Investing and Entrepreneurship in 2009

When it comes to economic and technology futures, Pittsburgh isn't Palo Alto. The market for startup capital in the Silicon Valley is wider and deeper than it is in Pittsburgh, and Pittsburgh investors have idiosyncrasies of their own. (They have an aversion to risk and an affection for short-term returns that is both curious and notorious for an early stage capital market.)

But connections between the two communities are strong, with individuals, firms, and money flowing back and forth more readily than outsiders might realize. So it's wise for Pittsburgh investors, technologists, and economic development firms (small fish) to pay close attention to what's happening on the West Coast (big fish).

Today's Times has a terrific summary of what the future looks like in Menlo Park. [Link here.] Are there likely to be similar developments in Pittsburgh? Excerpts from the Times:

Conversations with some of the leading venture capitalists about the types of companies that will receive some of the estimated $31 billion venture capital firms raised in 2008 offer a glimpse at the future of technology.

WEB 2.0 HEYDAY IS OVER Venture capitalists once poured money into Web sites that were free to users and that made money selling advertisements. If the site involved social networking, so much the better. But as growth in ad spending online cools and social networking becomes commonplace, the days of trying to be the next YouTube, Facebook or Yelp are over, said Jeremy Liew, managing director at Lightspeed Venture Partners.
. . .
Even Accel, an early investor in Facebook, might have turned that company away if it approached the firm today, said Theresia Gouw Ranzetta, an Accel partner. For Web sites that do not already have large audiences, “your business model may be just as plausible as it was 18 months ago, but we’re all more cautious about giving you a slug of money,” she said.

Instead, investors are looking for sites that make money in ways other than selling ads, like selling subscriptions or virtual goods. Selling 50-cent costumes for online avatars might not seem to be much of a revenue model, but pennies add up.

ENTERPRISE IS BACK Though investors are shifting their focus from the consumer to businesses, they are still reluctant to back makers of expensive software that manages data for companies.

“Big-ticket enterprise ideas that take $50 million to $100 million to get to market are going to be few and far between,” said Dana Stalder, a general partner at Matrix Partners. Instead, venture capitalists will invest in open-source software, Web-based software, Internet-based cloud computing and virtualization software that lets companies use less hardware to run applications. . . .

THE YEAR OF MOBILE? The iPhone and Apple App Store caught on with consumers in 2008, but investors are not convinced that selling ads or content like applications on mobile phones can make much money for them. More skeptical venture capitalists are sticking with what they know makes money in telecommunications, like carriers and makers of phones and accessories.

“Pure mobile content is overinvested, but hardware is underhyped,” said David Weiden, a partner at Khosla Ventures. Revenue from the iPhone and BlackBerry exceeds that of the entire mobile content market, he said. Battery Ventures is focusing on carriers, said Roger Lee, a general partner. His firm invested in MetroPCS, which went public in 2007, and last year put money into Pocket Communications, a wireless carrier in Texas that is expanding to the Northeast.

CLEAN TECH GETS REALISTIC Venture capitalists are still chasing clean technology. Through September, $3 billion was invested in technologies that create alternative energy and conserve power, up from $1.9 billion the year before, according to the National Venture Capital Association. But big, expensive projects like building factories to manufacture solar panels or biofuels are falling out of favor.

“The economic arguments for those businesses literally went upside down in a year,” said Paul Holland, the general partner in charge of the clean tech practice at Foundation Capital. Instead, some venture capitalists are looking at technologies that monitor energy demand, like software that tracks and regulates a building’s energy use.

PERSONALIZED HEALTH CARE Venture capitalists say one sector of the economy that technology has not yet transformed is personalized health care. Jennifer Fonstad, a managing director at Draper Fisher Jurvetson, is looking at companies that use information about a person’s genetic code to offer predictive medical advice or preventive health services or devices. Internet companies that help patients, banks and insurance companies manage health savings accounts or help people find assisted-living homes for aging parents are other likely recipients of investors’ largess.

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Pittsblog 2.0 is written by Mike Madison, a law professor at the University of Pittsburgh. Send email to michael.j.madison[at]gmail.com. Mike also blogs at Madisonian.net, on law and technology. Chris Briem of Null Space drops by from time to time.

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