It's been a busy few days at the Web 2.0 Conference.  I thought that Mary Meeker's 15 minute presentation was the most information-packed presentation of them all so far -- check it out for yourself here.  There also is a good story on the shifting landscape for early-stage investing in today's New York Times. 

More to come when I have some time...

The First Round Capital team and I will be out at the Web 2.0 Conference this week in San Francisco.  We've reserved a meeting room at the conference (Sonoma Room - on the second floor) to make it easier for us (and our portfolio companies) to meet.  If any of you are around, feel free to stop by and say hello.

Congratulations to Oren Michels and his team at  Mashery on their launch today. 

Mashery is a First Round Capital portfolio company that offers tools that make it simple to build, support, and manage access to web services, APIs and data.   Just as Feedburner makes it easier to syndicate/track/manage an RSS Feed, Mashery makes it easier to manage your API and developer program.  Mashery offers the only complete platform built specifically for this purpose, addressing the universal challenge that plagues all Web services companies - building and managing their developer network. 

In the last year I’ve seen that over a dozen of my portfolio companies have  had to create custom code to implement their developer program. With virtually every software company opening up APIs and offering web services, why should they all re-invent the wheel? 

Mashery provides metrics and reporting to track API usage, developer registration and key issuance, and comprehensive management of API access along with an integrated suite of community tools (forum/wiki/blog) to build a strong developer community.  Each developer network is built on proven tools and practices while retaining the client’s look, feel and culture.  An upcoming release will allow API owners to charge developers for access to their API -- and will handle the logistics/processes required for billing. 

More about Mashery's launch can be found on Techcrunch (I especially like their conclusion that Mashery has the potential "to be a key force in the realization of a future built of mashups") and ZDNet.

If you're going to be at the Web 2.0 Conference in San Francisco this week, be sure to stop by the Sonoma Room at the Palace Hotel to learn more.

I woke up this morning to some interesting news.  Charles River Ventures is now investing at the seed-stage.  This is a smart reaction on their part to several market trends:

• The fact that it costs less to start a software/Internet business these days,
• The fact that there are fewer large exits (both via IPO and M&A) taking place, and
• The fact that, over the long-term (10+ years), seed-stage investing has had a higher return than any other stage of venture investing.

It also is a recognition of some of the challenges that larger venture funds face.  Take a hypothetical traditional $400M VC firm.  In order to achieve a 20% IRR, the fund must return 3x their initial capital over a 6 year term -- or $1.2B.  Now say this hypothetical VC firm typically owns 20% of their portfolio companies at exit (an industry average).  That means that at exit their portfolio needs to create $6 Billion dollars worth of market value (ie, $1.2B / 20%).  Assuming that their average investment size is $20M, that means that they invest in 20 companies -- this assumes an average exit valuation of $300M PER COMPANY.  Given the tight IPO Market and an average M&A exit value of less approximately $150M, this math creates some real challenges.

I've only interacted with Charles River a few times (we were co-investors in Odeo together) but think very highly of them.  They have an enviable track record and a sterling reputation.  I think they are one of a few pro-active venture firms who are proactively seeking new investment models (I've now heard of two other venture firms that are establishing seed-stage programs).

However, I've always thought that there were some inherent conflicts that arose when venture funds moved to the seed-stage.  I'd be interested in hearing my readers thoughts on:

• I've always believed that one of the key roles a seed-stage investor plays is to help their portfolio companies raise a Series A round.  One of the reasons I don't like bridge loans, is that there is not alignment of interest between the lender and the entrepreneur.  As a lender, I would convert into the price of the next round -- motivating me to keep the next round valuation low.  As a shareholder, my motivation is aligned with the entrepreneur -- we both get rewarded by a higher second round valuation.
  
  
• When an venture investor has an option (but not an obligation) to take a certain percentage of your next round, I've always thought it created the potential for some bad optics.  If they exercise their option, and participate in the round, it could be a wonderful thing for the company.  But if they choose not to exercise their option, what signal is it sending to other potential investors?  As a small ($<50M) seed-stage fund, no one expects my fund (First Round Capital ) to be a lead investor in subsequent rounds...But if a larger VC firm has the option anddoesn't use it -- does that cause other venture funds to wonder why?
  
  
• Finally, as the First Round Capital website states, "we look to take an active role in most of the companies we invest in. We believe our insight and expertise are far more valuable than our capital -- and we look for entrepreneurs who feel the same."  Our whole business model is to roll-up our sleeves and actively help the company develop it's strategy/partnerships/business model, etc.  In fact, we tend to be far more active in the early-stages of a company than in the later stages.  Given the size of larger VC funds, are their partners able to actively get involved in a seed-stage deal?

Thoughts?

UPDATE:  Matt Marshall at VentureBeat has interesting insights here and Fred Wilson of Union Square shares his analysis here...

I am pleased to welcome my partner at First Round Capital, Rob Hayes, to the blogosphere.  His new blog, Permanent Record, is off to a wonderful start.  In his most recent post, Rob is right-on with his comments on Web 2.0, where he astutely observes that:

"the Web 2.0 label will inevitably end up in the dustbin of overused company descriptors (where it can have a cup of coffee with B2B, nano, and any non-medical usage of the word “eyeball”)..." 

I share his concerns.  While I'm looking forward to attending the Web 2.0 Conference next week as a convenient location to hold many of my west-coast meetings, I've come to believe that Web 2.0 has no useful meaning  as a company descriptor.  What started as an attempt to classify an emerging form of business model has come to signify any Internet company that was formed after 2003.  I don't look to fund Web 2.0 businesses - I look to fund good businesses.  I don't care if you use AJAX to develop your website any more than if you use Ajax to clean your office furniture -- just show me how you will satisfy an urgent and pervasive customer need and how you will generate revenue.   

Welcome to the blogosphere Rob - I can't wait to hear what you have to say next...

Rob's Blog, Permanent Record, can be found at http://permanentrecord.firstround.com/

Investing in pre-revenue startups is risky.  Seed-stage investors know that things typically don't go according to plan.  And sophisticated investors know that they will lose money in a good percentage of their investments -- with the expectation that they will make that back plus a nice profit in some of their other deals.

Today Evan Williams announced the creation of a new company, Obvious Corporation, that purchased the assets of Odeo (a company First Round Capital invested in).  As Evan wrote today in his blog, Odeo "was a humbling and highly educational experience."  And he concluded that although there was real value in what the team created, the structural constraints/requirements of venture investors were not a good match for the company. 

So he did something that amazed and surprised me.  He dug into his own pocket to return capital to his investors.  100% of our investment.  Evan did not have to do this.  His shareholders are sophisticated investors and we went into this with our eyes open.  We know startups are risky. 

The reason I invested in Odeo in the first place was because I wanted to make a bet on Evan – and his recent actions have shown me how right I was.  I continue to be a huge “Evan fan” – and should he decide to raise outside capital again, I hope to be his first phone call. 

In the meantime, I will be cheering for an Obvious success from the sidelines

Every business plan is wrong.  The moment an entrepreneur hits "save" or "print" the plan is out of date.  Things change.  In some cases you grow ahead of plan (like portfolio company Jingle Networks whose 1-800-FREE411 service has captured 3% of the US Diirectory Assistance market in one year) and are faced with the challenges of successfully scaling to satisfy user demand.  In other cases you find that some of your initial assumptions are no longer valid.  A competitor emerges.  New technologies emerge.  You are unable to build a team as fast as you had planned.  Distribution channel deals take longer than expected.  Customer adoption is different than what you expected.

Either way - it is critical for an entrepreneur to be able to listen to the market, their team and their customers and make changes to their plan as necessary.  I've always said that I'd much rather bet on an entrepreneur who can adapt to change rather than an entrepreneur who is convinced that they have the ability to predict the future.    But adapting to change is hard.  How do you maintain flexibility yet still preserve a goal oriented culture?  What do you say to investors who backed your initial plan?  When is a data point an outlier and when is it a warning bell?  Munjal Shah, CEO/Founder of Riya is doing a wonderful job blogging about his experiences in transforming Riya. 

(Disclosure:  Riya is a portfolio company of First Round Capital).