At the Red Herring Global 100 this past December in Los Angeles, Keval Desai, a partner at InterWest Partners, discussed where to invest in 2012 and beyond at a
keynote roundtable, together with George Coelho, managing director of Good Energies. Afterward, Red Herring had a chance to discuss with Desai about venture capital’s unique opportunities in the evolving digital age, why high price valuations for companies like Facebook and Groupon may be worth more than just a bubble, and the challenges facing the venture industry for the next decade.

RED HERRING: Why is this an exciting time for venture capital?

KEVAL DESAI: There’s no shortage of innovation. We are in a very fortunate era if you think about what’s happened in the last 15 to 20 years in terms of the history of the Internet. When Netscape came along in 1995, every business, small or large, started to create a website for their users. That was less than 20 years ago, but guess what, five or seven years ago, social networking came along, and all these business retooled what they do for the social Internet. Just within the last two years, those businesses are now retooling for the third time what they do for the mobile Internet.

From an investment perspective, it’s a dream come true. How often do you get three shots at the goal within the span of 20 years? I think it’s fantastic. As a result of this retooling of the Internet, there are opportunities at every single layer, which is why you see such a profusion of entrepreneurship and startups in the industry.

RH: Do you think there’s a bubble bulging in venture capital? Do you think brands like Facebook and Groupon are worth their high evaluations, or will investors be left holding the bag in these deals?

DESAI: Somebody said a bubble can only truly be seen in hindsight, so honestly I don’t know if there’s a bubble. In terms of Groupon and Facebook, I am still very much a believer in those businesses. If you think about their long term growth prospects, Facebook has 800 million users, which is still only about 10 percent of the world’s population. As big as it is, even Facebook has room to grow. Groupon has changed the way local businesses interact with users. They’ve had hiccups, but so has every company trying something innovative. If they can respond to customer feedback and improve, who’s to say Groupon won’t be around for the next 20 years?

Every human being is going to get connected to the mobile Internet, so the market is huge. As a result, these valuation benchmarks may turn out to be their own benchmarks for a connected world.

RH: As a third of the world has Internet, 5 percent has smartphones, what roles can VCs play in setting the table for the technological sphere?

DESAI: Access to technology has a huge role to play in every aspect of society, from how elections happen to creating free markets to just providing basis in transparency and truth, which has positive ramifications. If you look at what’s happened in the Middle East, major societies have gone through fundamental transformation fueled by technology.

Venture capitalists take a huge risk in investing in technologies that don’t have any near term business model or commercial ROI capabilities. Take even Twitter. Still today, people argue whether it’s a valuable business enterprise that’s profitable or not, but there’s no question that Twitter has been a transformative platform for changing society, and it’s a venture funded company. One can only imagine if there would be a Twitter without the venture capital.

RH: What do you see as the greatest challenges facing venture capital in the next decade?

DESAI: Early stage venture capital is about identifying truly disruptive ideas and giving them enough capital to see the light of day and get into the mainstream. The challenge for venture capitalists is to focus on identifying and funding those few rare diamonds in the rough, as oppose to funding companies that are already working. The role of early stage venture capitalists is to invest in companies nobody else would touch with a 10 foot pole. You have to find the next Larry Page and Sergey Brin or the next Mark Zuckerberg.

The second challenge is to ensure we provide returns for our limited partners. Venture capital is a risky business that only make sense if there are appropriate rewards. We’ve seen the troubles with that over the past year. If the public markets don’t open up, we have to find innovative ways to create liquidity for our LPs, whether M&As, the public market or what have you. We have to be creative at providing returns, or the whole machine comes to a standstill.

RH: We’ve seen the venture capital world consolidate into fewer but bigger funds. How do you see this affecting entrepreneurs and what kind of an ecosystem does this mean for startups?

DESAI: My view is that it’s a relative phenomenon. If you look at the absolute number of funds, there are still plenty. The dollars available for investment in venture capital are still pretty high, and have trended higher and higher over the last 20 years. Relatively speaking, we are probably seeing a consolidation of venture firms compared to what was prevalent three years ago, but I think that’s good. Fewer firms with higher quality investors who have the time and experience to help entrepreneurs build great companies is better for everybody.

I don’t see the overall activity of venture capital decreasing systematically. True, as the public markets remain closed for a long period of time, it might change the equation because VCs and entrepreneurs need liquidity to get the business going. But even in a dark day scenario where public markets are not available for liquidity, you see things like second markets and other platforms that provide alternative liquidity. In the long term, I remain bullish about the venture industry.

Though officially undisclosed, the price has been rumored to be around $10 million, Techcrunch reported.

Founded by three former Google engineers, Adku optimizes personalized shopping experiences on shopping sites like Amazon, eBay and Zappos through a variety of data on each shopper. The startup first launched at the AngelPad Demo event in 2010, and has since been in stealth mode. Groupon did not disclose how it would use the technology, but would likely use it to provide more personalized suggestions for its deals.

“We started talking to Groupon to bring our technology to more customers and quickly realized that we wanted to be a deeper part of a company that people love and is empowering merchants and customers in a way that’s never been done before,” wrote wrote Adku chief executive Ajit Varma in the company’s blog. “We’re looking forward to joining forces with Groupon to have an impact on millions of users and to share in Groupon’s vision of reshaping local commerce.”

Based in San Francisco, the startup employs six people. It has previously received funding from AngelPad, Battery Ventures, Greylock Partners, and True Ventures.

Thanks to a recently landed $55.8 million in Series C funding, LanzaTech may soon be delivering that fuel to a gas station near you.

The round was led by the Malaysian Life Sciences Capital Fund. New investors PETRONAS Technology Ventures Sdn Bhd and the Dialog Group participated alongside existing investors Khosla Ventures, Qiming Venture Partners K1W1, bringing the company’s total investment funding to $85 million.
The company produces ethanol and other chemical products using a proprietary microbe that has a WHO Category 1 safety rating (the same as Baker’s yeast). It currently has a pilot project at a steel mill in New Zealand creating 15,000 gallons of ethanol per year, and a facility in Shanghai that produces 100,000 gallons of fuel per year. If all goes well, the company hopes to be producing 30 to 35 million gallons of fuel by the end of 2013, and reach a billion gallon annual capacity by 2016.

The company produces the fuel from carbon monoxide taken from smoke stack flues. The process uses up 80 to 90 percent of the carbon dioxide, using water as the key element. The water is further recycled to minimize the water footprint. The process has the unique advantage of creating energy without competing for food, land or water.

“With a lot of feedstock, you run into the inability to get to billions of gallons, but the petroleum industry measures itself in billions of gallons per day,” said Jennifer Holmgren, CEO of LanzaTech. “Technologies like ours focused on waste resources that are widely abundant can have a real impact on the energy pool just because of the availability of that feedstock resource. This technology can have a broad impact.”

In addition to ethanol, the company also produces butanol and proponal, which can be used as high energy building blocks for transportation fuels. The company will use the new funding to bring its efforts to commercial scale.

“From the level of interests we’ve gotten, we’re looking at a pretty strong global footprint,” Holmgren said. “The key is getting past the demonstration phrase, and then we’ll see that hockey stick, as they say.”

The company is currently working with Biol Steel, the largest steel manufacturer in China; Capital Steel, the fourth largest steel producer in China; Gimbol Steel in India; India Oil, India’s largest oil company; and Petromus, a Malaysian oil company. It is working with Virgin Atlantic to produce aviation fuel.

Steel mills potentially have the capacity to produce 30 billion gallons of fuel per year, Holmgren said.

“The world’s going to double its energy consumption over the next 40 years,” Holmgren said. “Even if you don’t substitute for a drop of petroleum, at least you can make sure that that additional growth all comes from alternatives. We think we could be 20 to 30 percent of that pool.”

“We ask the court to stop selling and marketing for Apple’s iPad in China. We also demand an apology,” said Xie Xianghui, a lawyer representing the Proview Technology Shenzhen told China Daily.

It’s an interesting twist in a country where patent infringement can be as common as bootleg DVDs. Both companies claim the iPad as a trademark, but the Chinese company claims it has had rights to the trademark since 2000 or 2001. The company requests a stop to iPad sales in China due to the patent infringement as well as a fine for damages.

Apparently Proview Taiwan, an affiliate of the Shenzhen that did not legally represent it, sold the iPad trademark to IP Application Development, a UK-based company that then sold the rights to Apple, apparently unaware the parent company had not authorized the sale.

Apple sued Proview Shenzhen last year to legally gain the right to the iPad name, but lost the lawsuit.

The company recently raised $15 million in growth stage financing with a round led by Volition Capital with participation from existing investor Rustic Canyon Partners.

Rather than creating new leads, it helps these companies take existing leads and turn them into successful sales. Businesses can use the software to track appointments, manage new leads alerts, prioritize leads and track their progress with performance metrics.

“Leads360 does a better job than CRM systems at driving an efficient, responsive and high-touch consumer sales process that many companies spend vast amounts of time and money trying to achieve through CRM customizations,” said Nick Hedges, President and CEO of Leads360. “We are thrilled that Volition Capital recognized the potential of our platform and is joining the Leads360 team as an investor.”

The company produces its stands alone software, as well as Leads360 for Salesforce, which integrates a Salesforce program into the design, and Leads360 for iPhone enabling mobile leads management in real time.

The company has enjoyed a 40 to 50 percent revenue growth over the past three years. In addition to telemarketers, the company serves for profit universities, providers of mortgages and other loans, insurance sales and other sales markets requiring lead management.

The company will use the new funding expand its products, pursue strategic partnerships and promote its platform.

“Leads360 is creating a revolution in its approach to sales,” said Roger Hurwitz, Managing Partner at Volition Capital. “We are so excited to be a part of their journey as they grow and bring their consumer sales platform to a wider audience.”

The round was led by leading Internet entrepreneurs and co-founders of ServiceMagic.com, Mike Beaudoin and Rodney Rice as well as Boulder venture capital firms High Country Venture and Tango.

Along with the funding, Beaudoin, Rice, and Chris Marks will join the Board of Directors, along with Mosoro CEO/Founder Mike Stemple and CTO/Founder Chris Stemple.

The company produces “appcessories” that are Bluetooth devices containing dedicated companion apps for both iOS and Android. The company has two apps on the market so far, including 3D Sport and Weather. 3D Sport can be attached to your golf club for a more statistical judgment of your swing, while Weather provides updated local weather conditions.

“Mosoro is on the leading edge of a coming tsunami in Bluetooth-enabled appcessories,” said Rodney Rice

The company has two more apps in development, including Talk and Bonsai, a WiFi access point the size of a bar of soap with an embedded media server to stream video, audio and other applications directly to a WiFi enabled device.

“Mosoro is enabling a users smartphone to interact with the physical world in a highly creative manner,” says Chris Marks of High Country Venture. “Their combinations of appcessories, smartphones, and the Internet open up numerous new exciting markets.”

The company will use the new funding to accelerate product development and evolve into multiple verticals.

“With this new capital we will be able to grow our team and move faster in launching our appcessory products into the market,” Stemple said.

“There is a genuine void in the online fashion category for interactivity and excitement,” said Co- Founder and CEO, Dan Murillo. “The vision for Little Black Bag is to bring the real-world thrill of discovery and shopping with friends to the Internet.”

To help commemorate its launch, the company raised $5.75 million in Series A from investors that include GRP, DCM, Chamath Palihapitiya, Tim Kendall and David Tisch. The company will use the new funding to develop its product and team.

Users are first asked questions to determine their style preferences. After answering a quick questionaire, users are then provided virtual bags, each containing a revealed item and two mystery items. Bags are purchased for a $59.95 or $49.95 monthly subscription.

If the users aren’t completely thrilled with all items in the bag, they can then trade those items with other users for modest savings. The company turns a profit on the resale margin.

The company was founded by Murillo and Co-Founder and Chief Technology Officer Sasha Siddhartha, both Stanford grads, along with Co-Founder and President David Weissman, most recently an executive at GSI Commerce.

“I didn’t believe there was such a thing as ‘social commerce’ before Little Black Bag,” said Weissman. “I had many start-up companies pitch me their social commerce ideas over the last 24 months, but there was nothing social about them – you shopped by yourself. Little Black bag is the first incarnation of a truly engaging social commerce experience.”

Now available in more than 90 countries, the new iPhone 4S is largely to thank for the computer conglomerate ‘s success, selling a record breaking 37 million iPhones in the fourth quarter.

In the fourth quarter of 2011, the worldwide phone market grew 6.1 percent, slightly higher than IDC’s own predictions of 4.4 percent but behind the 9.3 percent growth experienced in the third quarter of 2011.

“The mobile phone market exhibited unusually low growth last quarter, which shows it is not immune to weaker macroeconomic conditions worldwide,” said Kevin Resitvo, senior research analyst with IDC’s Worldwide Mobile Phone Tracker. “The introduction of high-growth products such as the iPhone 4S, which shipped in the fourth quarter, bolstered smartphone growth. Yet overall market growth fell to its lowest point since 3Q09 when the global economic recession was in full bloom.”

Though the popularity of smartphones continues to grow, feature phones continue to make up the majority of all mobile phone shipments.

“Even though their proportion is eroding, feature phones maintain their appeal on the basis of price and ease of use,” said Ramon Llamas, senior research analyst with IDC’s Mobile Phone Technology and Trends team. “At the same time, feature phones are fighting to maintain their market share. To meet the challenge, feature phones are becoming more like smartphones, incorporating mobile Internet and third-party applications. While this may not stem the smartphone tide, it should slow down the rate at which smartphones are selected over feature phones.”

Nokia took first place in total shipments, a position it has long maintained due to the sheer amounts of cheap, non-smart phones the company produces. Samsung took second place in shipments, producing both smart Android phones and cheaper feature phones. Noted for being the first to break the 90 million phone mark for the first time in a single quarter, the company shipped 97.6 million phones in the fourth quarter.

LG and ZTE took third and fourth place in sales respectively, both dropping down a notch due to the surging popularity of Apple. LG particurlary took a heavy hit, from shipping 30.6 million phones in the fourth quarter of 2010 to shipping 17.7 million in the fourth quarter of 2011, dropping almost 50 percent.

Android has been activated on over 250 million devices, up 50 million since last November.

During the period, 234 million people ages 13 and older used mobile devices. About 97.9 million (up from 91.4 million in the previous three month period) used smartphones, representing 40 percent of all mobile subscribers.

Following Google Android’s top ranking, Apple took second place at 29.6 percent after growing 2.2 percent over the previous period. RIM ranked third with 16 percent share, followed by Microsoft’s share of 4.7 percent and Symbian’s 1.4 percent.

Samsung ranked number one as an OEM with 25.3 percent of US mobile subscribers, while LG took second place at 20 percent and Motorola came in at 13.3 percent. Apple was used by 12.4 percent of mobile subscribers, a 2.2 percentage point improvement over the previous period, while RIM had a 6.7 percent share.

Users are also using their phones for more than just phone calls. About 74.3 percent of US subscribers used their phones for texting. About 47.6 percent downloaded applications (up 5.1 percentage points), while 47.5 percent used browsers. About 35.3 percent used social networking sites, a 2.6 percentage point improvement, while 23.8 percent used their phones to listen to music.

The move will turn many of the company’s employees into instant millionaires, including not only former secretaries but the graffiti artist who painted its first office walls for stock shares now worth $200 million.

When the company finally makes its debut on the stock market in another three to four months, it will make history as one of the world’s most valuable companies. It’s expected to be the largest IPO ever, far out-shadowing Google historic $1.9 billion raised when it went public in 2004. Though valuations will naturally adjust to the market, and plenty of tech-saavy startups like Groupon, LinkedIn and Zynga failed to reach their initial estimated values, Facebook stands to be the largest financial powerhouse in the history of the Internet.

It’s a move that Zuckerberg has been putting off for years in order to maintain the company’s privacy and encourage innovation, though he has always acknowledged that an IPO would be inevitable. Secondary markets and special stock sale programs allowed some employees to sell off some of their stock for liquidity, take the pressure off the procrastinated IPO for a number of years.

The company had received an exemption from the SEC to avoid the “500 shareholders” rule mandating the company release financial public figures by arguing that most of its shareholders were employees.

In addition to stock market interest, Facebook’s IPO has been the talk of the web since its recent announcement, as the filing forced the company to reveal many of its secrets, allowing the Internet community to finally get to look behind the curtain to see how the company ticked.

The company has 845 million monthly users, more than half of which check the site daily, and more than half do so on mobile devices. In its filing, the company admitted it has not yet to begun to monetize on its mobile platform as the mobile version currently lacks advertising.

Facebook now stores over 100 petabytes of data, or the equvialant of 100 quadrillion bytes, which sounds like kid’s speak for “a heckuva lot.” On $3.7 billion in revenues, it earned $1 billion in profits for 2011, about 10 times the $106 million Google made the year it filed for its IPO.

Zuckerberg is the company’s largest shareholder at 28 percent of the company. That’s pretty good wages for a guy who now makes $1 a year, as he took the salary scale of Steve Jobs, though of course its the stock that pays his bills and those signature styling sandals.