Lijit has built up an impressive business by focusing on providing web publishers with tools to better engage with, understand, track and ultimately derive revenue from their site visitors. Through Lijit’s search, analytics and insight products, a rapidly growing number of publishers are discovering more about their users and finding new and better ways to engage with them. Federated brings a similar passion for publishers to the combined entity (powering “the best of the independent web”). And together we think the two businesses provide a broad set of tools and monetization capabilities to their combined over 77,000 publishers.

You can read more about the transaction from All Things D, The Lijit Press Release or the Federated Media Press Release. Seth also has a post up on his blog about the combination as does John Battelle and Todd Vernon.

Please join us in congratulating Todd, Walter and the rest of the Lijit team on this significant milestone for the business.

But maybe not.  We are pleased to announce our investment in Attachments.me, which is building a natural-language based platform to extract information from attachments and links contained within a user’s email store.  The company has created an email enhancement tool to enable easy access to the treasure trove of valuable data currently trapped within email systems.  Attachments.me indexes a user’s email account and presents an attachments-centric view of it, creating document thumbnails, providing search within attachments, and, above all, makes a user’s email experience better and more productive.

Imagine that you remember someone sent you a document about a particular subject or a funny video.  You just don’t remember who sent it to you or what the email text was.  Now, you will be able to search by subject matter embedded in links and attachments, and browse by content type, not just by sender, and the results will include not just data in the email body itself, but in the attachments and links themselves.

This mailbox crawling technology will allow for a single searchable interface to automatically group and filter the structured data and documents in a user’s email archive.  This data will also be accessible via mobile applications for on-the-go access.  Attachments.me recognizes the fact that for most users, email is their de-facto filesystem, knowledgebase and personal information manager, and that better tools are needed to access and manipulate the extremely valuable data in the messages a user sends and receives.

The company was founded by Jesse Miller, Benjamin Coe and  has been advised since inception by our friend and colleague Joe Stump, who is also a co-founder of our portfolio company SimpleGeo.

In general, we avoid investing in vertical markets. The one exception is a set of companies that are in our Distribution theme and include Zynga, Topspin, StockTwits, and Cheezburger. Each of these companies is aimed at a specific vertical market and has the following set of common characteristics:

A Gigantic Existing Online Market: We are only interested in companies that are attacking an existing online market segment that is greater than $10 billion in annual revenue. These are market segments that generally (but not always) emerged in the first wave of commercial Internet and Web activity between 1995 and 2000.

Entrepreneurs Obsessed With Transforming The Way The Vertical Market Works: We want to back entrepreneurs that are completely obsessed with the vertical market. They must be thinking – every single waking moment – about how they are going to change the way the world interacts with the vertical market they are attacking.

A Clear Opportunity To Use 2011 Distribution Dynamics to Transform The Market: This could be Facebook, Twitter, user-generated content, contemporary Web approaches, mobile, or something we haven’t yet thought of.

A Vertical Market At Least One Of Us Is Into: Since we generally avoid vertical markets, when we do invest in one, it has to be a vertical that at least one of us is infatuated with.

If you look at the four companies we’ve invested in the distribution theme, you see each of these four attributes writ large on the companies.

• Zynga: Video games + Mark Pincus + Facebook + Brad
• Topspin: Music + Ian Rogers + Contemporary Web / Social Networks + Ryan / Jason
• StockTwits: Stock market news and information + Howard Lindzon + Twitter + Seth
• Cheezburger: Entertainment (starting with humor) + Ben Huh + user generated content + All of us

In each case, the distribution dynamics will evolve over time as the company grows. For example, Zynga now uses distribution channels beyond Facebook (e.g. mobile) and Stocktwits now uses distribution channels beyond Twitter, while Topspin’s widgets live not only on their artists’ own websites and music-focused sites, but are distributed via sharing through Facebook and Twitter. We believe we have real intellectual leverage understanding how these different channels work and have spent a lot of time internally synthesizing what we’ve learned as we continue to evolve this theme.

There are plenty of vertical markets we simply aren’t interested in. For example, the online jobs market fits criteria #1, but we haven’t run into an entrepreneur or a distribution dynamic that we think is powerful. And, frankly, the online jobs market bores us, so it’s hard for us to engage in it.

As we’ve said before, we don’t have a particular quota or strategy for which themes we invest in – we use them to help us frame the kinds of companies we actually spend time with as potential investments and where we spend our intellectual time trying to better understand markets and where they are going. While we only have about 10% of our overall investments in the Distribution theme, we are extremely excited about the overall potential impact on our portfolio and our continuing to look for more entrepreneurs and companies to back around Distribution.

When we look back and see when the investments were made, our timing is very lumpy.  We’ve always been this way – we don’t have a particular pacing, tempo, partner allocation, or thematic allocation goal – we just all work on everything together and invest when we get really excited about something.

Following are the investments we made in 2010 by month.

- April: SendGrid
- May: BigDoor, Sifteo, SimpleGeo
- June: Triggit
- September: Openspace, Fitbit, Orbotix
- November: Urban Airship
- December: Integrate and a stealth company that rhymes with Integrate

These investments cover a wide range of geography (Boulder, San Francisco, Seattle, and Portland) and touch on most of our themes (Protocol, Distribution, HCI, Glue, and Adhesive).  We’ve got a good range of first time entrepreneurs, new relationships for us, and folks we’ve worked with in the past in the mix.

At the beginning of October, we raised a new $225 million fund (the same size as the fund we raised in 2007) – our November and December investments were from that fund.

In addition, we made many follow on investments to our existing portfolio companies, we remain very involved in a number of things around the entrepreneurial community including the continued expansion of TechStars, Jason’s involvement on the board of the National Venture Capital Association and the FASB Blue Ribbon Panel, Startup Visa, and the conferences we helped create (Defrag, Glue, and Blur).

We believe 2011 will be an incredible year for software and Internet innovation, company creation, and entrepreneurial impact and we are psyched to be a part of it.

He began the day at the Boulder Open Coffee Club, an informal twice-monthly gathering for those to talk tech, startups, geek and anything else of interest.  Stay tuned for our personal blogs to see what we individually had to say on the subject. 

In recent years it has become dramatically less expensive to design, build, and bring a consumer electronics device to market. The emergence of low-cost and low-power processors, DSPs and SOCs (systems-on-a-chip), the declining cost of all forms of memory, and Asian-based outsourced manufacturing (primarily in Taiwan, China and increasingly, Indonesia) has made investments in companies offering a consumer-electronics device a much more compelling opportunity from a VC perspective.

These cost-savings have enabled the companies we’ve invested in to maintain 40% – 60% gross margins on their products (while selling at sub $300 price points) sold into the retail channel, even at wholesale pricing levels. When these companies sell direct-to-consumer via their websites, the margins can be even higher. Contrast this with earlier venture-backed consumer-electronics companies like TiVo (whose DVR we essentially a PC in different packaging), which initially had to sell its product at negative margins and hope to make up the difference with service/subscription revenues.

Most venture capitalists would not agree with our view that gadget companies can present compelling investment opportunities, and there are certainly challenges associated with a business model that involves building widgets overseas and shipping them around the world to third-party logistics companies, distributors, and retailers. To name but a few: there is more operational complexity around manufacturing, distribution and sales, there are increased working capital requirements, the margins are lower relative to software or SaaS models, the cost of product defects is much higher, and there can be less real-time visibility into sales and the customer base, given that a retailer sits between the company and its users, at least up until the point of purchase.

There are some special things that we look for in a consumer electronics investment. First and foremost, we focus on the software element of the consumer electronics product. When we were on the road raising our fund, we’d often be asked by potential investors what it was the made the Slingbox special, and why we had decided to invest in a device play. We’d reply that the magic behind the Slingbox was the software and that Sling Media was a software company that just happened to package its software in a cheap plastic box.

Second, for any consumer electronics device to be successful, it must be dead simple to use and to set up. The out-of-the-box experience has to be seamless and just work, hiding all configuration complexity from the user. Not to pick on TiVo again, but rumors are that in the early days of TiVo, the return rate was well over 50%, primarily because of the great complexity of setup. Customers gave up in frustration before they were able to experience the magic of TiVo. Even today, upwards of a third of wireless routers are returned to the store because of difficult setup procedures.

We think the Slingbox set a new standard of usability and ease-of-installation in its day, while the setup process of the Pogoplug currently sets the gold standard for an install – it can be done in under two minutes, requires zero knowledge of network configurations or firewalls, and is literally as easy as typing in a URL and signing up for an account. Naturally, most any modern device should be network-aware and work closely with web-based services to provide an integrated experience. A software-powered consumer electronics device should also evolve – regular software updates mean that a good gadget gets better over time.

Finally, we also believe that for a consumer electronics company to be interesting to us as an investment opportunity, it should be establishing a new category of device. Sifteo’s Siftables, Cloud Engines’ Pogoplug. and Sling Media’s Slingbox are a few examples from our portfolio that illustrate this point. A startup has very little to offer in an established category – the world doesn’t need another audio player, smartphone or router. Leave those categories to established players who have the manufacturing, marketing and distribution muscle to compete. As a startup, rising above the noise in an existing category is difficult and expensive. Granted, establishing a new category of device has its own set of challenges, but innovation and disruption are the core mission of startups.

If you’re making a product out of atoms (powered by software magic) that fits the above description we’d love to hear from you. Atoms are the new bits.

We will continue to do exactly what we have always done: invest in seed and early-stage investment opportunities in the software and IT space that are located across the United States. We’ll also continue to pursue a strategy of Thematic Investing that has served us well over our investing careers.

We very much look forward to working with another group of great entrepreneurs and portfolio companies.

- Jason, Ryan, Seth and Brad

The genesis of the idea was to get our three portfolio companies in our Digital Life Theme together – namely Cloud Engines, Memeo, and Pie Digital – for a day or two of knowledge transfer and collaboration. After mulling the idea around, we decided to extend the gathering beyond our own portfolio and invite executives and board members of venture-backed and public companies that play in the broader Digital Life universe.

On the first day, we hosted board meetings with our portfolio companies followed by a dinner as a group at Restaurant 4580, one of our favorite places to enjoy an evening with a medium sized group. We began day two with a closed session where our three companies got together and talked about topics and issues relevant to each of them. In the second half of the day, we had an open session that included executives from companies as diverse as Apple, Comcast, CBS, Bug Labs, Boxee, EchoStar, Liberty Media, Sling Media, Sonos and Qwest. This afternoon session was organized around a series of interactive panels dealing with topics from building extraordinary consumer devices, marketing new products, and working effectively with strategic partners.

The day was concluded by a fireside chat with John MacFarlane, CEO of Sonos and Blake Krikorian, founder of Sling Media, moderated by Stewart Alsop. The discussion of what the digital living room would look like in five years continued well into what was a fantastic dinner at 14^th Street Bar & Grill.

We had a great time hosting this superb set of people in Boulder. In addition to plenty of insights, we had a lot of fun together participating in a wide range of conversations that wouldn’t have happened at a larger conference. We’ve now got focused events covering three of our four primary themes – we expect it’s just a matter of time before we do something around our Human Computer Interaction Theme.

We’ve been flattered with the feedback on our new Foundry Group website design.  We had a lot of fun putting it together and are really happy with how it turned out. Websites for venture firms can be a challenge and in our case we wanted to create a site that was informative, serious but not stuffy and corporate. It was also important to us that it reflected our personalities.

The front page picture for us is the real highlight of the new design.  Our intent was to poke fun at ourselves; not to imply that we were about to form the new Foundry Group band (although Jason and Ryan are indeed in a band together). The shot is actually a take-off on the iconic Reservoir Dogs picture (not of U2 as some have speculated). 

The picture came about almost by accident. After taking a bunch of individual candid shots (some of which ended up on our respective bio pages) we headed out to take some more industrial looking “Foundry” pictures in an alley near our office. Just before we left Seth’s wife, Greeley, called to suggest that we stage a Reservoir Dogs picture for fun. It was the last photo we took that afternoon and it wasn’t our intention at the time to use it anywhere on the site (we took a bunch of different group shots that day specifically for that purpose).  Fast forward a few weeks to when the photographer sent us the proofs. Upon opening these final shots of the day the unanimous and immediate thought was “this has to be on the front page of our new site”.

We’ve kept much of the content from the prior version of our site and continue to have the focus of much of the site on our blog as well as information on the companies in which we have investments.