Venture Investor Has High Hopes Despite Economy

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At times, Tom Huseby almost sounded like he was giving a stump speech.

"There's one thing that hasn't stopped at all and that's the great American startup machine. It will continue to produce. That's why this country is great," said Huseby, managing partner at SeaPoint Ventures, addressing a small group of people, many involved with wireless startups, at the Mobile Northwest conference in Seattle on Monday.

Huseby is a bit of a legend in Seattle. His fund has fueled startups in the area and beyond, particularly in wireless. He's revered for his keen insight into technology trends. Plus, he's funny.

"It turns out that not getting your money back is so much better than knowing you lost it. Isn't it? It's kinda nice to hope you might get your money back than to say, 'God, it's gone'," he said. That's his reasoning for why venture capital is actually now considered a safe bet. "Who would have thought that early-stage venture capital looked like one of the safe investments," he said. "A year ago people would have laughed. Who would have thought it'd be better than mortgages?"

Huseby offered his optimism about how the economic downturn might only minimally affect the startup engine in the U.S. and his opinions about what he continues to look for particularly in new mobile companies.

The downturn is unlikely to have a major affect on venture capital because the venture capital machine doesn't rely on debt, he said. "If you're an early stage venture play, you don't really rely on debt markets. You rely on equity. That equity comes from people who don't borrow to give it to you. No one borrows money to create a venture fund," he said.

Venture investors are also typically prepared for a long return on their investment. "Everyone who raises money from us says, 'in three years we'll be cash flow positive.' We nod and say, 'that's nice'," he said. But in reality, he doesn't usually expect a return before eight or so years, he said.

"There's no reason to panic despite the Sequoia panic notes," he said. He was referring to reports of a meeting that Sequoia Capital reportedly called recently to warn its portfolio company of dire times to come because of the economic downturn.

Still, Huseby acknowledged that there is certainly an economic crisis. "We will have high unemployment rates and people are really going to be suffering. We need to help people who aren't as well off as we are. Those are economic realities," he said.

His sentiments about the venture capital markets were largely backed by a report issued over the weekend by PricewaterhouseCoopers and the National Venture Capital Association showing that venture investing in the third quarter this year is about normal, though they expect a dip in the coming quarters.

The report showed that venture capitalists invested US$7.1 billion in 907 deals in the third quarter in the U.S. While that's down from the $7.7 billion invested in 1,033 deals in the second quarter, the researchers said the third-quarter numbers were in line with historical norms for the quarter.

The danger in the future, the researchers said, is if new companies struggle to find exits because of the economy. In that case, investors will have to continue to put money into their portfolio companies to support them, channeling their resources away from new deals.

For new companies particularly in the wireless industry hoping to find available funding, Huseby offered some advice. Startups will need to have a very clear business plan. "Hope is diminished. There's no question that the Sequoia panic notes have reduced the probability that you can get funding based on hope," he said.

He pointed to a couple of aspects that he looks for when considering new investments. "We look for a winner-take-all Switzerland play," he said. That describes companies that have offerings that work best if essentially all operators or mobile-phone makers adopt their offerings. He used Tegic, the predictive text technology, as an example. "How many different ways are people going to learn to input text? Probably one," he said. SeaPoint is an investor in Tegic.

Location-based applications are also looking interesting, although he had a word of caution to developers. No pitch that starts with "say you're walking by a Starbucks," is going to work, he joked. "Just eliminate that line," he said. The example, usually in which someone walks by a Starbucks and automatically receives a coupon for discounted coffee to their phone, has been used for many years by companies as they try to jump start the location-based services market.

Applications that can remove what he calls "viral road blocks," are also appealing. The slightest discouragement -- such as an application that only works with one operator or on a certain type of phone -- can completely stop an application from becoming viral, he said.

He's also excited about mobile advertising. "The really neat thing is that people don't make the decision to consume advertising," he said. Still, mobile advertising companies will need to convince advertisers to budget for the expenditure. "The key to mobile advertising is to get out of the 'new shit' budget," he said. That's his description of a budget line some companies have for experimental practices.

Huseby, who primarily looks at wireless companies, said Seattle is the place to be for mobile. "Seattle it turns out is the center of the universe for mobile apps. You have to go to London before you find a higher concentration of expertise," he said.

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