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Masthead Investment Thesis: Innovation and the New Investment Cycle

Thesis: Innovation Creates Opportunity
The following paper presents the principles that have been guiding Masthead Venture Partners' investments and which will continue to do so as we go forward. Masthead partners believe that we are at the beginning of a new investment cycle. We see several trends creating extremely favorable conditions for a return to early-stage, technology investments.

A dramatic acceleration in the pace of discovery is igniting new investment opportunities. Technology as a growth engine has by no means disappeared, and the rate of innovation has not slackened, even in the face of post-bubble economics. The number of new patent filings continues to increase as researchers and entrepreneurs across the country incubate the next wave of innovation.

Despite market cycles, the buffeting ups and downs, booms, burst-bubbles and recoveries in the technology sector, innovation marches on, presenting new opportunities unaffected by market forces. This uniquely human drive to discover the new is now giving impetus to the emergence of the next incarnation of the Internet.

The Internet remains an engine for technological innovation and economic growth and continues to dramatically redefine computing and communications. The 'mobilization' of the IP network onto every device platform, from cell phones to PDAs and beyond, only adds to this enormous growth potential for more robust infrastructure development and ever more advanced applications layers.

The vision is for the Internet to integrate a slew of innovative, and often disparate, technologies (GPS, XML, RSS, RFID, WiFi, WiMAX, etc.) and morph into a wondrous new creature - a Network of Networks. The proliferation of new mobile devices, broadband, Web services and databases is laying down a powerful interlinked platform for a new era in communications and computing only glimpsed before in our favorite sci-fi movies. Its breakthrough into mainstream use is still years away, but for the VC community, the time for seeding that future is now.

This new Net of Networks will give us a new, ubiquitous platform that will only increase the already frenzied pace of discovery, innovation, killer applications and displaced incumbent products. This new platform will enable new classes of applications and services. Powerful, technology-enabled applications and services will sit on top of the new platform and drastically alter the way we do everything from how we receive advertising and entertainment, search for information, conduct financial transactions, to the way our healthcare is dispensed.

The Internet will transform, from a vast database where you have to do all of the looking, into a service anticipating your next wish, proactively assisting you by looking for and delivering information and services when you need them, wherever you may be.

Strategy: Seek the New
The emerging "Net of Networks" platform will inspire and spawn a host of applications, services and infrastructure systems that will constitute a new wave of technology-enabled solutions. We are, once again, at the start of another technological revolution, based on the maturation and integration of several different enabling systems. All the disparate pieces are out there for another quantum leap in what digital technology can do for us. As they are integrated together, producing better ways of doing things, new technology-enabled services will be creating new, high-growth markets. Masthead is seeking investments that leverage this coming wave of new technology. We are closely watching several fields for emerging trends.

With sound fundamental business trends and emerging industry standards, technology-enabled services present rich investment opportunities. Services that scale through the use of information technology is the fastest growing segment of the $2 trillion a year services market. Technology-enabled applications and services built on the new "Net of Nets" platform will redefine enterprise software models. Masthead has the deep industry experience, expertise and network to focus our resources on this important, high-growth sector.

The new, mobile Internet platform will also unleash a new generation of wireless services, enabled by emerging technologies such as WiFi and RFID tagging, which in turn will generate M-commerce channels further challenging incumbent, offline retail outlets.

With new technology-enabled services, the Internet will shift from a place where you search for information to a platform that serves you personalized knowledge. Serving knowledge engines will be the next killer app, replacing incumbent search engines. New enabling technologies, such as blogging tools and RSS services, are making getting the news and information you want easier and faster than ever before. From the emergence of syndicated information channels from thousands of blogs and other Web sources, you will be able to have exactly what information or entertainment you want delivered to your desktop, cell phone or TV screen. Rather than today's inefficient search-engine paradigm, on the vast new Net, information will search for you.

Online digital media properties offer another example of how new technology-enabled solutions are overturning market incumbents. The recent realization of our investment in Bitpipe supports our belief in the potential of digital media. Online media properties provide huge opportunities as dynamic forces challenging traditional, paper-based media. New Web content and syndication models also open broad vistas for interactive, behavior-tracking advertising. Made possible by companies such as Tacoda Systems, interactive, behavioral targeted advertising is a powerful alternative to current advertising media.

Other promising trends include software-as-a-service, which utterly changes the way we purchase and use software, and Voice-over-IP is clearly a new threat to the plain old telephone system. Blogging itself can be seen as a revolutionary application, changing the way we receive information, making news itself an interactive enterprise and creating new markets. Business implications are only now emerging with the rise of syndicated blog content.

Meanwhile, the application of information technology to the health care industry (e.g., genomics, bioinformatics) is perhaps one of the most important trends in the early part of the 21st Century. Many industry analysts contend we are on the verge of a true breakthrough in the medical sciences, and a new generation of bioinformatics companies is emerging to take advantage of this phenomenon.

Tactics: Aggressive Early-Stage Technology Investments
Masthead believes this is a time to be aggressive. We think a gap exists for seed- and early-stage investments. Traditional venture capital firms who have lost too much capital cannot see doing investments of $2 million to $3 million. They want middle-market and later-stage companies, which might be more secure, but the returns are not that high. Masthead, on the other hand, believes the times warrant being very aggressive in early-stage investments.

Reaping the full benefits of technology's re-emergence means seeding early-stage companies now. There is now a window of opportunity to return to investing in early-stage technology companies. Technological innovation will continue to be driven to a large extent by small, emerging companies. There exists a pent-up demand for new technology solutions to support, extend and implement the revolution in the distribution and processing of information. Also, the quality of investment opportunities currently available is high. Strong management teams with successful track records and sound business strategies are pursuing a finite pool of potential early-stage investors. It is very much an investor's market.

In this new investment cycle, Masthead seeks companies capable of overthrowing old paradigms and dominating the markets they help to create in the process. We are seeking investments in technology companies that offer innovative platforms that can help grow the revolution currently sweeping business processes, accelerating information transfers, speeding up product lifecycles and providing customers with real world returns.

About Masthead Venture Partners
Headquartered in Cambridge, Mass, Masthead Venture Partners is a venture capital firm dedicated to providing early stage information technology, internet infrastructure and services, communications, and IT-intensive life sciences companies with the capital and hands-on operational support they need to develop into industry leaders. The firm has the advanced technical expertise, proven operating experience and deep industry knowledge and relationships to help entrepreneurs build companies with category defining potential. For more information please visit www.mvpartners.com.

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