Black Enterprise — August 2011
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Geeked!
Marcia Wade Talbert

Tech entrepreneurs check in to Silicon Valley, hoping to cash out

RAISSA NEBIE HAS ALWAYS BEEN A RISK TAKER.

The intrepid nature of this Côte d'Ivoire émigré with roots in Burkina Faso has taken her to the halls of Howard University, the rough-and-tumble offices of Wall Street, and the kitchens of the top-rated French Culinary Institute in New York City. She even left her position as a private equity associate to pursue her passion for fine cooking at Le Citrus Etoile, located steps from the Champs Elysées in Paris.

She quickly discovered that preparing food didn’t prove as rewarding as bringing people together through food. That epiphany led her to the idea for Spoondate—an online/mobile, location-based service helping food lovers make social and romantic connections. “Culinary school led me to the Web,” says the 31-year-old entrepreneur. “I came home one evening and booked a one-way ticket. I got to San Francisco at the end of last summer and didn’t have a clue about what the city was about. I just knew there were lots of engineers.” But Nebie has now come to understand what so many entrepreneurs knew: Silicon Valley is to tech startups what Hollywood is to budding filmmakers. It’s the place where dreams come to life.

Nebie, who hadn’t used a computer before the age of 18, decided to learn several Internet languages, including CSS, HTML, and Java Script, enabling her to craft the user interface she wants her audience to experience.

Spoondate helps you find food based on people or people based on food. After entering the types of food you are craving and your location into the website, you will see a stream of all of the people in your area who are also craving that same type of food. You can scan the list for someone you want to meet and have dinner with. By handling the programming chores, Nebie saves as much as $115,000 a year until she can afford to hire a front-end engineer. The Back-end code that runs the algorithms that produces matches was created by co-founder Van Nguyen, a sofware engineer who once worked for Metamoki, a social gaming company that at one time drew in $1 million per month from the multiplayer game Mob Wars during Facebook’s early days.

Together Nebie and Nguyen own more than 90% of the company. Less than a year afer teaming up, they’ve raised $50,000 in seed money from 500 Startups, a Mountain View, California-based incubator for newly minted Internet ventures, for a 5% equity stake in their company.They raised additional capital through issuance of a convertible note to The Initio Group, a Vancouver, British Columbia-based early stage investment firm. The note will convert only afer Spoondate raises its priced equity round, a set price that will allow investors to purchase a stake in the venture.

Spoondate was so popular that when it first launched in private beta in June, signups occurred so fast that it reached its membership quota within a couple of hours and the site almost crashed. This led Nebie to limit users to invite-only in San Francisco until it’s ready to launch publicly this month. Right now, membership is free, and Spoondate generates revenue by selling dining experiences in the Bay area. They are also finalizing a paid membership that will include special dining perks. To grow Spoondate and offer dining experiences outside of San Francisco. Nebie and Nguyen need $500,000 in capital, which they will use to round out their team And push sales and marketing efforts in other major cities such as New York, Los Angeles, Chicago, Boston, and Miami.

Nebie won’t be the first or the last black entrepreneur to travel to the tech mecca to advance her venture. In fact, eight black-owned startups traveled to the Valley this summer for a similar, though less permanent, experience through a nine-week program called the NewMe (New Media Entrepreneurship) Accelerator. As members of the program, these innovators are part of an incubator that provides instruction, technical expertise, and financial assistance—building blocks necessary to propel a rough idea to a viable venture.

Programs such as NewMe will drive the type of transformative industrial innovation that will lif American enterprise to “out-innovate … and out-build the rest of the world,” as stated by President Barack Obama. Capital is the lifeblood of innovation, an elusive commodity for African American startups. The number of African Americans launching tech firms nationwide is dismal: Less than 1% of venture capital-backed companies were black-owned in Q1 and Q2 of 2010, according to a survey conducted by CB Insights, which tracks venture capital, angel, government, and private equity-backed private companies.

There have been recent attempts to level the playing field though. Earlier this year, the Small Business Administration committed $2 billion as a match to private sector investments for high-growth ventures over the next half decade. Of that, $1 billion will go to funds that invest growth capital in companies Located in underserved communities. And the Obama administration introduced Startup America Partnership, an independent nonprofit to work with corporations and foundations to further develop high-growth firms. Moreover, some private corporations have initiated financing programs of their own. For example, as a result of its merger with NBC Universal, cable giant Comcast pledged to invest $20 million to expand such opportunities for minority entrepreneurs.

Even with these developments, blacks still are not plugged into prime capital sources in Silicon Valley, birthplace of the semiconductor and home to leading tech giants Apple, Intel, and Google, among others. To position their companies for financing and create a platform to grow into industry leaders, black entrepreneurs must take a number of steps: develop a strong concept; build a top-flight, technical team; create an infrastructure to protect ideas and fully execute business models; and cultivate a powerful business network.

Says Stanley T. Smith Jr., a principal at Syncom Venture Partners (No. 7 on the be private equity firms list with $410 million in capital under management): “Venture capitalists are skilled at pattern recognition and tend to invest based on identified patterns that have resulted in successful investments. One of the most common patterns employed by investors is investing in entrepreneurs from their ecosystems—people they know or people that have been referred from trusted sources. If you are not a member of an investors extended ‘trust’ network then it Is proportionally more difficult to earn their trust and investment dollars. Ofen, but not always, investment decisions are made based on access and familiarity rather than color or ethnicity.

REWIRING THE TECH BUSINESS

Angela Benton, founder and CEO of Black Web Media L.L.C., which produces the popular tech blog Black Web 2.0, and creator of mobile location-based app Cued, was inspired to help start the NewMe accelerator afer organizing a conference last year in which approximately 100 entrepreneurs and policymakers reviewed barriers that kept minority firms from evolving to the level of Twitter and Facebook. “Those entrepreneurs felt like they weren’t ingrained in the industry and it has hindered their success, not necessarily because of race but because of location,” says Benton, who lef Charlotte, North Carolina, to join the seven other NewMe participants. “It’s hard to get in the Silicon Valley network if you’re not vetted by somebody who is already very successful.”

Most creators of new media startups launch enterprises upon.

Graduating from top-rated computer science or software engineering programs and afer receiving additional training as employees of large, established companies. African Americans earn only 4.7% of all engineering bachelor’s degrees and remain vastly underrepresented in employee pools at leading tech companies. Blacks averaged just 2.5% of employees and 2. 0% of officials/managers at the top 10 tech companies in Silicon Valley, according to Department of Labor data from 2005 obtained by Silicon Valley’s Mercury News through a Freedom of Information Act request. However, five companies—Google, Apple, Yahoo, Oracle and Applied Materials—convinced federal regulators to withhold gender and race data, stating that it would hurt their competitive advantage. The Black Economic Council, along with the Latino Business Chamber of Greater Los Angeles and the National Asian American Coalition, sponsored several protests this year against Apple and Google and have, among other things, requested that the Department of Labor release the withheld data and that the Obama Administration deny temporary foreign worker visas for any company with less than 5% black employees.

Such stats aren’t surprising but should be considering African Americans are among top consumers of tech products and adopters of social media. Smith admits that “we’re not producing meaningful numbers of professionals from our communities with the requisite skills nor access to the hiring ecosystems that would enable employment at innovative technology leaders such as Google, Facebook, Zynga, etc., and then take their turn at being entrepreneurs.” He adds, “More generally, we are not creating a culture of entrepreneurship in highgrowth technology sectors.”

That’s why NewMe is so groundbreaking. It offers a select group of entrepreneurs access unavailable to most aspiring African American tech founders: total immersion in Silicon Valley’s culture and mentorship from the digital elite. NewMe provides living expenses for all eight participants; Benton and partner Wayne Sutton, founder of SocialWayne.com and an expert on locationbased business development, decided participants would reap greater benefits by sharing quarters in a house located in Mountain View, California, just minutes from Google, one of NewMe’s sponsors. Google’s corporate headquarters served as the venue for the NewMe welcome reception in June, and top management has enlisted sofware developers to provide time, instruction, and mentorship to program participants.

GAINING THE RIGHT SKILLS

Whether tech entrepreneurs are part of an incubator or not, they must take key steps that enable their ventures to reach full potential.

“Technology is such that your idea needs to be special, it needs to solve a problem, and it needs to work,” says Chuck Baker, CEO of Fileblaze Inc., a cloud-based system for media professionals such as filmmakers, musicians, and producers who need to securely transfer and store large uncompressed files that can be viewed in real time without need of expensive, memory-intensive sofware.

Baker founded Fileblaze in 2009 with his partner/investor, Rhahime Bell. Fileblaze is differentiated from its file-sharing competitors such as YouSendIt and Dropbox by its speed; access controls, which require passwords to preview files and disable the recipient’s ability to download files; and streaming features. The 41-year-old former music producer and brand strategist put up six figures of his own money. The duo raised another $2 million in angel financing from 15 family members And friends, including former basketball star Alonzo Mourning and filmmaker Malcolm Lee. They’ve since brought on several angel investors, adding from $10,000 to $750,000 each, for a total that has exceeded $2.5 million. Baker plans to raise $15 million on their next round of financing.

The money didn’t flow into their coffers all at once. They would receive $50,000 here or $200,000 there. So instead of trying to build Fileblaze all at once, as the company received capital injections, Baker decided to target specific milestones such as the ability to stream media without downloading it or installing access controls that would limit viewing to the intended receiver. They started out with only four developers, recruited 75,000 users for a beta test group, and released the product four different times over 18 months updating afer each iteration. Before the final launch on July 4, users had already transmitted 25 terabytes of data. With each milestone Fileblaze surpassed, the value of the company would increase. This way, Baker and Bell could command larger sums from investors for the same percentage equity stake and thereby raise additional funds without significantly reducing their majority equity position. Baker, the majority shareholder, projects revenues of $350,000 to $500,000 in 2011.

Having worked as the director of strategy at Village Ventures, a New York venture capital firm, Baker, who taught himself how to write computer code over a seven-year period, knew investors wanted more than a concept. He sought to collect proprietary research, amass a team with product development skills, and build a workable product capable of producing substantial returns. “Invest in your own intellectual capital so that you can provide value to your organization,” says Baker, whose father worked for IBM for 30 years. “That is going to be your biggest value. Go to school. Learn at night. Get a team of people to work under you. Do whatever you need to do to bring intellectual capital to the table.It shouldn’t cost much. It will be your payment in kind.”

BUILDING A POWERFUL TEAM

In the tech community, the team ofen excites venture capitalists as much as the idea or individual. In fact, investors are more likely to pony up dollars for a talented tech squad than a lone prodigy. “Investors are keen to see groups of smart motivated people who are going to do what it takes to make it through the companybuilding process,” says Johann Schleier-Smith, 32, co-founder of Tagged, a social discovery website for meeting people, playing games, and sharing interests. “You can’t do things alone, but if you get a nucleus of a team you can do great things.”

With more than 100 million users worldwide and $32.5 million in revenues for 2010, Tagged is now on track to generate $45 million in 2011. The company has been profitable since 2008 as a result of its three distinct revenue channels: virtual currency micro-payments, premium subscriptions, and advertising. They plan to boost staffing by the end of the year, for a total of 150 employees. But in the beginning there was only the dynamic duo, Schleier-Smith and his partner and childhood friend Greg Tseng. The two grew up in McLean, Virginia, working together on science projects in middle school. Eventually both would study physics at Harvard University. During their time there they developed several Internet companies, including a price comparison website to help students get the best deals on books at the student bookstore.

While in graduate school at Stanford University, they launched Jumpstart Technologies, an incubator for their business concepts, which in turn spawned Tagged in 2004—roughly the same time that other social network was being developed by another Harvard student. Later, in 2007, realizing they couldn’t outpace Facebook, Schleier-Smith and Tseng switched their objective from a social media company that connects acquaintances to one linking up new contacts.

As chief technology officer, Schleier-Smith figures out how to make ideas conjured up by the team functional. Tseng, CEO, provides the business development, vets acquisitions, and oversees product development. They realized, however, their combination of talents represented two-thirds of a whole, and tapped their mentor Reid Hoffman, co-founder of LinkedIn and a former PayPal executive critical to financing efforts, to serve on Tagged’s board of advisors.

Both Tseng and Schleier-Smith have a double-digit, controlling percentage ownership in Tagged, with venture capital firm the Mayfield Fund as the other principal owner. Obtaining funding requires that founders of startups not only spend hours toiling in the lab but dedicate sufficient time to promoting their products and pressing the flesh with prospective investors. This summer Schleier- Smith and Tseng mentored participants in the NewMe Accelerator by helping them navigate the rocky terrain of making connections and forging alliances as an outsider in the Valley.

PROTECTING YOUR CONCEPT

While it’s important to collaborate, new startups must be careful not to disclose their “secret sauce” when pitching ideas to investors. “If you have What you feel is going to be a killer product, first lock down your patent,” says Michelle Fisher, CEO of Berkeley, California-based Blaze Mobile, a developer of mobile commerce solutions. The inventor recently received a patent for the 5-year-old payment sticker idea she invented to help consumers make purchases and payments and keep track of retailer’s rewards points via cell phone. “You have to walk a fine line. You have to put enough detail in there so that you can get a patent granted but at the same time you can’t give away too much so that you make your patent a complete blueprint for others to steal. As a small company you are very vulnerable.”

Fisher maintains that about a half dozen companies she pitched her idea to have tried to copy her technology, which embeds a near field communication microchip into stickers that attach to the back of smartphones. When held up to a NFC receiver that accepts MasterCard, the sticker debits funds from bank or credit accounts or loads retailer information such as coupons. Fortunately, her patents will protect the idea as well as allow her to collect licensing fees and royalties from companies that continue to use her intellectual property. Blaze Mobile has received roughly $7 million in funding over the past six years from angel investors to further develop the technology.Maintains Fisher: “Your intellectual property is a form of revenue that will attract investors.”

Clayton Redmon, CEO of Dallas-based StreamVenue Healthcare L.L.C., says: “Getting a patent only costs about $10,000, but enforcing your patent is what costs millions of dollars.” His main product, StreamingOR, uses sofware and instrumentation that plugs into the endoscopy, X-ray machine, and other auxiliary equipment in operating rooms to securely stream video, photos, and vital information in real time anywhere in the world. StreamVenue is able to install its technology in hospitals for $5,000 with a monthly fee ranging from $1,500 to $2,500, while installation for its competition can start at $35,000 and top $2 million in some instances.

StreamingOR uses H.264, a common video-encoding technology needed to view high-definition video if an Adobe Flash plug-in is not loaded. This is useful on iPhones, iPads, and newer browsers. H.264 is a codec standard licensed by MPEG LA, a consortium of tech companies that licenses patent pools for use in video technology. As a licensee, MPEG LA agrees to legally protect StreamVenue from poachers who try to steal his concept, says Redmon, who owns 55% of StreamVenue Healthcare with the Remaining stake in his company held by independent surgeons, management groups, and banking executives. The company recently signed a nonexclusive channel development agreement with Ausmedical L.T.D. in the Netherlands and Australia.

“I couldn’t be an island out there alone,” says Redmon, who is not a part of the NewMe group, but who believes entrepreneurs benefit from collaborative experiences and team input. “I’ve found the only way to survive is to have a bodyguard. If you don’t have a bodyguard big enough, you most likely are not going to survive.”

For innovators to gain traction in this sector, they must protect their concepts as well as successfully execute their business models.“In order for the ecosystem to accept African Americans as a viable source for talent to build meaningful ventures, we have to have evidence of repeatable success,” says Syncom’s Smith. “The burden is on entrepreneurs who have received capital to create valuable and meaningful institutions. Despite historical and contemporary examples of unfairness and inequity in accessing capital, success is ofen the great equalizer.
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