage processing, and medical devices. Important items to note around the credit include:

  • Federal and State credits can amount to as much as 20% of the costs incurred in developing new products and/or manufacturing processes.
    • Example: For every $1 million in payroll that qualifies for the Research credit each year, clients would be eligible for approximately $100,000 in Federal Tax Credits. Additionally, you can also take advantage of state credits in approximately 40 states. In Massachusetts, for example, you can add to the federal credit by 50%.
  • You can go back 3 years to claim past credits if they haven't been claimed already.

  • You can carry forward credits for up to 20 years.

  • Typical return on investment is a cash benefit of 3-10 times the cost of the BRS study.

Dave got into this business after having founded his own energy efficiency company and growing it to $15M in sales. He understands first-hand the day-to-day challenges of a business owner around cash flow and finances. Some of the best advice he received in his career is “to keep your financial house in order,” meaning having the best people running your finance and accounting department. This will lead to development of proper processes and controls, and accurate, timely information for management decision making—all things that BRS can help with.

For inquiries, please contact dave@brsvt.com.

Written by Cheryl Silveri

Protecting Your Innovations: Patent Pitfalls to Profits

Savvy investors and technologists understand the power of patents.  They appreciate the extraordinary value that blocking a competitor from the market can yield, and they also understand the link between company value and sound patent protection.

Fundamentally, patents provide a right to exclude.  Their exclusionary boundaries are defined by their claims, which must be precisely worded to capture the essential features of an invention while avoiding unnecessary verbiage and other perils.  Strategically minded companies understand that their patents must be carefully developed and placed at critical access points to their technology in order to impact competitors.  Patents directed to technological features that a competitor doesn’t need in order to compete may provide little or no value to the company.  On the other hand, when patents are aligned with a company’s business strategy, the company can realize super-competitive power.  By excluding others from practicing its technology, the company can more safely build a customer base, obtain financing, develop a brand name, establish market power, and grow revenue.  Such power can set the company up for profitable operation in the marketplace or a lucrative exit.

Savvy investors and technologists also understand that not all patents are created equal.  While some can offer extraordinary opportunity for their owners, others have little or no value.  And, there are many ways to render a patent valueless.  For example, failing to establish a connection between a company’s business strategy and its patent strategy can result in patents far afield from what matters to the company’s competitors.  Patent value can also be impacted by missteps in the drafting and application processes.  Patent “lemons” of this type represent costs without benefits.

Growing technology companies cannot afford to ignore patents and their potential for creating real company value.  At the same time, however, pursuing patents without razor-sharp strategy and execution can result in patents that fail to impact competitors, and thus offer little or no value.

Written by Darren M. Jiron & Elliot C. Cook, Finnegan

Citi Ventures' Vanessa Colella on the Evolution of Financial Services, Venture Investing, and the Value of Diversity

It’s been really exciting to work with Vanessa Colella, Managing Director and Head of Global Venturing at Citi Ventures, which is sponsoring this year’s MIT Venture Capital & Innovation Conference. With three degrees from MIT, including a PhD from the MIT Media Lab, Vanessa makes us MIT ladies proud! In preparation for the conference on Dec. 12th, I had the privilege of speaking with Vanessa about a number of topics, including Citi’s perspective on the evolution of financial services, the rapidly changing environment in venture funding, and Vanessa’s experiences in the male-dominated world of Venture Capital and Financial Services.  

Citi Ventures has been actively investing in Commerce and Payments companies like Square and financial advisory firms like Betterment. What is the motivating factor in investing in these types of companies? Do these investments speak more broadly to Citi’s perspective on the evolution of the financial services sector?

Vanessa: Citi is an institution that has been around for more than 200 years, so that has a huge impact on our investment philosophy. First, our venture investing philosophy is that financial and strategic returns go hand in hand. We invest in entrepreneurs and companies with the possibility to generate a financial return and where we can provide that startup with resources, insights or access to help make them successful. In my view, great entrepreneurs can get funded from many places – there is ample capital available for good ideas. We only want companies to partner with us if they think Citi can help them grow and scale their business in a meaningful way.

The pace of change in the world today, especially in the financial services sector, is extraordinarily rapid, and we see that change as an opportunity to drive better experiences for Citi’s customers and clients. Change and innovation happen in a lot of different places – both internal and external to Citi. My group functions as a bridge that identifies and brings outside entrepreneurs, technologies and startups into Citi. Often, smaller companies have great ideas and want to disrupt and change the financial services environment in a positive way – but they often don’t have the capital, scale, or capability to achieve their vision. Our goal as a venture group is to enable maximum impact to benefit both the sector and Citi’s clients and customers.

When thinking about investing, how does Citi Ventures’ due diligence and investment activity fit more broadly into Citi’s strategy and internal product development? Do trends from the startup community influence development of new services on the commercial banking side?

Vanessa: In today’s world, it’s amazing – we find innovation in so many different places. We really view our venture investing activity as a way to help grow and build ideas and technologies that will also help our customers. Our investment team knows how hard it is to build and scale a business. Our investment often serves as that extra push to help take a great business or idea to the next level. Citi Ventures is focused on enabling technologies to support our core business, which provides a wide range of financial products and services to our clients around the world. One great example is in security. Security might not sound very sexy, but it’s absolutely critical to everything we do as a financial institution.  As a result, we are constantly on the lookout for people who have figured out ingenious ways to make the financial sector a safer, sounder place.

Talk to me about how your investment strategy differs from traditional VC. We’re all familiar with the early stage VC model, but how does a firm like Citi think about later stage investing?

Vanessa: We work very collaboratively with a lot of traditional VC firms. What we see as our value-add and point of differentiation is that we work with the entrepreneur to bring perspective and expertise from a large enterprise POV to their business. We have a team that interfaces with our portfolio companies to help them find the right customers and navigate the commercialization process. While a traditional VC might be able to make introductions, we offer a deep set of connections across Citi and our industry. For many of our portfolio companies, we invest at a stage when they’re looking to close their first or second deal with a global enterprise – and we can often be an avenue to help these new companies close deals and scale.

It’s also very important to note what we are not. One thing that we don’t do is look for any kind of exclusivity with our portfolio companies. In our investment activity, it is always our goal to make our portfolio companies successful, with whomever and in whatever way is necessary. We aren’t trying to buy ideas or lock up companies for our own advantage – we are trying to help companies and great ideas scale and grow as quickly and effectively as possible.

As you know, one of our big challenges from a conference organizer perspective this year was presenting a more gender-balanced view from the investment community and the entrepreneurial community. It’s been a major news topic, and we recognize many of the challenges around gender in both startups and venture capital. Has it played a role in your career, or in your perspective as an investor?

You’re right – the gender balance issue has been highlighted this year, but it’s been a persistent challenge throughout my career. What you’re doing with the conference, actively addressing the issue, is what really can make a difference. Simply acknowledging gender and diversity issues is not enough without actively working to make changes. In my group, we think of this in a few different ways:

  • Understanding the End Impact: Many studies show that more diverse environments lead to better outcomes, financial and otherwise. I have a long-standing personal commitment to how we think about growing diversity from many different angles, not just gender. Our entire leadership team at Citi Ventures happens to be women, and we appreciate the opportunity to stand out from the norm. Of course, we also recognize that we need to encourage diversity of opinion on our end as well. It excites me that the dialogue includes a focus on fairness and on delivering business results. Diversity results in better outcomes. Period.
  • Building a Broader Funnel: It’s not always easy to find minority or female founders or investors. It’s my view that we need to think differently about the problem, and really frame it around broadening the top of the funnel where we channel talent and resources into developing people, rather than a problem at the end of the funnel when selecting and placing talent into roles. I love serving as a mentor and I always tell my mentees, go and do what you don’t yet know how to do. Be willing to go out of your comfort zone, to learn and ask questions, and to take risks and accept failure as a positive outcome. We have to train students to think this way early on by giving them the opportunity to learn, discover, and be creatively confident so they can go out in the world and take risk.
  • Creating Opportunities: I absolutely recognize that I’ve been lucky to have had such a wide variety of opportunities throughout my career. We need to expand that opportunity to a wider array of people. I would encourage both prospective employees and employers to take a risk, and to try something different to create new opportunities not only for themselves but also for others. The great thing about the startup community is that your failure can actually make you better – you can learn from it and then keep trying and experimenting. That’s not failure because each iteration teaches you something critically important.

Thanks so much for your time and insight Vanessa. We’re really looking forward to seeing you on December 12th and hearing your thoughts about innovation in the financial services sector – this is an area we’re very passionate about and where we see tremendous disruptive potential! 

- Written by Meltem Demirors, Conference Managing Director and MIT Sloan Class of 2015

Talking to Washio about the Challenges of Funding and Effective Ad Tech

I recently had the pleasure of chatting with Nick Greenfield, Vice President of Marketing and Growth at Washio, a startup that wants to do your laundry and dry cleaning. Washio has recently expanded its services to the Boston area after raising an impressive $14M in funding in the past year. We talked about the vision that Washio started with, the challenges of funding a wash and fold service, how Washio is using ad tech, and Nick’s experiences as an early stage employee at Lyft and now Washio.

This year, we’re excited to share Washio with our conference attendees, who will all be receiving a special gift so they can try out the service themselves and finally have a sock drawer with no missing socks. Seriously- there must be some little troll who comes and steals that one sock every single time I do laundry!

Meltem: Tell me a bit about Washio. What was the burning pain that made this an obvious idea?

Nick: Jordan [Metzner] and Juan [Dulanto], the founders lived in Argentina from 2005 until 2011. In Buenos Aires, every neighborhood has many a wash and fold laundry locations called lavanderias. When Jordan and Juan got back to the states, they really missed the convenience of having that service, and realized that in the US, laundry services are few and far between, and are often too expensive to be practical. They did some surveying and research, and it turns out - a lot of people don’t like doing laundry!

The founders started with a vision to create a peer-to-peer laundry platform, where we would pair people with unused washers and dryers with individuals who didn’t have time to do their own washing and folding.

However, we quickly realized it made more sense to work with commercial facilities that have unused capacity, so we could streamline our process. By centralizing operations, we opened up the possibility of adding dry cleaning as a service to make Washio even more valuable to the end consumer.

One of the topics we’re talking about at our conference is how the funding environment is changing. Washio has been tearing it up, raising $14M, but I imagine VC’s weren’t really jumping on a wash and fold laundry service at first. What was the funding process like?

Nick: When the company started in March 2013, the founders were doing everything: all the customer support, driving the laundry around, sending texts to customers manually, updating the back end data base. They quickly realized that to grow, they needed capital, so in May 2013, they started to raise funding.

Every VC, seed fund, and incubator said no thanks. However, there was one angel [Haroon Mokhtarzada] who said yes and that really changed everything for us. Haroon helped us raise an angel and seed round from some of the smartest investors around including SV angel, Pejman & Mar ventures and Ashton Kutcher’s A Grade. This summer, we were lucky enough to welcome Canaan Partners as our Series A investor, leading a round of $10 million+. Each step in the fundraising process elucidated new ways in which we could improve our business and analyze our performance. Once you take institutional money, everything changes. Your business is quantified and measured at every turn along a broad range of metrics, and you have to deliver results.

Meltem: At this year’s conference, we are actually hosting a panel on the evolution of marketing and advertising, which has become an incredibly quantitative science thanks to startups like Localytics, DataXu, and Pixability – just to name a few in the Boston area. In your role as VP of Marketing and Growth, how do you use new advertising technologies and other startups with amazing ad tech products to reach your target customers?

Nick: For our marketing strategy, it’s important to keep mind that our service area currently covers less than 2% of the US population, so we have a limited audience we can actually serve. Additionally, we have to find the right people in our coverage area that fit our customer profile further limiting our pool. Think about Washio as a hyper local dry cleaner with a national presence.

In terms of technology, we use Nanigans as our Facebook API partner – they’re really strong at helping us understand our social media funnel and driving user acquisition. I also use Yozio, which is probably the most exciting ad tech company out there for organic growth and mobile attribution. They’re at the forefront of tracking of organic referrals for companies such as pinterest and airbnb. Their technology for deep linking, passing metadata and tracking attribution helps me understand the metrics I need for improving our marketing strategy.

Meltem: Nick, let’s talk about you for a second. This is the second rocket-ship company you’ve boarded – you started at Lyft, and now you’re at Washio which is just taking off. For our conference organizers and my fellow Sloan classmates, a lot of us are inspired by the idea of joining a startup but that comes with risk. What motivated you to take the path you have?

Nick: For me the “aha” moment came in college - being young and graduating, it seemed like a much bigger risk not to take a risk. It’s so much better to do something that has a HIGH risk of failure at this stage in your life! I started at Lyft when it was still Zimride. I was hired to do sales but very quickly moved into working on user acquisition, simply because we didn’t have anyone else with the capacity to work on marketing. Eventually I had the privilege of hiring my own boss which was a phenomenal experience.

Every three months I’d meet with John [Zimmer], one of the co-founders, for a review. He would provide me with suggestions and advice on ways I could improve personally and professionally. One area in particular that he hammered home was focusing on numbers and metrics. John would always tell me the number one thing I could focus on was becoming a data-driven marketing professional.

As Lyft continued to grow from startup to growth company, I decided that I wanted to find another opportunity that would let me maximize my learning and personal growth potential at the fastest rate possible. Enter Washio. The responsibility you have at a small company is astounding, and that’s where I thrive. When there’s only a handful of employees, the risk of failure (and success) is riding on your shoulders! That knowledge is a powerful motivator that forces you to learn, and quickly.

Meltem: Thanks Nick – this has been an awesome chat, and very much appreciate you taking the time to speak with us! We look forward to seeing what Washio does going forward, and I’ll certainly be using your services soon so I can elude the mysterious sock troll who seems to strike every time I do my laundry.

We encourage everyone to attend this year’s MIT Venture Capital & Innovation Conference to learn more about exciting changes in the funding landscape, awesome new technologies driving advertising and marketing in new channels, and to get a chance to sample Washio’s services!

- Meltem Demirors, MIT Sloan Class of 2015 and Conference Managing Director 

Gender and Funding: Are Female Entrepreneurs Really Disadvantaged?

Let's talk for a moment about the female funding gap. This news story has been percolating in the entrepreneurship community for the past year or so, and if Huffington Post is writing about it, we view that as an indicator that this is major news y'all! (sorry, that's the Texas in me)

There are a lot of facts being thrown around, and since we love bulleted lists (seriously... LOVE), we thought we'd take a moment to figure out the facts:

  • According to the University of New Hampshire, and re-quoted by Forbes, only 12% of angels funded women in 2011. We assume this is what HuffPo referenced when they stated: women globally receive less than 12% of all venture capital invested
  • According to Women 2.0 and Stanford’s Clayman Institute for Gender Research reports that women-led businesses only get 4.2% of venture capitalist funding. Other reports cited by Women 2.0 claim that female entrepreneurs receive 7% of the funding.
  • MIT's own Innovation Initiative leader Fiona Murray conducted a video study and found companies pitched by men were about 40 percent more likely to receive funding than those led by women.

However, analysis would indicate VC's should be rushing to invest in female entrepreneurs!  A 2013 report from the Small Business Administration (SBA) had some interesting insights when they evaluated the impact of gender on fund performance. They conducted a multi-factor study of over 2,500 VC firms and their portfolio of investments and found:

  • Investment in women led businesses has a positive impact on a VC's portfolio and results and actually improved performance. The study did not determine if that was due to 'more vigorous due diligence' or the fact that VC's who tended to invest in women tended to also have women on their management teams.
  • One really interesting statistic that stuck out: Firms that initially invested in women have higher subsequent investments in women led enterprises, AND, VC firms who invested in women had a higher rate of success than those who did not.

So what's going on here? Do VC's just not like the ladies? Well- we think there are a few factors at play:

1. Gender of Investors: Part of the problem is the broader VC industry and the gender gap in funders. The majority (90% according to some reports) of VC's are male, and the majority of funding comes from men. Social identification and selection bias enters into the picture, making it difficult to separate correlation from causality when trying to understand the funding environment for women. Add the concept of social capital and the fact that business networks are still heavily gender driven, and it all starts to make sense. Women just don't have as much social capital in the majority of cases, and have been less focused on networking and building that connection with potential investors, either due to different sets of opportunities or a lack of awareness.

2. Women Led Startups have a Different Value Proposition: There are less women in STEM fields, and research is only so telling as it an earlier time period when fewer women were employed in tech and other fields that are likely to spawn the high value, market disrupting technologies VC firms want to invest in. Economics y'all. This isn't to say that there aren't tons of amazing and super-smart women starting tech companies. MIT's own Vanessa Green of FinSix (who raised a $500K Kickstarter) or Leslie Dewan of Transatomic Power are living proof, but in our view, still a minority when it comes to the boys. Not only are women getting smarter about the industries they pursue innovation in, they are also getting savvy to the game of knowing the right growth rates and exit strategies to pitch to investors. A fashion startup aiming for $100,000 in revenues in Year 3 is just not an appealing investment for a VC firm when compared with an ecommerce technology platform aiming for $250M in revenues in Year 3.

3. Funding Preferences: According to Kay Koplovitz, chair of Springboard Enterprises, women prefer to self-fund their startups using their own cash, family and friends, or emerging sources like angel funding and crowd funding. We'll be talking about this in our 'Brave New World' panel at the conference, and hope to have a bad-ass female entrepreneur talk about funding preferences. Funding through these alternative sources allows more control and also, lets you keep a larger share of the company! Perhaps its also a question of industry and product fit, but the emergence of female entrepreneur focused angel groups like Astia or crowd funding platform Plum Alley are showing that leaving women out of the VC game has allowed other investors to get in and build a strong niche brand.

So what happens now?

We are lucky to be part of a generation that is experiencing a great gender equalization (to some extent). In recent years, there have been some incredible efforts to educate and empower women in STEM fields including organizations like WomenWhoCode, whose founder Alaina Percival will be speaking at our conference in December.

On the funding side, the gauntlet is also being 'thrown.' Google recently issued a funded challenge to accelerators, incubators, and others to increase women's participation by 25% in 2014. Paul Graham's Y Combinator recently held a female founders conference. And another Silicon Valley based incubator, 500 Startups, announced their intention to pump $1M into 10 companies with women founders already in their portfolio.

There are a lot of bright spots that give us hope that the female funding gap will begin to equalize. At this year's VC conference, we are pushing ourselves to find and engage with bright, dynamic women who are changing the game and makin' it rain (so to speak). Last year, we had one panel with women on it, specifically called the Women in VC panel. If you look around at other schools who host similar conferences, you'll see rosters of all male speakers. One un-named conference this past spring had 56 male speakers and only 3 females. This is mind-blowing. This year, we will have multiple women on multiple panels, and for the first time in our history, a female keynote speaker (perhaps multiple). We strongly feel that it is our duty to ensure we bring perspective and diversity to the table, and this year, the gauntlet has been thrown not only for our conference, but all MBA conferences. Bring on the women! Pretty bad-ass if you ask me...

Join the conversation, either at the conference, on our blog, or @mitvcconference

- Meltem Demirors

 

An Update on Non-Competes in Massachusetts

On Tuesday, July 1, the MA Senate held a hearing on the status of non-compete employment contracts in the state. The vote came after Governor Patrick’s proposal this spring to ban noncompete agreements, which prevent workers who leave jobs from joining rival firms or launching new companies in the same industry, often for a year or longer. This past week, Governor Deval Patrick's organization has shown signs of a possible compromise on the issue, and indicated a willingness to accept a middle ground offered by Senator Brownsberger. The Senate voted strongly (32 - 7) in favor of placing limits on non-competes but not banning them outright. The vote will serve to limit the duration of noncompete agreements to six months and prohibit their use for hourly employees, which indicates some forward progress but doesn't address the issues the original ban was intended to address. Read the specific language of the compromise here.

MIT Sloan Professor Matt Marx testified, along with many others in academia and venture capital, to support a complete ban on non-competes. Having taken Prof. Marx's class, Dilemmas in Founding New Ventures, and read several cases on the subject, it's become an important determinant where we, and many of our classmates, choose to pursue not only our new business ideas but our careers after MIT Sloan. It's frustrating to see that the MA Senate might find a comprise suitable, as it fails to address many of the issues raised by non-competes. 

We strongly urge Sen. Canderas and Rep. Wagner to carefully consider the impact this legislation will have on our classmates, the broader Institute, and the young talent in the state of Massachusetts. We are fortunate to be classmates and colleagues with tremendously talented peers both at MIT and the dozens of other brilliant academic institutions in the Boston area alone. We see a mass migration of students to California each May, following graduation, and its a sad state of affairs when the MIT Club of North California is far larger than that in Boston. We hope the state does not settle for the proposed compromise and thinks about the broader impacts a full ban could have on the future of our state. 

As this issue unfolds, our leadership team and the broader MA student population, will be watching closely. We encourage everyone to attend our conference in December for opportunities to discuss this topic, as well as many others!

- Meltem Demirors

Announcing a New Venue and Format for the Conference!

This year, we are excited to borrow from one of our favorite learning and discovery mediums, TEDtalks, in programming our conference. We are thrilled to be hosting the event at Royale in Downtown Boston, a versatile, open space with a fantastic AV system that will enable us to create better engagement with the audience through audio and visual content.

Our leadership team will be hard at work putting together this new style of event but hope you will enjoy our new and improved Venture Capital & Innovation Conference!