The Hive Raises $22M for Second Startup Fund

Things are buzzing at The Hive this week.

The seed fund and startup accelerator in downtown Palo Alto announced today it has raised a total of $22 million for its second fund. That’s well above the $8 million contributed by individual investors to The Hive’s first fund, Hive I, which has supported six young companies.

One of those six startups, cybersecurity company E8 Security, announced on Tuesday that it had completed a $9.8 million Series A financing round led by March Capital Partners and joined by Allegis Capital and The Hive.

In-house experts at The Hive conceived the idea for E8 Security, says the accelerator’s co-founder and managing director T.M. Ravi (pictured above). Company formation is a key part of The Hive’s business model, he says.

“We recruit the founders,” Ravi says. “For them, it’s like handing them the company on a plate.”

The recruited executives get founders’ equity stakes, he says. It’s an approach we’ve seen taken by other investors, including Seattle-based Madrona Venture Group, which began its Madrona Venture Labs last year.

The Hive, founded in 2012, also incubates very early-stage companies that have already been formed by small teams of entrepreneurs. Its staff works closely with all founding teams for 15 to 18 months, until the startup has launched a product into the market and developed relationships with customers and partners, Ravi says.

The larger Hive II fund will support as many as 14 startups, and it already has a running start. In early 2014, when part of the new fund had been raised, Hive II financed the formation of Kosei, a startup that used machine learning to develop a commerce recommendation engine. Kosei turned out to be Hive II’s queen bee.

In January, Pinterest acquired the 6-month-old startup for an undisclosed sum. Pinterest, a popular image-sharing site, is making Kosei part of a new drive to monetize its business, Ravi says. Kosei, which was based on an idea originated by The Hive, is the accelerator’s first exit.

Hive II money is also supporting four other startups so far. They include Foghorn, located in The Hive’s studio in Palo Alto. Ravi describes Foghorn as a “factory to create apps for the Internet of Things.”

While seed funding for Hive I startups ranged from $500,000 to about $1.5 million, the richer Hive II fund will lift the high end of the range to $2 million, and allow The Hive to reserve more money for follow-on financings, Ravi says. In addition to office space and the expertise of its staff of seven experienced technologists and entrepreneurs, The Hive offers startups the use of an open-source based, big data application server, and connections to its network of investors and advisors.

Backers for both Hive I and Hive II included individual investors from Silicon Valley companies, but Hive II also drew commitments from venture firms, including March Capital Partners and Verizon Ventures.

The Hive focuses on data-driven applications, Ravi says. One of its three main focus areas is innovation in business process applications. Next-generation products will bring predictive power and automated actions to functions such as supply chain management, security, and customer relations, Ravi says. Another focus is online activity that can be enhanced by data-driven applications, such as financial services, advertising, and e-commerce.

The Hive’s third major area of interest is the Internet of Things. Ravi is among the many people anticipating new business opportunities as homes, cars, factories, oil rigs, and many other sites are outfitted with Web-connected sensors. One of the major challenges in this arena will be protecting the security of data captured by sensors, he says. Another challenge he expects is a demand for speedier action in response to data the sensors collect. Sending the data to remote cloud applications, and waiting for their response, may be too slow, he says. Systems may need to include tiers of computing power closer to the sensors, Ravi says.

The payoff for solving these problems could be substantial, he says.

“People expect 50 billion sensors to be connected by 2020,” Ravi says.

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