Earlier this week Return Path announced that it has acquired Netcreations. As a result of this merger, Return Path now has over 1,500 U.S. marketers as clients, 500 top web sites and ISPs as data partners, 650 channel partners, and a registered user base of 41 million active consumers.

Both Matt Blumberg (Return Path CEO) and Fred Wilson (Return Path board member, managing director of Union Square Ventures) have written blogs on the deal. Rather than repeat what they’ve said (beyond – of course – congratulating both the Return Path and Netcreations teams), I’d like to talk about two key events that have occured in the Return Path’s history as a way to illustrate how acquisitions can play a key part in the creation of a startup.

Return Path Acquires Veripost – Creating a Leader in an Emerging Segment

I can’t really speak to the initial creation of Return Path as I was only aware of it shortly after I funded a company called Veripost (it was originally called IECOA – “Internet Email Change of Address” – thankfully we changed the name). The analog analog for Veripost (and Return Path) was that of the NCOA (National Change of Address) program provided by the USPS (if you have ever moved and filled out the change of address form in your post office, you are likely in the NCOA database).

Both companies came into existance in the 1999 – 2000 time frame. Veripost was a raw start up at the time that was founded by Eric Kirby (now at Doubleclick), George Bilbrey (see the comments on George below in the Assurance story), and Kevin O’Connell. Veripost spent the first twelve months of its life building its email change of address (ECOA) product. Return Path did the same and both companies launched at about the same time. We knew we were competitors, but initially didn’t realize how direct the competition would be. Even though both companies were very young, they instantly began slugging it out. There were a few other folks trying to put together ECOA systems, but they weren’t very visible.

In the summer of 2001, both Veripost and Return Path hit the road for a second round of funding. Interestlngly, they ran into each other at several venture firms who were looking at making an investment. I knew Fred was an investor and either I reached out to him or he reached out to me (I can’t remember which). If you recall the late 2001 funding environment, it was pretty bleak as the Internet bubble had burst and VCs were rapidly retrenching to work on their existing companies. In the context of this, Fred and I quickly broached the idea of merging the companies and then backing the combined enterprise. Given our past relationship (which was extremely positive and high on trust), we were open about strenghts and weaknesses on both sides. Fred has reminded me several times that at the end of our first conversation, I said something to the effect of “We can fund these companies separately and they’ll continue to beat the shit out of each other. At some point, one of us will have picked the right one and the other company will be dead. Or, we can merge them together and – worst case – we’ll have one shitty company to worry about…” (probably reflecting the emotional low that most VCs – and technology entrepreneurs in general – were feeling after the Internet bubble burst).

Simultaneously, Eric and Matt had started talking to see if combining the companies made sense. They had a typical “hush hush” meeting at a trade show (one of the DMA shows, if I remember correctly) and both came away excited about the idea of merging the companies. Since both the CEOs and investor groups were aligned on the idea, we started working on it in earnest.

In short order, we came to terms on a deal to merge the companies and put together a single financing. Both Fred and I have done a lot of mergers so we insisted that the two management teams work out the combined vision and team before we pulled the trigger on the deal. As part of this, Eric and Matt did a superb job of rationalizing the senior team and the operations of the company – leaving the CEO, finance, and sales in NY (where Return Path was located) and engineering, operations, and customer support in Colorado (where Veripost was located). Pre-merger, Veripost had about 15 employees; Return Path had about 25. Post-merger, the combined company had around 20. We were nervous about the split geography, but in hindsight it has worked out remarkably well. The integration was very smooth – hopefully Matt will blog about it at some point.

Greg Sands from Sutter Hill had been looking at both companies. He very much liked the idea of merging them together so he led a financing that Mobius, JP Morgan, Flatiron, and Doubleclick participated in.

Return Path Acquires Assurance Systems – Extending an Established Company into an Adjacent Market

Return Path’s ECOA business took off nicely. However, after about a year (end of 2002), the ECOA market was growing slower then we had anticipated. Since we had an excellent customer base and reputation / relationship with these customers, we started thinking through other potential services that we could add to the platform we had created. Spam had become a key issue for the email marketing industry and our clients (legitimate opt-in direct marketers like Williams-Sonoma) were struggling to insure that their email got through to their customers. Coincidentally, one of the Veripost founders – George Bilbrey – had started a new company called Assurance Systems. George had bootstrapped his company – working out of our offices in Colorado – and was growing the business very quickly.

We starting talking about Return Path acquiring Assurance Systems. George was still an observer on the Return Path board – as a result he was very aware of where we were as a business as well as the strategy discussions we were having. George, Matt, and Karl Florida (Return Path’s VP of Operations) went deep on the idea and we quickly agreed that the fit was superb as the functional strategy made a lot of sense and we felt confident that we could cross sell Assurance’s products to existing Return Path customers (we were already doing this). Geography was easy – George and Assurance were in the same office as the Return Path Colorado office. The cultural fit was also easy – George would be rejoining a team that he had helped create at Veripost.

Once we decided to do the deal, we were able to complete it in about 30 days. A year later, the delivery assurance segment of Return Path’s business has grown to be the same size as the ECOA business and shows no sign of slowing.

Act 3: Return Path Acquires Netcreations

Return Path’s acquisition of Netcreations is our most significant deal to date. Return Path now provides the email marketing market’s largest and most trusted permission-based customer acquisition solution. We also provide the leading market research solution to direct markers. We believe that as a result, Return Path now offers marketers an unparalleled suite of best-in-class e-mail marketing solutions to improve the performance of their customer acquisition and retention e-mail programs.

Matt Blumberg, Michael Mayor, and the combined Return Path / Netcreations team – congrats and let’s go get ’em!

Rally Software – which we funded with Boulder Ventures in October 2003 – just shipped their first product. Nine months from startup funding to v1 – not bad!

Rally provides an on-demand subscription service for Agile software development. I’ve written a little about Agile software development in the past – we’re finding many of our software companies are adopting various Agile development approaches. The “on-demand subscription service” is a key attribute of Rally’s product family – rather than heavy upfront licensing fees for software development tools, a customer can quickly and cost-effectively begin using Rally’s products.

If you or your company is using or considering Agile software development, I encourage you to take a look at what Rally’s products can do for you. If you are in the business of providing Agile products and services, consider becoming part of Rally’s ecosystem.

NewsGator announced our investment last week. I received a number of nice notes from folks in the RSS world. I also received a bunch of questions about why we invested, how the process worked, whether we were going to do other RSS investments, and where NewsGator is going now that we’ve made the investment. Suffice it to say that these are all relevant and good questions and in true blog fashion, rather than send individual emails answering them, I’m going to try to address some of the questions here as openly and transparently as I can to help anyone that is interested understand how and why this investment happened.

I thought I’d begin by talking about why we invested in NewsGator. To answer this question, I have to start by clearing up what appears to be a common misperception (and one we intend to fix quickly) about NewsGator. Interspersed in the feedback of “wow – neat investment – NewsGators’ Outlook plug-in is a phenomenal RSS reader” were comments that while NewsGator was a neat Outlook-based aggregator, there were other places people wanted to receive RSS feeds (e.g. web-based RSS readers) along with the question of “Gee – an Outlook plug-in – won’t Microsoft just crush that when they release their own?”

The misperception is that NewsGator is only an Outlook plug-in. While the most popular product from NewsGator is currently their Outlook-based aggregator, what really turned us on when we dug into NewsGator as a potential investment is NewsGator Online Services (NGOS). Greg Reinacker’s vision is much broader than simply an RSS aggregator – his goal is to provide RSS content on any device. NewsGator currently provides clients for Outlook, the Web, POP email, mobile devices (web-based and wap), and Microsoft Media Center (how cool is it to get an RSS feed on your TV?).

Following are several examples of how NGOS can be used today:

– I use a Tmoblie Sidekick – made by Danger – as my cell phone and wireless data device (web browser, email, AOL IM, wap browser, calendar). Using NGOS Mobile Edition, I can read my feeds via my web or wap browser on my Sidekick. These subscriptions are synchronized with my desktop, so I don’t have to do any set up on my Sidekick – I simply access my services.newsgator.com mobile edition account.

– NGOS has a custom search feed capability. I put in all of my companies as keywords (one per feed) and then get feeds for each company. This is similar to Yahoo! Alerts and Google Alerts, but also searches all of blogworld so I get any postings in these feeds also.

– A NewsGator / Gmail interface exists. Using this, you can route all of your feeds into your Gmail account and take advantage of Google’s search technology on your personal feed database.

Now – while Greg’s vision is broad and his technical skills amazing – he’d be the first to admit that NewsGator hasn’t packaged and promoted their various products in the most effective way. We’re already hard at work on this – expect a steady stream of product announcements in the next few months as we roll out new products to more clearly package and expose all of the technologies NewsGator has built. Existing NewsGator customers should expect to benefit broadly from this – we intend to be fanatically loyal to all of our customers – especially our early ones. We’re also extremely interested in finding out how people are using NewsGator and NGOS, as well as what they are looking for in the future products.

Ok – hopefully I’ve cleared up the misperception that NewsGator is simply an RSS reader for Outlook (although it is a damn good Outlook-based RSS aggregator!). Let me move on to why we invested in NewsGator. When I started really digging into RSS and blog technology, I began by actively playing with and trying as many different products and services as I could find. I had three goals: (1) figure out which were the most interesting products available today, (2) determine what the segments of the RSS / blog universe were, and (3) determine the “analog analogs” from the evolution of other segments (publishing, email, web, and ecommerce).

The first was fun for me as its appeal to my inner-nerd was very tactile. In many of the market segments that I invest in (such as IT infrastructure software products – companies like Cyanea, Newmerix, Oxlo, Rally Software and Xaffire) I can’t actually use the software in a sustained way. Sure – I can look at demos – but I’m not the target customer or user – so any real use case is contrived. In the RSS / blog universe I could set up a blog, read blogs, use RSS syndication, explore the tools, look at and think about my stats, and play with new search and advertising technologies as they appeared. Once I got into this, I ran across a number of interesting new companies.

Once I became “a user” (meaning I was no longer in demo mode, but I was actually using this stuff every day), I starting figuring out which segments each company fit in and correspondingly began to rank the companies in terms of my perception of their future potential. The segments I came up with in hindsight are not that surprising, so I’m happy to share them here (and take constructive feedback from anyone that’s bothered to read this far). The segments I identified are content management systems (CMS), readers (aggregators), tools, hosting, content, search, analytics, and advertising. There is obviously overlap between these segments (e.g. a company could be in more than one segment – search and advertising are a natural pairing, as are readers, tools, and analytics).

I decided that rather than try to find one “ultimate investment” in RSS that spanned all the segments (I don’t think this will exist), I wanted to make investments in several segments. I’ve been working closely on this with Ryan McIntyre who was previously a founder of Excite and knows many of these segments well from his experience there (and – hence – another view on the analog analog). We identified several companies in different segments that excited us and have been systematically exploring working with / investing in them. In several cases these companies overlap in various segments, but when in the same segment (e.g. search), they are complementary to each other rather than competitive.

NewsGator was at the top of my list for readers and tools and NGOS complimented search and analytics. Per the misperception discussed above, NewsGator is currently thought of as only a reader – and an Outlook-based one at that. In fact – today – NewsGator (through the Outlook client as well as NGOS) has capabilities that cross all four segments. Clearly the emphasis is readers and tools – but if you dig into NGOS – you can see how NewsGator could be very complimentary to other companies that have their emphasis on search and analytics.

I was introduced to Greg by Karl Florida at Return Path who had been talking to him about RSS and how it fit within Return Path’s world. Greg and I got together and I immediately liked him. He passed the “15 minute test” (in 15 minutes I believe you can make a directional decision on whether or not you want to pursue working with someone you have met for the first time). Over the next month, we met several times for increasingly long periods, talking about NewsGator, RSS / blogs in general, and his vision for what he wanted to create as an entrepreneur. This corresponded with an increase in my use of blog / RSS technology – I began actively using NewsGator and NGOS as my only aggregator technology (dumping all the other ones I had been playing around with), set up a Typepad blog (which I transitioned to Movable Type after about a month), and incorporated the reading and writing of blogs into my work habits.

In mid-May, I’d reached the point where I had a clear view that I wanted to pursue an investment in NewsGator. Greg and I started discussing this seriously and I started working through my deal approval process within my partnership. By the end of May we had a deal and officially became partners last week..

We hope NewsGator is the first of several investments we make in the RSS / blog world. I encourage you to give me feedback on NewsGator, your view of the way the market segments break down, and – if you are involved in what you think is in an interesting company in this universe, my door (ok – my “email box“) is always open.

When Raj Bhargava came up with the idea for Quova in 1999, one of his initial examples was that law enforcement would eventually focus on the Internet as a way to track bad guys that did bad things. Quova has had good success in the government marketplace and today announced that it was partnering with a company called Forensic Explorers to launch a new product called GeoLookup.

Forensic Explorers NetWitness product models what users do with computer networks. Quova’s GeoPoint software instantly determines the real-world geographic location of a web site visitor. The combination enables NetWitness to incorporate real-time geolocation into their product – immediately helping identify the geographic location of an Internet attack or suspect based on their IP address.

Both the Internet and the world is a big place. Hopefully products like GeoLookup help make it a safer place when used correctly.

There’s been an overwhelming amount of “news” in the past year about the growth of India’s technology sector. Much of the focus has been on the significant trend of US companies outsourcing jobs to India – starting with call center and data processing type jobs but accelerating in the past year to higher-end software development, engineering, and design jobs.

As the outsourcing of jobs to India has increased, there’s been the expected political backlash. Since it’s an election year, both Bush and Kerry are taking strong positions on this issue.

Independent of my views on Bush or Kerry, I believe the resistance (or opposition) to outsourcing is a simple case of protectionism. There are endless debates on this, but I’ve always felt that protectionism was a bad idea and violated the simple American concept of “land of the free and the home of the brave” (recognize that line?).

As a venture firm, we’ve spent a lot of time thinking about this issue. About a third of our software-related companies have some sort of “activity” in India. We’ve concluded that one of the highest leverage issues we will continue to and need to be facile with is the notion of a cross-border US / India company where some of the activity of the business is based in the US and some is based in India. One of our companies – Stratify – recently had a nice article published about it titled Stratify woos Indian BPO market.. Stratify is a US (California) based company, is run by a very smart and accomplished Indian named Ramana Venkata (BS from IIT Chennai, MS from Stanford) and has a mixed US / Indian management team. Stratify has been very effective at developing part of the engineering team in India and is now directly addressing the Indian market (as well as the US market).

This is a hard problem to optimize as the natural reaction of venture firms would be to “hop on the trend”. This is dumb – a deeper, more thoughtful approach is required that is based on both a real understanding of the issues as well as experience. Entrepreneurs like Ramana help us understand this better.

MOUNTAIN VIEW, Calif.–(BUSINESS WIRE)–June 8, 2004– Stratify, Inc., a leader in unstructured data management for business applications, today announced the launch of Stratify Legal Discovery Service 3.0 solution for law firms and corporate legal departments. The explosion of discoverable information in legal proceedings challenges attorneys to move beyond labor-intensive search techniques that needlessly increase costs and analysis periods. With the Stratify Legal Discovery Service product attorneys can intelligently comprehend the document universe, efficiently tag, review and produce documents, and accelerate and fortify early case assessment and advanced risk analysis for their clients. Providing intelligent concept-based foldering, integrated search and filtering, and email traffic analysis, the Stratify Legal Discovery Service solution enables attorneys to develop, test and execute winning strategies faster based on an early mastery of the facts in a case.

Stratify Legal Discovery Service 3.0 delivers the most powerful end-to-end electronic discovery solution on the market for both law firms and in-house counsel. At the heart of the service is Stratify’s unique technology for electronic data discovery currently in use within the U.S. intelligence community as well as large-scale publishing and oil and gas companies. Stratify processes all data (including metadata) extracted from any supplied media, including hard-drives, backup tapes, email, CD/DVDs, and hard-copy records, creates concept-based folders uniquely representative of the specific case issues from the universe of discoverable documents and records, and then automatically sorts each document into relevant concept-based folders. These concept-based folders provide attorneys an intuitive understanding of the document universe, enabling them to immediately focus on relevant facts and expedite their analysis and case assessment.

“Stratify worked closely with AmLaw 100 firms to develop this new legal discovery service to enable litigators to better serve their clients,” said Ramana Venkata, Stratify’s President and CEO. “Our ability to quickly process massive amounts of data and automatically sort it into concept-based folders provides attorneys with a 360 degree view of complex litigation and regulatory matters, based on which they can more accurately assess the facts and develop the optimum strategy for their clients.”

Scalable in the extreme, the Stratify Legal Discovery Service product processes over 1,000,000 pages per day. Attorneys can quickly grasp the essence of a case even while their legal team continues to incrementally review and tag relevant documents. Because the concept-based folder organization efficiently culls out junk mail and irrelevant material, reviewers can immediately focus on the most relevant documents. Leveraging the concept-based folder organization of the document universe, the Stratify Legal Discovery Service solution provides a robust set of features for efficient document review and analysis, including:

– Attorneys and reviewers can search and filter the document universe using keywords and metadata including date, tags, senders and receivers to effortlessly focus their analysis on relevant documents
– Links to attachments are preserved and duplicate documents, both near and exact, are presented with every document, enabling attorneys to analyze changes and accelerate their document review
– Documents are displayed in over 225 native formats facilitating review of spreadsheet formulas, hidden columns, and document metadata
– Reviewers can efficiently tag documents from concept folders or search results, and annotate and assign them to work folders for subsequent attorney analysis
– Email traffic is analyzed for senders, receivers and custodians enabling legal teams to reconstruct communications on key issues and find critical documents

The Stratify Legal Discovery Service is an ASP (Application Service Provider) solution hosted at a secure data facility in San Jose, California. Legal teams can securely access their data over the Internet from anywhere, at anytime, as well as contact dedicated Stratify technical support personnel. Stratify supports clients through every phase of document review and analysis, assigning a personal project manager experienced in litigation support operations and a dedicated support team for each case. Stratify maintains complete audit trails and logs of all operations performed in the data center, as well as all user actions that take place within the application interface.

Stratify, Inc.

Stratify is a leader in Legal Discovery and unstructured data management software. The Stratify Legal Discovery Service is an ASP solution that combines a complete eDiscovery application with our leading-edge technology to enable attorneys to accelerate case assessment, strategy development and analysis using unparalleled analytical and discovery capabilities; litigation teams to process large volumes of discovery documents combining efficiency and quality within a complete eDiscovery workflow; and Legal IT to leverage Stratify’s secure, scalable architecture with minimal infrastructure investment. The Stratify Discovery System is a complete enterprise software platform that helps enterprises harness today’s vast amount of corporate information by automating the process of organizing, categorizing and acting on the business-critical, unstructured information that is usually found in documents, presentations and Web pages to provide them Intelligence-at-a-Glance.(TM)

Founded in September 1999, Stratify is a privately held company that has received funding from Mobius Venture Capital (formerly Softbank Venture Capital), and In-Q-Tel, the venture capital arm of the CIA. Named as one of the 100 KM Companies That Matter for the second consecutive year by KM World in 2003, Stratify is headquartered in Mountain View, California. For more information about Stratify, please visit www.legaldiscovery.com.

——————————————————————————–
Contact:
Stratify, Inc.
David Bayer, 650-934-8539
david_bayer@stratify.com

Marie Alexander, the CEO of Quova (our Internet geolocation company), was part of a USA Today article from a Churchill Club panel including Marc Andreesen (Opsware, Netscape), John Chambers (Cisco), Steve Jurvetson (Draper Fisher Jurvetson), Ed Zander (Motorola, Sun), and John Thompson (Symantec, IBM). It was illustrious company and Marie nicely held her own. All the panelists were optimistic about the future of the Internet (Chambers: “You haven’t seen anything yet”).

There was a nice segment on “The Internet becomes more local” – which is the core of what Quova helps companies do.

Q: The Internet has always been seen as global, but there is a possibility of the Internet becoming more local. What’s going on?

Alexander: There are reasons to have borders on the Internet. There are many things that can be enabled by understanding where the user is. You have situations where there are laws and requirements in one country but not in another. In Mexico, it’s OK to buy an antibiotic over the counter. In the United States, it is not. There are very good reasons for being able to understand geography and understand those borders on the Internet. And it can be done in a way that doesn’t take away anybody’s anonymity. An example of that is Major League Baseball, which last year introduced the ability to watch a baseball game on the Internet. But MLB had sold (video) rights to those games to (TV stations) in certain geographic areas. To be able to take that business to the Internet, MLB had to be able to determine if you were in an area where they had already sold rights to someone else. And in that case they would block you off from being able to see that game (though you could see all games to which local rights hadn’t been sold to someone else).

Jurvetson: There’s been a globalization trend for a few years, whereas this new trend that hasn’t yet fully played out is taking advantage of local services. It’s understanding where someone is based, either for personalization, for searches, for products and services, location-based services over wireless networks, you name it.

World’s Leading Java Developer’s Portal Chooses GeoPoint’s Patented Technology

MOUNTAIN VIEW, Calif., June 1 /PRNewswire/ — Quova, Inc., the world’s leading provider and developer of Web geography services and technologies, today announced that TheServerSide.com, the world’s largest community for enterprise Java architects and developers, has chosen Quova’s patented GeoPoint to provide state and country-level geolocation for its website, which serves over 500,000 unique visitors per month.

TheServerSide.com provides news, feature articles, product reviews, case studies and a discussion forum for Java software developers worldwide, and is widely considered the voice of the Java development community. The site has deployed GeoPoint to analyze geographic traffic patterns and detect users operating under aliases, as well as automatically pre-populating the country and state dropdowns on the site’s registration page. TheServerSide is also an advertising business, and has ambitious plans to leverage GeoPoint to provide innovative online marketing solutions to vendors of enterprise tools and services.

“We chose Quova over competing providers because they clearly had the best technical expertise and the most easily integratable product to help us serve the Java community,” said Floyd Marinescu, founder and General Manager of TheServerSide Communities. “In addition to the current applications, we plan to deploy GeoPoint to help us deliver customized content and advertising based on each visitor’s nation and state of origin, enabling us to generate new ad revenue for our company and more relevant content for our members worldwide.”

“TheServerSide.com is a household name among Java developers, including our own,” said Tom Miltonberger, Senior VP of Products for Quova. “We’re proud to be able to help them serve this thriving development community and execute a successful business model in the process, and we’re committed to a partnership that will produce stronger and more versatile technology across multiple industries.”

One of my companies – Return Path – recently released a white paper called Beyond Clicks, Opens & Bounces. This white paper talked about metrics that help marketers understand email performance. This has some obvious parallels to the struggle I’ve been having to determine what my blog stats mean.