We are excited to announce our investment (along with Javelin Ventures) in 3scale, a leader in API Management.  We’ve been very impressed watching Founder/CEO Steven Wilmott and team build the company and work diligently to find product-market fit.  We believe they have the right product at the right time.  It is the only developer self-serve product on the market, requiring no interaction with salespeople to get started. It is a freemium product, delivering substantial value at no cost.  It is highly scalable and configurable, adds no latency and avoids putting an additional vendor (and potential point-of-failure) *between* a platform and its customers/partners.  It is the least expensive commercial solution on the market.  We’re voting with our feet and joining the 3scale team with full-throated enthusiasm.

 

My friend and Netscape Co-Founder Marc Andreessen famously wrote in 2011 that software was eating the world (http://on.wsj.com/ZjM0C8).  Just two years later, it looks like APIs are taking over.  it used to be that software companies divided fairly cleanly between “platform” companies and “application” companies.  These days, if a company is in the software business, it must have a strong API to expose its features and capabilities to its partners and customers.  If a company’s product collects data, making this data available to analysts through an API let them add value to its customers.  Johnson Controls (a 125 year old company founded by the inventor of the thermostat) rolled out such just a platform product using 3scale in 2012.

 

This is a fascinating time in the API Management space.  Mashery (a cloud-only solution which stands between a platform and its partners) was acquired by Intel this week.  Layer7 was acquired by CA this week.  The Programmable Web (a thought leading web site) was acquired by MuleSoft this week.  These major companies are seeing the momentum in the market and have become believers that is can be a large and highly strategic market.  We agree.  But we think a developer-friendly, self-service and highly scalable product with a freemium approach is a unique and much-needed offering. Give it a try and let us know what you think.  

We are excited for the rest of the world to get a look at what NovoEd is doing with today’s announcement http://bit.ly/ZtlAtX . Founder Professor Amin Saberi began what became NovoEd because he wanted to create a collaborative and experiential learning experience for his class in the Management Science and Engineering Dept. of Stanford. It was rolled out as Stanford’s Venture Lab and it has now served hundreds of thousands of students on courses like Creativity, Technology Entrepreneurship, Sustainable Design and Product Management.

NovoEd’s philosophy is to advance the online learning experience by making online courses more experiential, interactive, and collaborative. Its platform provides a connected, effective and engaging learning environment for students using a combination of techniques in crowd sourcing, design and analysis of reputation systems, and algorithm design. Students not only have access to lectures by thought leaders and professors from top universities, but they are also able to form teams with people around the world and work on class projects.

NovoEd offers courses and programs by thought leaders in a wide range of fields and in partnership with universities. By fostering online collaboration, team work and project-based learning, it nurtures problem solving, collaboration, and leadership while addressing specific topics and business opportunities.

We are thrilled to partner with Amin and NovoEd help them build the platform for delivering learning opportunities at a massive scale.

We’ve frequently referred to Applied Big Data as one of our core investment themes.  It seemed about time to drill down and discuss some how we think about it in more detail.  The simplest answer is that they are data-driven applications at massive scale.

For those who haven’t already figured out what Big Data is (in spite of the hype), I’ll summarize it in layman’s terms. Big Data refers to the extraordinary wealth of data that the current world generates. As we used to say at Netscape in the mid-90s, Internet scale is WAY bigger than Enterprise scale. With Facebook at 1billion users and 2 billion smart phones generating clickstream data, this statement is doubly true. Broad sensor networks from logistics infrastructure to street parking similarly generate tons of useful data.

Traditional Enterprise data was structured, meaning it fit neatly into rows and columns like an Oracle database (or even a spreadsheet).  Facebook’s relationship data or Google’s logfile data is unstructured and no longer fits that approach.  Open Source tools like Hadoop, Cassandra, Mongo DB and Hive were developed to store, manage, search and analyze both structured and unstructured data – at massive scale.

There is clearly much good work and many investment opportunities in the platforms themselves, but years of innovation history suggest that Applied Big Data are as big an opportunity as the underlying platforms.  Our focus at Costanoa is on data driven applications, marrying: #1 a solution to a large business problem; #2 best in class machine learning and predictive analytics AND; #3 proprietary data.  When these elements are combined they can create a tremendous value proposition for customers – and provide the foundation for a great business.

There are some several good examples, some well known and some less so.  The most notable company that fits this profile today is Splunk.  It provides a highly scalable platform for companies to manage their logfiles.  My own thinking on Applied Big Data originated with my investment behind Matt Glickman and Mark Selcow in the Series A of Merced Systems in 2001.  They believed it could use data to help improve the productivity of human capital.  By focusing initially on the call center, where every action is already instrumented, they were able to prove value very quickly. Companies like Dell, Sprint, and Delta Airlines successfully reached for the product when in operational crisis.  As a result, Merced Systems was sold for $192m to Nice Systems in 2011, having raised a total of $2.5m.  The key lesson here was “in-stream data aggregation” – finding places where processes are instrumented, but existing data assets are messy, hard to integrate, or simply left on the cutting room floor.

A canonical example in the Costanoa portfolio is DemandBase, which provides a Business-to-Business (B2B) Marketing Optimization platform leveraging proprietary data that appends IP addresses to traditional business information. As a result, customers like Salesforce.com and Hewlett Packard can identify anonymous users visiting their site by business identity and type, target their messaging, improve conversion rates and generate more qualified leads. Demandbase recently rolled out a B2B product to target advertising by company to enable customers to increase engagement with their key prospects.  The company began by aggregating existing data and spent years curating it. But the part about which we got so excited is that the majority of the data has now been generated by Demandbase and its customers as they interact with the system, providing classic network effects.  At Costanoa, we’ve invested with similar theses in companies like Risk I/O for vulnerability intelligence management, Guardian Analytics for prevention of online banking fraud, and Return Path in email intelligence.

We’ve learned a few things in pursuit of this hypothesis.

• All of these companies started with a high value business or technical problem.  Demonstrating early that this data-driven approach creates value for customers is a critical first step.
• In-stream data aggregation, tapping into an existing data flow, enable each user to get much more out of the system than they put in.  Expecting users to input data is a long putt – and a bet we’d rather not make.
• In order to create real enterprise value, it is important to aggregate and curate and originate data.  A clever data origination process creates network effects.
• Best in class predictive analytics and machine learning can provide exceptional value to customers, especially when operating on proprietary data.  To the question of which is better, great algorithms or great data, we say BOTH.

When these elements are combined, cloud-based products and services can create great value for customers and let entrepreneurs build important and valuable companies.  We’re looking for more such opportunities.

I’ve had two amazing experiences in the last 48 hours that really highlighted the role of gratitude in being an effective investor . . . and professional . . . and human being.

First, I met with Phil Wickham, CEO of the Kauffmann Fellows program.  We were talking about some of the characteristics that are important raw material for young venture capitalists whether going into his program or joining the team at Costanoa Venture Capital.  After hitting on all many of the obvious skills and characteristics (smarts with intellectual curiosity, love of the product and technology, ability to identify and partner with talented entrepreneurs and executives) Phil started, “but the hidden ingredient  is . . .”

With a pause hanging there, I responded “Humility,”

Instead, he said, “Gratitude.”

We reconciled that they are two sides of the same coin. Humility is needed not just because some investments will inevitably fail, but also because entrepreneurial teams are truly the ones risking their professional lives. They are the ones making product, finding its market and servicing customers.  They are the proverbial Man in the Ring.  With that recognition, what follows is gratitude for the amazing community to which we belong in Silicon Valley.  We are surrounded by people who make the extraordinary happen every day. Entrepreneurs, angels, venture investors, thriving growth companies, and universities all play critical roles in the ecosystem.  Although, it is easy to take for granted the entrepreneurial culture that was built over the years, I am grateful for it and I recognize that we truly stand on the shoulders of giants.

Second, I met an entrepreneurial team yesterday morning for coffee. One of them reached out his hand and said, “I think I’ve met you – or at least your kids.” Pregnant Pause . . .  “I’m on ski patrol at Sugar Bowl.”  I could only bow my head in gratitude.  Two years ago, my then 12 and 8 year olds were skiing first run together while I sipped a cappuccino.  The afternoon before had been warm and it got very cold over night, freezing everything (even the groomers) into a dangerous sheet of ice.  They went into a gulley and immediately started sliding, bouncing over moguls, barely missing rocks and trees, for 900 feet.  My coffee partner yesterday was the First Responder. He checked them out and calmed down two terrified kids. He and his partners got them out safely.  I’ve never had the chance to thank him personally – until this morning.

Knowing what crazy things live can deal us and how much entropy (tendency toward chaos) there is in life and business, what an extraordinary village it takes to things happen that we in Silicon Valleys sometimes take for granted, provides me ample humility and gratitude. In the immortal words of Jim Harbaugh, “Who’s got it better than us?!”

* I’d also like to acknowledge inspiration from a couple of other veteran VC bloggers. Recent posts by Brad Feld on vulnerability and Scott Weiss on Authentic Leadership  convinced me that this was worth writing about.

Our friends at Intacct maintain a blog that covers a wide variety of industry topics. I recently had a conversation with the team and you may enjoy the blog post that came out of it. Click here to read View from the Cloud: the Intacct Blog!

I enjoyed this piece of local coverage from the January 4th edition of the Silicon Valley Business Journal. Rather than edit so I look smarter, I thought I’d it include in its original form: http://bit.ly/106TUkl
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Greg Sands launched his venture capital firm, Costanoa, in 2012. In December 2012, Costanoa announced it had raised $100 million and staked 10 companies, with investments ranging from $500,000 to $3 million.

After 13 years with Sutter Hill Ventures , I decided to take a risk and launch my own VC firm. I was motivated to create the firm because I saw the opportunity of an underserved market.

The timing felt right because I had a very good year where my portfolio had three significant liquidity events.

Over the last few years, I saw enterprise-focused entrepreneurs who were told by venture capitalists, “Hey, come back in a year, when you need $5 million.” But what they needed right then was $1.5 million.

I kept thinking about that and how I could build a firm that would satisfy those needs.

There is no doubt that it’s much riskier to go off on one’s own, but there were three good reasons to do it.

First, I really did feel that there was a market opportunity.

Second, I felt that my highest and best use and the thing that would make me the happiest was to create the firm that I wanted to create.

Third, I felt I had the right mix of experience and credibility — and that at 45, I was still young enough and energetic enough that I was willing to go put it all on the line and give it a shot.

I knew it would involve a lot of hard work, and in Q4 of 2011, I started the planning phase. I asked my advisers about what they thought it would take. Nobody said, “That’s a terrible idea” or “I think you’re crazy.” Lots of people said, “Wow, that’s a big move, and I’m so excited for you and let me know how to help.”

The first thing I did was talk to a bunch of entrepreneurs and other venture firms, even small firms, to validate that the market opportunity was there. I had a bunch of conversations about strategy and approach, level-headed business conversations, about what I wanted to do.

Next, I had to have capital to invest. I began networking and business development to get the funding. I had to put a set of materials together, and I assembled a virtual team. I put together a presentation, pulled together the data and put together the due diligence material that people wanted.

In the end, I think I met with 80 institutional investors to get about a dozen of them to say yes.

It required $40 or $50 million to do what I wanted to do — that was the threshold. That was the first close, which was June 7, at which point we were up and running. We were in business. It was a huge relief to get there and to know that we’ve at least got ourselves to the starting line and now we can run the race.

At the same time, I woke up the next morning with this incredible sense of responsibility — awareness of the responsibility and trust that people had placed in me, which is the next motivation for the next step.

Lastly, I had to find those great entrepreneurs and companies to invest in. That phase is ongoing.

I’m continually meeting with entrepreneurs, finding great entrepreneurs who are trying to solve real problems by building great technologies. We are really focused on software-as-a-service, but a lot of what we like is the interface between consumers and businesses.

A really good example of the kind of company I’m talking about is Demandbase Inc., based in San Francisco. They develop proprietary data that lets a business identify business owners who are coming to their website.

It has an incredible value proposition to its customers, which is always the first thing I’m looking for. And it has a proprietary data advantage that gets bigger over time rather than shrinking over time. I’d invest in a company like that all day long.

Our No. 1 goal is to find a small handful of great entrepreneurs where we can build shared vision. Job No. 2 is to harness all the energy and goodwill that has come out of the launch. We want to build a vibrant Costanoa community that can really help these entrepreneurs and demonstrate that we’re an important, value-added player in the ecosystem. But at the same time we want to treat our entrepreneurs and our partners with respect. If we can do that over the next 12 months, I’d be thrilled.

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Thanks to Silicon Valley Business Journal for authorizing our use of this article. Article and Interview by Gloria Wang Shawber. @SVbizjournal @glois_lane

Where Cloud meets Data

We have been hard at work building Costanoa Venture Capital behind the scenes, and we are excited to tell you more about the firm and our unique approach. We’ll use this forum to talk more about insights we’ve gained from working with our portfolio companies and key themes we’re interested in exploring.

I invite you all to join me in this discussion overtime on this blog and follow me on Twitter at @gsands and the firm at @costanoavc.

 

First the facts

Costanoa Fund I is a $100M early stage investor in cloud-based services solving real problems for businesses and consumers by leveraging data and analytics. We believe the explosion of the data produced – due in large part by the Internet, mobile devices, and increasingly, by machines – and the development of extremely powerful analytical platforms has created a data revolution. Applications of what we call “Applied Big Data” often (but not always) have business customers. In fact, many of the things we really like are at the intersection of business and consumer markets.

We expect to lead early stage rounds with $500,000 to $3M checks. We are an active and value- added investor. We are small enough to make early stage investments and yet have the capital base to support companies over time.

 

Who we are

Right now, I am sole Managing Director at Costanoa, which streamlines both decision-making and partner meetings. I founded the firm after 13 years as an investor at Sutter Hill Ventures, where I led early stage investments in companies like Merced Systems, QuinStreet, Feedburner, AllBusiness, and Youku. My personal interests have always been working on innovative solutions to important problems, figuring out how to create rapid and sustainable growth, and working shoulder to shoulder with the best people I can find.

Before Sutter Hill, I was the first hire at Netscape Communications, following its founding engineering team. I was the company’s first product manager, wrote the initial business plan, gave the company its name, and created the SuiteSpot business unit, which grew from zero to $150M in revenue. I also served as manager of business development at Cisco, where I architected a global channel management plan. You can read more of my detailed bio here, but most importantly, I founded this firm because of my long-standing love of entrepreneurs and start-ups. With the launch of Costanoa, I am excited to build such a start-up of my own.

I started this journey in early 2012, wanting to address this emerging market opportunity and to reinvent the early stage venture capital business in a way that works with my interests, skills and values. After extensive discussions with entrepreneurs, investors and venture colleagues, the result was Costanoa Venture Capital. The firm’s name originates from the Costanoans (also known as the Ohlones) who were the original settlers of Silicon Valley.

The founding principles of the firm are:

• Making “right-sized” investments in early stage companies and yet being able to support them as they grow
• Building a firm of value-added investors who love working with companies and can help in initial market entry, achieving product market fit and going through the sales learning curve
• Investing in great entrepreneurs solving real problems and building real companies

 

What We’re After

• In core sectors like Software as a Service (Saas), we find that consumer interfaces and distribution strategies (e.g. freemium) create interesting opportunities even for Enterprise-focused companies. Our recent investment in Risk I/O is a great example of a freemium product for Enterprise Security. Adding both a social layer into applications enables different levels of collaboration around specific business problems or processes – harnessing the power of extended enterprise in a completely different way.
• We’re actively exploring what we’re calling “Applied Big Data,” where companies aggregate, curate and originate proprietary data AND drive it into high value applications. DemandBase does this for B2B marketers, Guardian Analytics for fraud prevention and Inflection for consumer access to public records. We’ll explore Applied Big Data is subsequent posts, but we think there is a lot of opportunity there.
• We’re also active in marketing and monetization, which are largely SaaS applications focused on enabling publishers, e-commerce companies and online marketers. These are technologies that focus on creating tremendous value out of previously underutilized assets. For example, LinkSmart helps online publishers manage their internal link structure, and our recent investment in iSocket enables advertisers and publishers to deliver on the vision of Programmatic Premium.

I think we are fortunate to come to market at a time when many are just beginning to see the opportunity where Cloud meets Data. It’s therefore an exciting time.

Our unique investment thesis allowed us to raise a $100M first early-stage fund from both traditional, institutional Limited Partners and a group of Silicon Valley entrepreneurs and CEOs. We are appreciative of the support of my prior firm, Sutter Hill Ventures, who participated as a sponsoring LP. And we have been able to include positions from some great companies, where I previously led investments: Return Path, Inflection, Datalogix, Intacct, Guardian Analytics, DemandBase and LinkSmart.

I cannot express how happy we are to shift focus back to making investments, building the Costanoa Community, and helping entrepreneurs (as opposed to our own fundraising). We aim to find more great young companies – and build a venture firm and ecosystem that serves them well. We want to be there with entrepreneurs when they take chances, make mistakes, learn, improve, and ultimately succeed. We’ll be engaged in the same exercise – learning and (eventually) succeeding right along side them.