Nice Day for NYC and FirstMark

We’ve enthusiastically spoken about the momentum in NYC and our support for the ecosystem.  This morning we had a couple of good events transpire.

First was the announcement of the World Economic Forum’s 2011 Technology Pioneers. Thirty-one companies received awards out of a global pool, thirteen specifically in the areas of Information Technology/New Media (where we focus).  Of the thirteen, three companies are from NYC (Knewton, SecondMarket, and foursquare), two are from the FirstMark portfolio (Knewton, SecondMarket)!   The Wall Street Journal had nice coverage here.  Each company represents a distinct sector – financial services, education, and new media – where NYC has specific depth and expertise.

Second was the announcement that TechStars is coming to NYC.  TechStars is the second accelerator program to launch in the Big Apple, and we believe this is a continuing sign of the growing depth of the NYC market.  We are enthusiastic supporters (and investors), and look forward to working closely with the inaugural class.

Both events underscore what we have been advocating for a long time.  NYC is an incredible place to start a company and one of the most exciting venture markets.  As technology investing has shifted from infrastructure buildout to leveraging the Web as a platform, so value creation has shifted from plumbing to “Internet-optimized” businesses combing the best of technology 2.0 with deep vertical expertise/talent to disrupt large incumbents.  We expect this to be a major trend for the next 5 – 10 years and NYC to benefit disproportionately from it.

Re-Shaping of the Data Center: The Scoop on the 3Par Bidding War

This morning HP announced they were trumping Dell’s bid for 3PAR, offering a whopping 33% on top of Dell’s 85%+ premium. I’ve read lots of chatter about why, but I think much of the analysis misses the mark.  I thought it would be worthwhile putting the deal in historical context.   

First, let’s talk a little bit about data center and storage history.  Storage many years ago used to be housed with the CPUs.  The large vendors shipped computers with high end processors, packed with disk drives and called them servers.  As data storage grew faster than compute, the industry began to decouple storage from the compute, giving birth to companies like EMC. 

EMC and Hitachi Data Systems operated in the high end enterprise segment with very large storage arrays designed for high performance, availability, and reliability.  Because of how critical and difficult storage is, very few of the server makers chose to wade into the market.  In fact, most compute players would regularly OEM product from the specialized storage makers.  This led to a very happy symbiotic market with clean lines where everyone knew their place, and each of these vendors in fact OEM’d one another’s products.  For example, Sun and HP each resold HDS’s products.  Dell resold EMC’s products.  Brocade was built almost entirely on a channel model.  

A couple of moves really changed this panacea.  First, EMC got a hold of VMware and virtualization subsequently became the hottest trend in the data center.  This pulled EMC into the server side of the market and led them to rapidly expand beyond storage into systems management, software, and other layers of IT spend.  Second, Cisco announced they would be entering the high end server market.  This clarified their growing ambitions from dominating the router market into the compute part of the IT spend. Cisco announced a JV with VMware and EMC to complete their product vision late last year. Third, Dell bought Equallogic and HP bought LeftHand Networks, both signaling a movement towards owning IP for storage (albeit the mid market).  Dell had been partnered with EMC going back to 2001 and was a meaningful channel for EMC’s mid range products.  Very quickly everyone got a wake up call that their place in the stack was not secure.

So what’s happening now?  Every major data center platform vendor sees two major trends going on.  First is the rise of the dynamic, agile data center within enterprises.  This requires being able to spin up resources – compute, network, and storage – automatically in response to business demands.  Second is the eventual move of the data center to private and public cloud offerings.  In this model, the vendor no longer sells equipment to the enterprise, but assembles and runs all the parts as either a dedicated or shared service.    

In order to fulfill this vision, you need all parts of the stack working together seamlessly.  This is where 3Par comes in.  3Par was born during the great storage gold rush of the early 2000s.  Bringing their product to market took over $200MM in venture capital, including some recaps along the way.  They were one of many startups that were funded to build flexible, modular, high end systems, but one of the few to survive.  An enterprise’s lifeblood is storage and they would not trust startups lightly.  This required high burn to build the technology, and then high burn on the sales side to succeed in market.  To 3Par’s credit, they managed to get public and raise sufficient capital to sustain themselves to critical mass and profitability.  And now they benefit from scarcity value.

Looking at the landscape, 3Par is the only real alternative to EMC and Hitachi in terms of high end storage.  EMC has its own ambitions for data center dominance, while HDS is part of a much larger conglomerate.  If you believe you need to own storage and server, both to fulfill the vision above and to avoid partnering with a competitor, than 3Par is the only place to get this type of deep high end storage technology.  Given HP and Dell have a much larger sales channel than 3Par, these guys can immediately double, triple or quadruple sales from 3Par products overnight once it is part of their catalogue.  Both reasons afford the premium we are seeing.

Going forward I’d expect to see more data center consolidation.  There are some major battles brewing as companies compete to own the enterprise! Network Appliance has long been rumored as a fit for Cisco.  Plenty of other combinations make sense as well.  It’s clear to me, though, that the march is towards creating end to end solutions and masking complexity.  Should be a fun next few years to watch!

Announcing FirstSteps & Our Tenth Seed Deal

Today, we are excited to formally announce our seed program, FirstSteps, and our tenth investment from that program.  FirstMark Capital has had a long, successful history of investing at the seed level (Riot Games, LiveGamer, Clickable and others) and even starting companies from scratch (Dovetail, EagleEye, Outlooksoft).  But it’s clear there has been a real change in the last few years.  Companies now can get started at a fraction of what they could in the past and can accomplish more with less than ever before.  As the entrepreneurial climate has changed, we wanted to ensure our considerable resources were available to the best entrepreneurs at the earliest stage.

 What do we look for in seed companies? 

  • We start with capital efficient technology and technology-enabled businesses.  The types of businesses we will look to back will mirror the themes we have successfully invested in over the years. 
  • We look for strong founding teams.  While we back many serial entrepreneurs, we have backed as many first time entrepreneurs that have gone on to build great companies.  A common trait across both groups is demonstrated excellence in life.  This could mean being one of the best sales rep in a prior company; being a scholar athlete; generating outstanding customer traction with no resources.  We fundamentally believe that people who overachieve tend to do that consistently.  We also like our entrepreneurs to have domain expertise.  If you want to start a gaming company, do you passionately game?   
  • We prefer our founding team to include the technical co-founder.  This is the age of iteration and having a technical partner who wakes up in the middle of the night with you to help A/B test and optimize every button, menu and screen is critical.
  • We look for large markets ripe to be disrupted.  More and more we are seeing new companies that are technology enabled and leveraging the connectivity of the Internet to launch new business models. 
  • We want a shared view on capital usage and value creation.  Because so much can be accomplished so quickly, we love when entrepreneurs have a very clear view on how much (or little!) they need, why, and what they will be able to accomplish.  We want our entrepreneurs and employees to own the majority of their companies!  We get nervous if you’re willing to give away too much!  Many things will not move in a straight line, but we are now in an era where the cost of planning is significantly higher than the cost of failure.
  • We invest nationally, but prefer to invest in companies that can benefit from our strong NYC presence.  We want to ensure we can add value every step of the way.

 How do we partner with seed companies? 

  •  We look to invest anywhere between $50K and $1MM in our seed companies.  Typically we write between $250K – $500K.  Total round size is usually between $1 -2MM.  Our investments are typically a simplified preferred equity structure. 
  • We lead transactions, write term sheets, and often help syndicate rounds.  Or sometimes we simply join in a round that is already being syndicated.  Because we believe the seed round is an opportunity to set up an early and strong network around a company, we usually syndicate with other seed firms and leading angels, playing an active role introducing our entrepreneurs around to other partners who share our values and thinking.  Recent co-investments have included folks such as First Round Capital, Genacast, Metamorphic Ventures, IA Capital, Accelerator Ventures, New York Angels, Ron Conway, and others.
  • We do not view seed as an “option”.  We are excited about every seed deal we go into and want to provide those companies with every opportunity for success.  Our entire organization thinks about you and your success.

 Why work with FirstMark Capital?

  •  We are deep thematic investors that have spent over a decade watching a portfolio of over 200 companies start, grow and succeed.  We bring that institutional knowledge and relationships to bear for you.
  • We have created dedicated programs, networking, and infrastructure for our seed program.  Our companies are actively engaging and learning from one another, sharing insight and helping avoid pitfalls together.  In addition, our seed companies benefit from the larger events we host for our entire portfolio – such as our Annual Marketing Summit – and our more intimate targeted events with leaders in industry.  Our seed companies also learn from some of the best practices of a much broader portfolio of companies that have grown to achieve breakout scale.
  • Our base in NYC leads to having exceptional relationships across many of the industries that are now getting disrupted, from financial, retail, education, healthcare, gaming, publishing, advertising, media, and more.  NYC is the world’s business capital and we leverage that density for our companies’ benefit.
  • We have a deep bench of venture partners who have decades of operating and entrepreneurial experience, and often can be mentors to our young companies.
  • As a result of our large footprint, we touch a lot of talent.  We work hard at building out the best teams for our companies – finding, interviewing, referencing, and selling.  Execution and team make all the difference on an idea.
  • We support you through fundraising processes.  We do not front run, we do not put our interests ahead of the Company’s.  Instead, we work with you to identify the best possible partners and help you navigate the complexities of raising subsequent capital. 

 Our portfolio of seed companies has already enjoyed tremendous early success.  We invite prospective entrepreneurs to reach out to any of our companies to get a sense for how actively we work with them to build value together.  And if you think you’d make for a great investment, feel free to reach out to us through our network or apply HERE!