Network Partner

“We want them [startups] to really understand the fact that 2009 is the year of survival. To grow and get to the next milestone and be successful, you need to survive.“

— Jeff Clavier, Founder and Managing Partner of Softtech VC

“And as I said, I've mentioned Microsoft BizSpark to all my portfolio companies, essentially, and a bunch of them have signed up for the program.”

— Jeff Clavier, Founder and Managing Partner of Softtech VC

All rights reserved. This case study is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS OR IMPLIED, IN THIS SUMMARY. Microsoft, BizSpark, Windows, and Silverlight are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries. The names of actual companies and products mentioned herein may be the trademarks of their respective owners.

SoftTech VC is a seed stage venture capital firm based in Palo Alto, California. Started in 2004, it has grown to become one of the most active angel investors in early stage Web 2.0 startups. In 2007, the firm launched a $12M seed fund focusing on the consumer Internet space, aiming at investing in more than 50 companies over 3 years. Here is our conversation with Jean-Francois “Jeff” Clavier, the founder and managing partner.

Q. Tell us a little bit about your VC firm?

“I run a firm called SoftTech VC, which for the past five years has been investing in seed stage opportunities in the consumer Internet space, either as a business angel or as a venture capitalist (VC), and the difference here is that business angels invest their own money, whereas VCs invest other people's money. Either as a business angel or as a VC, I've invested in 55 consumer startups since mid-2004, which makes me one of the most active investors in the space. Back in the late 80s, I did a startup in France (I’m French) in the financial services market. We sold that company to Reuters in 1993, stayed for seven years there, and then in 2000 I moved to Silicon Valley to become a VC with the Reuters Greenhouse Fund, which was their corporate venture arm. I did that for four years before leaving and starting to invest on my own in 2004 as a business angel.”

Q. Do you only invest in Silicon Valley?

“Ninety percent of what I do is in Silicon Valley. I have done a few deals in London, in Seattle, in Los Angeles, but the core of my investment strategy is really in Silicon Valley.”

Q. What have you invested in during the last five years, and what are your best stories so far?

“I've had five exits in my angels portfolio, one to Yahoo, two to AOL, one to Johnson & Johnson, and one to Hearst Interactive. So those are sort of realized successes. Some of the pretty well known companies I have invested in include Kongregate, or Buzznet, or Mint in the angel portfolio. Most recently, portfolio companies such as Tapulous, Social Media, or GetSatisfaction have made quite a bit news. A lot of the companies I've invested in are still stealth, so it's difficult to pinpoint the major successes in the recent fund. But I have a few that I've just named that have gotten some early traction.”

Q. How is your inflow in 2009?

“I have done two small follow-on investments in the existing portfolio, and I'm currently working on three new investments, one of which I might close today. What has changed over the past six months, I think it's fair to say that I'm spending much more time with my portfolio companies to make sure that they ride out this challenging financing and economic environment. I have seen the flow that comes to me slow down a bit in terms of quantity, but I've seen a rise in quality. So what I’m now getting is actually much better, well, measurably better in terms of the interesting opportunities that I was getting, say, six months ago. I never have a plan to invest in a set number of deals, but my guess is that I will do eight to ten deals this year.”

Q. Given the economic environment, you don’t think it’s time to stop investing?

“Oh, no, it's definitely not time to stop investing, it's actually a great time to invest, because, as I said, I think that the quality of the deals that come through is higher. I've seen that entrepreneurs now are not postponing the question of how to actually make money. They actually come with either pretty good ideas to what their business model is going to be, or they've put together businesses that actually generate money from the get-go, either because of the use of subscription services, because there's a transaction element, or some other means that are directly linked to a user’s activity. Essentially, a lot of the companies I've invested in over the past six months are already generating cash, just because they understood that using an advertising model was going to get increasingly difficult.”

Q. This newsletter will be send to thousands of software entrepreneurs around the world — what do they need to do to have their startup backed by your company?

“The best way is to figure out who in your network, the entrepreneur's network, knows me, so that a mutual connection can make a referral. These will tell me why they think this particular entrepreneur has something interesting to look at. The referred deals are the ones that get the most attention.

“If you don't know anyone who knows me, and that would be surprising because I know a lot of people, and a lot of people know me, then you can reach me directly by e-mail, at Jeff.Clavier@SoftTechVC.com, but it's better to try and find a person to make an introduction.

“The other alternative is to find me at one of the many conferences that I speak at or attend, because I always Twitter where I am, it's easy to find me, and pitch me for a few minutes. That way, we can have a quick conversation that establishes whether we should follow-up or not.”

Q. What areas are you most interested in these days in the software/Internet sector? What is your sweet spot today?

“Traditionally, I have invested in five sectors in the consumer space, and I still look at opportunities in those five. Social media as one, while a lot has been done, there are still some interesting opportunities. Search is still one of my big areas of interest, and I’m still very fond of gaming. I've done five or six different gaming investments, and I'm still looking at more. Consumer infrastructure, I haven't found a great name for that “bucket”, but it's called that cloud infrastructure that will enable services that you can use to run your business, or certain parts of your business. We can deliver a lot of value cost efficiently that people or companies will pay for, and that's where I see a lot of opportunities. So I'm going to do quite a bit in the area of cloud-based services in the next 6 to 12 months.

“I’m less hot on advertising monetization and ad networks — I've already done quite a few of those, and in this environment, those will be challenging to scale. And as for new spots, I think that mobile is definitely becoming interesting, because of these new platforms that we've seen emerging over the past 12 to 24 months. With the iPhone being sort of number one there, and gaining prominence with its distribution model that via the iTunes appstore, and with Android, and what Microsoft I’m sure is going to be doing, I think this will force a set of new innovations and businesses in the mobile space, outside of the control of the carriers. And I think this is very good news.

“I mentioned that I'm an investor in Tapulous, which is the maker of Tap Tap Revenge, which is the number one game on the iPhone, and we've seen those guys grow from zero to 6 million users in about six months, and at an increasing, growing rate of adoption, which is quite amazing, because there was just no way to get to that sort of penetration in such a short time in a tighter controlled environment. So I'm pretty interested in following that market.”

Q. So what advice do you give your companies in these difficult times?

“We want them to really understand the fact that 2009 is the year of survival. To grow and get to the next milestone and be successful, you need to survive. Unfortunately, a lot of companies are getting caught up in their growth plan, and the fact that they have to spend money on marketing to grow. You have to realize that unless you survive 2009, and are able to sustain yourself through what is expected to be one of the most challenging funding environments, over the past however many years, then there won't be any sort of success at the end of the road.

“So it's a matter of being very sensitive to costs. It's been widely publicized that VCs were asking their companies, or suggesting to their companies to cut back on expenses, and only focus on the core projects. They need to make sure that they can last for quite a long time on the cash they have raised, and the revenue that they are generating.

“Being fiscally conservative is very important, but at the same time a lot of existing players scale back their efforts — and that unlocks opportunities to grow and take market share. So it's a balanced effort between being very conservative and not spending too much money, and trying to figure out what opportunities are there.”

“If you have to raise capital, then you have to be prepared to spend at least six months of the year on the raising campaign, go all out in the market and figure out who out there might actually be interested in funding you. And the good news is that I've seen first hand that there are financing rounds happening, I've had six portfolios close their next financing round since October 2008. So these do happen, they just take a long time, and are not always done on conditions or terms that you like. But, in this market, raising money, or achieving the goal of raising money actually is the most important.”

Q. As a BizSpark Network partner, can you talk about when you first heard about the program? We understand that you’ve invited all of your portfolio companies program to join?

“About two years ago I had a discussion with one of the executives at Microsoft about why open source and the LAMP stack were so popular in the startup world. And I just said, well, listen, it's great, it's open source, so everyone has access to the source code, which introduces an element of trust, but first and foremost it's free. And you cannot beat free when you are a startup who doesn't have any sort of means. And one of the bi-products of using open source software are free infrastructures — so that means your cost of development, your cost of starting up a business have dramatically been reduced over the past 8 years, where it used to cost $3 to $5 million to get a product off the ground, because you had to pay all those licenses and everything, and now it's basically down to a few tens of thousands of dollars.

“ I was pleased to hear that you guys had decided to essentially make your software available for the same price, i.e., zero, to startups so that they can have a choice of infrastructure and stack that they want to support and leverage, as opposed to being forced by the cost factor to make that decision. I was really excited to hear about BizSpark, and the fact that now if a startup wants to go with the Microsoft stack they can, and if they want to go LAMP stack, they can. I think it's a very welcome move. And as I said, I've mentioned it to all my portfolio companies, essentially, and a bunch of them have signed up for the program.”

Q. What type of feedback are you getting from the portfolio companies in the BizSpark program?

“Some of them were already using the Microsoft stack, and they welcomed the opportunity to get the rest of the stack for free for three years, and so forth. Others were not building on your stack yet, but it's a good way for them test it, figure out whether they want to, or should support it, as well. And for a few it might be an opportunity to transition to your stack from what they're using today. The feedback has been positive, overall. I think the outreach of the program has been great. In a couple of months, as people will have had six months of exposure, they will start supplying you with feedback and potentially ask for either more software, or some different types of infrastructure support, we’ll see. I know for a fact there are a couple of companies that I’ve been actively working with that are really pleased with the BizSpark program, and the support that they have received.”

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