December 15, 2004 Venture Capital Update; Warren Weiss, Foundation Capital By Warren Weiss, Partner, Foundation Capital At times Silicon Valley seems obsessed with one question, "Is the venture investment pace up or down?" The latest Money Tree Survey says that the pace of venture capital investment slowed in Q3 of this year -- down to $4.3 billion from $5.9 billion, and the highest since early 2002, the quarter before. At Foundation Capital, we keep tabs on the industry but do not sway with the changing winds. Instead, we stick to our own numbers: one new investment per month. Foundation has had the opportunity to invest in great companies led by brilliant people, ranging from veteran entrepreneur Reed Hastings and Netflix, to Financial Engines, led by Nobel Prize-winning economist William Sharpe. We tend to shy away from investing in the space du jour. If you're reading about it in the Wall Street Journal, you're too late. Roughly 80% of our new deals -- the lion's share being first round investments in early stage companies -- are with people we have backed before, or that are referred to us from our personal network. Our firm maintains close ties with Stanford, Berkeley and other leading institutions, as well as large corporate research labs. These connections allow us early access to innovations at their purest from; we thrive on the chance to turn these great ideas into sustainable businesses. Teresa Meng was a professor at Stanford when John Hennessey, then dean of the engineering school, brought us into a partnership that would ultimately grow to become Atheros Communications. In recent months, we have invested about 30% in enterprise software, and an additional 20% has been pointed toward companies that deliver software via the 'on-demand' model -- more on that later. The other half we invest in technologies ranging from semiconductors and EDA to networking and storage. Enterprise software has had its ups and downs with the CIO and the venture capitalist. Over funded sectors in enterprise software such as security, wireless applications and supply chain, have delivered bleak results for investors. Lately a new sector is showing significant promise: the on demand model for delivering software to the enterprise. We believe it's the real deal. On demand - in demand Foundation has backed several companies delivering software as a service, and we expect to make more investments. Typically these companies deliver solutions that are more horizontal in nature (vs. a vertical industry solution). For example, we invested in Talaris, which uses the web to streamline and deliver employee services like travel, FedEx, limos and food services. On demand applications are often critical to operations but not strategic, meaning that customers will use them in areas that are necessary but not core to their business. Major corporations including Delta Airlines, Maytag and Kennametal rely on the on demand procurement and spend analysis services of Ketera. With Delta, for example, the company does not help them manage the acquisition of airplanes but rather the food and beverages that are also critical to their success. BoardVantage supplies secure and virtual board meetings as a managed service, allowing large companies to save big money and time by outsourcing board management activities. We believe that additional areas of the enterprise can be automated successfully, and at a lower cost than existing technologies or expensive, custom applications Voice applications are a good example. A company named TuVox is working to commercialize speech recognition software for the enterprise by arguing that custom speech applications are overkill and packaged applications with greater pre-built functionality are the way to go. Its customers include Netflix, Definity Health, USPS and MCI. New tech meets old industries Can there be more killer apps? I would argue yes. Looking ahead to 2005 and beyond, we have spotted two more areas that will be increasingly important. IT will increasingly aid services delivery, and its importance and impact is growing in industrial and energy markets. manageStar sells software that helps service organizations automate the entire service life cycle, transforming it into a standardized, measured, value driven process with the goal of increasing productivity, asset performance and contract management performance. The company has 30 customers across a number of industries including: financial services, telecom, CPG, government, hospitality, healthcare, manufacturing and transportation. In some cases, even the most futuristic-sounding invention can be turned into practical industrial use within a relatively short amount of time. Founded by UC Berkeley professor Kris Pister, the inventor of smart dust, Dust Networks is working to commercialize a wireless mesh networking platform for enterprise-class monitoring and control solutions that is easier to deploy and less expensive than the solutions it replaces. Dust technology is already deployed by customer networks ranging from defense contractors to a major grocery chain. Energy markets present great opportunity for using IT to lower costs and improve operations. In the 90s there were companies -- such as CellNet -- that spotted this trend ahead of its time. Now we are finallyseeing new technologies gaining adoption. For example, Silver Spring Networks allows gas, electric and water utilities to replace old mechanical meters with a standards-based, two-way utility network infrastructure. These low-cost, high function network devices support the two way, real time control and monitoring of every aspect of the utility's operation, enabling new operational enhancements and service initiatives. Opportunities for new breakout investments in the enterprise will continue, as long as they are driven by bold new innovations and serving real customer needs. Insight Ventures CIO Panel Newletter. Contact: Vince Sosnkowski