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This is a transcription of a SiliconAngle rebroadcast of a panel discussion originally webcast from VMworld 2010. SiliconAngle CEO John Furrier MCs a panel discussion by representatives from three venture capital firms, discussing the financial market for startups. Participants are:

• John Furrier, CEO, Slilcon Angle (MC)
• Charles Beeler, Partner, El Dorado Ventures
• Pete Sonsini, Partner, NEA
• Ping Li, Partner, Accel Partners

JF: We are back in the Cube with a discussion with venture capitalists who are investing in all the hot startups.

First question, on a scale of 1 to 10 how would you rate the overall climate for start-ups in cloud?

CB: Startups in cloud I would say pretty close to 7,8,9. The negative right now is more around the funding environment than the opportunities for companies. I think that as venture guys we have to look past that and look at the opportunities for the businesses. Fortunately you have three groups here who have capital to put to work so we can actually fund these things. That's the biggest challenge we see out there right now.

PS: I agree. It's definitely not is there a hot sector out there enterprise-related it's certainly cloud-related. The backdrop relates to the overall venture climate casts a pal and can effect investment a little bit. But everybody knows this is a big change in the system that creates tons of opportunities for businesses, and so everybody's very focused on it or they're missing it.

PL: I agree. I think in terms of areas of excitement, enthusiasm with entrepreneurs it's definitely 9 or 10. It's not just on the infrastructure side as well, I think if you look across our portfolio, I'm sure it's the same with Pete and Charles, three quarters of the companies are actually built on cloud infrastructure now, so there's no servers or data rooms in any of the start-ups we work with. So I think up and down the stack from the applications down to the infrastructure there's a lot of enthusiasm for what the cloud can bring.

JF: How do you guys evaluate a company today. It's so easy to fake out a VC if they're not smart about the process – throw some cloud stuff up there, making it look great, give it some voodoo. Is there a new model for evaluating an entrepreneur or start-up?

CB: For me it still comes down to the team. I don't care where they went to school, I care what they know about the market they are going after. To the extent that they are going after something in virtualization or cloud player storage pedigree matters a lot. What have they done before that shows they understand the market they're going after? I'm hoping that the entrepreneurs we back know a lot more about the market they are in than I could. If they're really good at it I'm not going to keep up on that piece of it. I just want to make sure they understand it, they understand how they fit in the ecosystem. At the stage where we invest it really is all about the team because good teams have good ideas, and they know how to pursue them.

PS: You can be aware of the trends, but you don't know everything about everything, there's no way you possibly can. So you try to narrow it down to – generally speaking its people, its markets, its business traction, its technology. At the end of the day I think it comes back to those four things most of the time, and everybody's got their own personal filter as to what they like to optimize around. I think for the deals we'll do in one of those four categories one of those four categories has to be off the charts to grab your attention to do the deal. But I think it still goes back to people, technology, markets and the passion behind the entrepreneur. Does the entrepreneur really have that privileged insight and opportunity? Do they know this market and this opportunity and how to exploit it better than everybody else? At the end of the day that is probably the most important thing. You can't know everything about everything, and you cant expect to get anywhere close to that, so you try to find those individuals who do have that key insight into the opportunity. That's how we look at it today.

PL: I agree. I think the fundamentals of what we look for in a company hasn't really changed. I think the sectors and trends, as you noted, have changed a lot. I think there's still the constant tension between features and actual categories defining break-out companies. I think when you see a new market like cloud computing, the first wave of ideas are sort of features in existing platforms, and the next generation of emerging ideas are going to be the category platform type of opportunities. So trying to parse out which is which is not an easy task. We've spent a lot of time on that.

I think the other big change is capital efficiency. I think a lot of these companies are able to get to market with a lot less capital because the tools and resources, whether it's open source products or a think like EC2S3, can really change how companies can get to market much faster. So the kind of thing we look for is if you can build it and get to market much faster let's see it rather than spending three years building and pray the market's there.

JF: The capital efficiency, the entrepreneurs that boot-strap love the cloud. they say, “Hey, I can do a data center for $20,000 in three countries.” So let's talk about that. Capital efficiency's one thing, and you guys provide a lot of funding, but the momentum has always been the thing. You can be capital efficient and never make the market. Where do you guys see the most momentum in cloud-related things. We have end-user environment, the VDI stuff, some desktop, mobile obviously, middleware – that model's changing – and infrastructure, plumbing, storage. Where do you guys see the most momentum most fertile for entrepreneurs to stay, a safe harbor if you will. Do you guys see that out there?

CB: Clearly the place where you're going to see the most momentum is the closer you get to the end-user of a product, if something's getting adopted quickly and ramping quickly, if your hosted in the cloud it's a lot easier to get the plumbing, continue to deploy and meet that scale. If you look at the infrastructure, the guts that are going on, we're pretty big believers that virtual desktop is still early in terms of enterprise usage. We think it's at the point now, the technology's far enough along that it's ready to go. We think that's a market that's starting to gain momentum and when it does things will happen quickly.

I think a lot of these other areas there are still great opportunities but sometimes it's company-specific. I think that when one really figures out how to take advantage of a technology and leverage something, whether its software, infrastructure, or network, it's more the company getting it right. You've seen that today, and you mentioned some of these acquisitions. Companies that have figured that out, how to catch that wave at the right time.

PS: I think you want to get in before the momentum hits. That's really where the money is made in venture capital is getting in before the wave when they all hit. So there's certainly plenty of excitement around the cloud to spread around.

JF: Which do you like the best?

PS: I think platform-as-a-service and private cloud, there's a lot of excitement around that right now. It's kind of open field, there's huge growth in prospect ahead of it, there's no real dominant player, and the venture investors' minds kind of go crazy thinking about how big this opportunity could be without really that many proof points.

JF: So you're saying the category's not really formed yet.

PS: Yes, take private clouds as an example. There's clearly a lot of interest and talk in IT organizations around private cloud. People are talking about it, how many deployments are there? It's actually not commensurate with the hype. So you have to discount that back. So there's always going to be interest among investors in things like that, but at the end of the day you're taking a leap of faith that it will materialize, and something like that is not there yet.

JF: Well you had Data Domain at your firm. That Data Domain acquisition was a big exit. 3Par is going to HP it looks like. So there are big deals to be had.

PS: As it relates to virtualization and cloud, it's really shaking up the entire staff. We all know that. It's a big change, and all these areas are presenting huge opportunities for new businesses, and really novel technologies coming to capitalize on them. Even in traditional areas like storage – which is, you know, storage, it's boring old storage...

JF: Storage rules.

PS: Exactly – crazy things happen and there's a lot of innovation to be had as it relates to cloud. Charles knows that companies he as has the thing, so....

JF: Ping, you're on the board of Cloudera, which we are aware of. They are friends of ours in Palo Alto. They service the Hadoop platform and are commercializing it. But you have big cloud players out there like Facebook. Google. Amazon, that have a product they don't sell, they just use. So there's a whole other world of big data, and data is a big theme in this conference and the world. What is your view of the tsunami of data, as Mike Oleson would say, at Cloudera?

PL: I think it ties really well into a lot of the conversations you're having around virtualization and cloud computing because you look at what cloud computing is doing, it's actually reinventing the entire computing stack. There was mainframe, there was client-server, there was Web, and now there's cloud computing. So I think there's opportunities at all the layers of the stack. Cloudera is focused on the data layer. The big data trend you could argue started in the Web world because they were pushing most of the data when Facebook, Yahoo! And Google were collecting clickstreams and and trolling the entire Web to figure out what was relevant to different people. I think that amount of data has really been pushing today's database technologies. I think what Cloudera and Hadoop is trying to do is change the boundaries of what data can do and what database technologies and database management technologies can do. One thing we've seen at Cloudera is everyone's got big data. Most of the customers we talk to start off with a terabyte and by the end of the conversation they find they have petabytes. So the reason why people didn't have all the data back then is because they were throwing it away. There was no cheap, efficient way to store and derive value from semi-structured and unstructured data so they were kind of going to waste. I think now with the technologies such as Hadoop you can really change that paradigm around. You can do analytics, you can do a lot more data management capabilities you couldn't do before.

PS: It's hard to think of anyone better than Mike Oleson to run something like that, too.

JF: Yea, he's a good guy, a great guy.

The question about scale and startups [inaudible]. So let's talk about from a startup's perspective. They're out there, super-angels have been in the news; we've covered that on SiliconAngle. You guys are venture capitalists, and you deal with big deals. If I want to get started off the ground, what advice do you have for an entrepreneur out there? They want a good VC, they want someone who's not going to screw them over, they want somebody who's grow with them, help them navigate, and reduce their risk as well, and go to the market and be successful. So what advice do you have for some of entrepreneurs out there about navigating the “I've got to get financed, I have a prototype, I'm going to fill this white space in the VMware platform or do this and that”? What would you advice be?

CB: I'm sure we agree that you just go to El Dorado, start there :-). In a lot of ways it depends on what your business is. We talked about capital efficiency, but if you're building a storage solution, if you're building complex technologies, it's going to take 12-18 months to build and get to market, you've got to be funded to get through that point. The hardest financings today are the series B financings for these companies. If you don't appropriately fund your company through the series A and give yourself time to get to market, get the product out, have some customers work with it, it's going to be really hard to raise a good follow-on financing round. As an entrepreneur you suffer the most, frankly, because you suffer dilution from that. More capital-efficient deals, and I've heard some really smart super-angels say the same thing: the best deals they've ever done, they may have done it on their own initially, but most of those over time take enough capital that if you cannot raise venture money it would be a very challenging thing to do to build it appropriately.

JF: So you're saying if you want to built a real big business go to a serious VC.

CB: Absolutely. And if you want to start small, a few million bucks, because you're idea only takes that, then great. Most of the companies that we're seeing are not going to get to profitability on $2 million. As an entrepreneur if you really think that's going to happen you should really look at your business and look at all the comps (?) around your business and see how many of them were able to do it. And if none of them were you have to ask the question: “What's so unique about our model that's so different, or should we be planning to get more capital.”

JF: I think most entrepreneurs don't know that angels tend not to do follow-on financing. So if it's an intensive deal that needs more cash they may not pony up more.

PS: I would just add that when you're an entrepreneur looking at a venture firm or an angel you obviously have to pick a firm that has some money to be there for successful financing. People don't always knock it out of the park every time after their first financing, they have to have successive deals, and its an up-and-down ride. So you need to have a firm the obviously has money and that has contractual....

JF: You want value-add.

PS: There's certainly value add. But the point I am making is that there is contraction in the venture business right now. So there is a lot of pressure on firms that aren't going to be able to raise future funds. So you have to feel good that there's going to be funding there for you down the road. That's obviously very important. And you have to feel good about who you are working with obviously. And yea the value add is important, the network that the firm brings, the experience they have, and the companies actually.... We feel it's worth something. We've done that before.

JF: You've got experience under your belt. You've got a lot of success.

PS: Yea, and we think that that can help. We have a bunch of entrepreneurs who can speak on our behalf and hopefully say the same thing, but that's the way we look at it.

JF: References are a big thing, right?

PS: Yes, that really matters.

CB: But a big part of that value add, as we said, is having access to additional capital from your initial funding source. Knowing that when push comes to shove if things are going well but you're having a hard time raising money out in the market, you can come back to your existing group of investors and continue to scale the business the way needs to be scaled or should be scaled to be successful. That is a component of being value-add to those companies, being there when they really need you to support them.

JF: Ping you work for a blue chip in Accel. They've earned a reputation over the years and have a slue of great investments. And you've got a good track record in cloud. What do you say to the folks out there who're saying, “Oh, just go super-angel”? There's some dilution not just in capital but in reputation, don't you think?

PL: I think the angels are an important part of the ecosystem for startups. We work with a lot of angels, we have angels in Cloudera, we have angels in a lot of our companies. So I think they definitely provide an important segment of the creation of startups, more and more today than ever because the capital....

JF: Isn't a super-angel just a fund?

PL: No, I think they provide value add just like a VC will. I think for me it's more that the entrepreneur needs to decide what they want and where they want the company to go. And I think figuring what the business needs should help you to figure out whether you go with angels, VC, you go with both, you go with a combination, you bring people in in different times. I don't think there's one formula. But I do encourage entrepreneurs not to feel there's one way to do it – there's probably more than one way to do it – and take the time to figure it out. The most important thing is get to know the people who will be investing in your company. Spend the time to get to know the VC. We're all very accessible, we return telephone calls, whatever it takes. And that's true for the angels. Get to know everyone, and that will help you to make the right decision.

CB:' I talked to someone recently who said, “It's hard to get an investor to come into your company, but it's ten times harder to get him out.” You've got to get it right because it can absolutely kill a company if you get the wrong one.

JF: And if you run out of cash, too, you're out of business. I heard that somewhere.

Can you guys comment on Facebook? What is the phenom of Facebook? Obviously it's a cloud play, it's a huge platform growing at scale. Is that a cloud play for an enterprise to look at? Is it a unique data point?

CB: I'm going to look at the expert. The last time I sat on a panel with Ping was three weeks after they did the initial investment in Facebook. I still couldn't get in because it was only for college students.

JF: They are growing at scale, they use open source, they're writing their own code. It is a cloud kind of play.

PL: We've had a lot of conversations with different enterprise architects who are curious as to how Facebook has built its data center. I think whether it's Facebook, Google, Yahoo!, or Amazon, it's very interesting to see how these Internet data centers are becoming thought leaders in terms of where some of the new ground-breaking technologies are, whether it's in the storage layer or network or compute layer. Facebook's an early adopter of a lot of these technologies just because they were pushing the boundaries of what can be done.

JF: You think it's a proof-point, though, of a roadmap for enterprises to look at, or is it a unique, one-off?

PL: I think it is. I think you have to be careful about just transplanting things that were done for a consumer-Web property and all the nuances you need for an enterprise environment, but I think it's just like a lot of consumer companies like Facebook use enterprise technologies. So I think it is just an evolution of what they're building would be adapted. I think a lot of the private clouds enterprises are investing in is very much borrowing from a lot of the “public cloud” understandings and bringing that to an enterprise environment. You talk to the enterprise IT guys and CIOs are saying to the architect, “We want one of those Amazon things.”

JF: And you go out and build it.

PL: That's what they're saying. So that's one trend. I think the other trend is....

JF: But we don't want them to have it.

PL: We don't want them to have it. And then the other thing is applications are getting rewritten for different ways. In other words, people are building applications for EC2S3 that are Web-based, cloud-type applications. As more of these type applications get built they're going to end up on the enterprise. And then the infrastructure is going to have to adapt to the application. So I think that that cycle just keeps going.

JF: Pete, a question for you. You have a lot of experience in the enterprise, obviously, and IT was a sector that sort of went dark from a venture perspective, seems to be coming back with cloud. How is enterprise IT changing in the marketplace – I mean like a market for entrepreneurs? What do you see that's different now from when you were in the enterprise? You were at HP, you worked as a startup in the enterprise. It's changing.

PS: Before I got into the venture business six-seven years ago, the whole social media, consumerization of IT was not really happening. So that's a huge change that's impacting the enterprise IT landscape. It's got IT executives running around with their hair on fire on how to deal with. So in the world of IT that's a huge change since I was in the business eight or nine years ago. It's still an unsolved problem. No one knows exactly what the right answer is with all these iPads and so forth entering the world. So at the same time a lot of these startups are trying to bring consumerization of IT and social media into the enterprise. But still a lot of the problems are unsolved.

JF: It's the same problem Facebook has. They have to operate at scale and completely rearchitect their platforms.

CB: But also I think the IT organizations up until a few years ago were really focused on “I've got my enterprise apps, everything that's outside of the enterprise, my job is to keep it outside the enterprise and keep my stuff here.” And increasingly the good IT organizations – there are a lot of them out there – are realizing they need to find a way to enable that technology to come in. I had a guy at Morgan Stanley who ran all their end-user apps. He said, “You know our job used to be to block this stuff. Now we have buys going home at night, and they're more efficient getting things done at home than they are in the office because of the limits we put on them. We've got to change that paradigm.” I think it's a fundamental shift in the mindset of IT, and I think you see a lot of the guys here, and I would point to Facebook and Google and others as things they look to as resources their employees are using and ask, “How do we take advantage of that for our company.” it's a major mind shift.

JF: A final question; I know you guys gotta go. What is your outlook for the next five years in terms of what people might expect, not so much from a venture perspective but also from a personal perspective? You see a lot of deals, you see patterns, you see problems that need to be solved. What do you see in the next five years in opportunities that are out there?

PL: One of the things I'm excited about is I think is cloud computing's going to enable a whole new set of mobile applications that were never possible before. I think the iPad, the iPhone, the whole opening up of the operating systems are creating a whole new set of applications that are very tethered to the mobile handset. But now you're seeing people leverage those open platforms as well as the cloud in new applications. I think that's going to spawn a whole new set of consumer user experiences that we never envisioned.

JF: And new policies that need to be implemented at the router level.

PL: Yes. I do think your imagination can run wild. If you can process all the data in the cloud through a Hadoop cluster and you can build a really neat user interface through the iPhone imagine some of the applications that's possible that just don't exist today.

PS: I agree. Like I said earlier, we're early in the innovation cycle here. It's going to be driven by in large part the U.S. economy and world economy as to how fast things go in terms of five years, 10 years, 15 years. But we're early in the cycle, and the sky's the limit. You look at mainframe to client/server – mainframe growth kind of continued along and the client/server boom brought all sorts of new applications. That's sort of what's going to happen here. What they are exactly we don't know, and at what pace we don't know, but it's going to happen.

CB: I agree. We're definitely in front of it. I think five years from now you'll see some of these sectors getting sorted out. HP's making a big play right now, Dell's trying to, Cisco is. They're all trying to figure it out.

JF: You're on the board of Compellent, the last standing storage deal out there.

CB: I'm on the board of Compellent, the best storage deal out there.

I think you're going to see a lot of the infrastructure, the pipes get built, the software that drives a lot of this stuff, people are starting to settle in on a few choices there. There are apps out there today that will continue to get better. The choices for enterprises will continue to improve. I think you will see significantly more flexibility in terms of how you migrate what you have in your data center into a private cloud, into a public cloud, to the point where ideally over time the end-user shouldn't even know where it sits. And most people through the organization don't really need to know where the information resides or what they're running it off of. There are very few people who need to. It's a question of what do we need to get done with this and what is the best place to put it as a result. I think we are at the very early stages of getting that done. If I were an entrepreneur looking at this market I would be all over where do we go over the next 10 years. There will be a ton of innovation and a lot of opportunity for companies.

JF: Okay, guys, thanks so much. I'll summarize by saying that if you're an entrepreneur out there there's a boatload of money these guys are spending. So there's plenty of money out there if you have something innovative, the market's growing.