Sending ? and ? from the boldstart team at the end of a challenging 2021. With COVID raging at the beginning and end of the year, it is all the more amazing what our portfolio companies have accomplished the last twelve months. We are truly ?? to our founders, limited partners, co-investors, and friends for another year of growth and learning.

boldstart kicked off 2021 by announcing the closing of $230M of funds, $155M fund V and $75M opportunities ii, to continue supporting developer first & SaaS founders from Day 1 to scale(?).

We added 3 team members:

Ellen Chisa, Founder-in-Residence and former co-founder of Dark

Ab Gupta, Operating Partner and former VP Strategy & Ops at Kustomer

Ernest Addison, Associate and formerly at Audax group.

And our portfolio continued to grow:

1. ? Day one lead/co-lead in 14 founding teams: (most still in stealth) representing ??, ??, ??, ??, ??, ??, ??. Continued investments in developer first, SaaS, and crypto infrastructure companies.
2. ? ? Day one to scale: Huge congrats on milestone valuations realized for dev first security company Snyk ($8.6B) and fellow security startups BigID ($1.25B) and Security Scorecard (almost ?), crypto infra startups Blockdaemon ($1.255B) and Fireblocks ($8B, investment via MStateLabs our enterprise blockchain lab), and YipitData (new ?).
3. ? Day one to follow on funding: Over $1.7B in follow on funding for the portfolio including those above and Superhuman, Replicated, Dooly, Env0, SpectroCloud, Cape Privacy, Hypr, and 3 others which closed new rounds but will announce early 2022.
4. ?? Day one to exit: Huge congrats to FortressIQ on its sale to Automation Anywhere. We are ?? to have partnered since day one as FortressIQ created the market for process discovery and automation and scaled to dozens of enterprise customers.
5. ? From idea to product launch: New company launches out of stealth include developer first startups Jit Security (orchestration for dev first security), Slim (container optimization), Atomic Jar (integration testing shifted ), Cloudquery (OSS cloud asset inventory SQL), CodeSee (code visualization), Liveblocks (API for collaboration), and SaaS co UtilizeCore (service mgmt automation).
6. ??‍? More amazing angels/advisors added to the boldstart family: We continued doubling down on our enterprise angel/advisor network bringing diversity and some of the best builders and doers in product, engineering, and sales to help our founders accelerate their path to product market fit with folks from Airtable, Notion, Twilio, UiPath,Tableau, Elastic, Coinbase, Hashicorp, and more…

What’s ? in Enterprise 2022

1. The next big thing in 2022 is blockchain is the new “dev tool” as many long time enterprise founders rush to explore and build newcos in crypto infra and enterprise investors fund any company with “enterprise + crypto.” Despite the number of companies that don’t make it, there will be a handful of foundational companies started in 2022 that will create returns that far exceed the money lost.
2. VC funding will hit another record year in 2022 but don’t be fooled as while the total will be higher than 2021, the numbers will be skewed towards the perceived highest quality and fastest growing companies. In 2022, there will continue to be separation from the haves and have nots and this further increases the importance for funding outstanding and dynamic management teams who are also recruiting machines.
3. Rise of orphaned companies — Speed bumps will surface for overcapitalized companies who raised too much ? too early and who tried to stay on the trajectory of super fast growth to be one of the top companies but fell short — lots of pain will surface in 2022 from these companies that overspent and don’t have much to show for it.
4. A number of open source projects will become a DAOs (decentralized autonomous organization) instead of pursuing the classic venture backed model.

If you’re interested in staying on top of current trends on a weekly basis, please subscribe to my substack, What’s ? in Enterprise IT/VC.

?? again for all of your support, and here’s to a healthy and prosperous 2022!

The post boldstart 2021 recap & what’s ? in enterprise 2022 first appeared on BeyondVC.

Welcome to our annual boldstart recap and enterprise predictions letter. We had another solid year filled with learning, growth, laughter, and new projects and partners. Thanks to all of the amazing founders, advisors, co-investors, corporate partners, and others that helped make 2018 an amazing year. We are truly grateful for your support.

People often ask us why firstcheck.vc or what is first check and our response is that the seed landscape is so confusing, and what founders need is an investor with courage and conviction to lead their rounds and support them from day 1. This initial round could be $500k or it could be $3mm. We are purpose-built to not only invest pre-product but also to help accelerate your path to product-market fit with our decades of entrepreneurial and investing experience along with our active CXO advisory board.

To that point, we are most excited when our founders are able to go from slide deck to product-market fit and Series A and beyond. This year was a banner year as boldstart portfolio cos raised over $150mm of follow on capital from some of the top Series A and B investors (highlights below).

1. 1. First check leads in 5 founding teams, all in stealth. Some of these themes include privacy/ML, next gen CMS, intelligent automation, and developer productivity.

1. 1. First check to Series B — congrats to BigID on its $30mm Series B led by Scale Venture Partners, Kustomer on its $25mm Series B led by Redpoint, and Snyk on its $22mm Series B led by Accel and GV. Truly amazing that all of these companies went from slide deck to B in approximately 3 1/2 years.

1. 1. First check to Series A — congrats to Fortress IQ on its $12mm Series A led by Lightspeed and a stealth co on their $13.5mm Series A led by Bessemer Venture Partners. Once again, we led each of these rounds at slide deck stage and helped land the first handful of customers to accelerate path to product market fit and their Series A rounds.

1. 1. First check to seed — congrats to Blockdaemon on their seed round led by Comcast Ventures and Wallaroo Labs on its seed led by RRE Ventures. In each of these cases, we led much smaller rounds before they raised proper seed funding.

1. 1. Smallstep, Clay, Dark, and Windmill emerged out of stealth. All are developer first companies respectively in zero trust security, automation, and developer productivity.

1. Rebel exit to Salesforce. Dev-first API for interactive emails — will be a great fit with the Salesforce marketing cloud.

7. New CXO advisors join — Tony Saldanha (P&G Next Gen Svces, Transformant), Farhan Shah(Allstate, CTO, Head of Platform Eng), Munu Gandhi (VP Infrastructure, AON), Virginia Lyons (CISO, Williams Sonoma) and GTM advisors — Natalie Diggins (Neustar, ex-VP Cloud Platform/DevOps), Francesca Krihely (MongoDB, Dir. ABM/Demand Gen), Richard Crowley (Slack, Ops Architect), Misha Brukman (JanusGraph, co-founder). This means more collaboration with the Fortune 500 and more go-to-market experience as our portfolio companies navigate their path to first customers. In 2019, we’ll be doubling down on this effort as we are hiring a GM for our CXO Advisory Board & Network (job description here).

9. Ongoing press coverage of boldstart themes: every Fortune 500 is a tech company, developer first, and security including Fortune, Techcrunch, Wall Street Journal, Business Insider, SaaStr podcast, and more…

Fortune December 2019 Investor Roundtable

The post boldstart 2018 recap and what’s hot in enterprise 2019 first appeared on BeyondVC.

\I had the pleasure of speaking with Harry Stebbings for the second time on the SaaStr podcast released today. On this episode we took a different tact, focusing more on the zero — 1 enterprise stage and how to get your first referenceable customers vs. scaling post Series B. Please listen here if interested in how to grow and gain your first Fortune 500 customers — show notes below.

SaaStr 190: Why SaaS Founders Should Not Sell Their Products in The Early Days, How Founders Can Build Relationships with Enterprise CIOs and The Right Way To Think About Discounting and Pilots with Ed Sim, Founding Partner @ Boldstart Ventures

In Today’s Episode You Will Learn:
• How Ed made his way into the world of VC from one very meaningful high school lecture that changed his life and career path?
• What does Ed mean when he says “founders should not sell their product to enterprise in the early days”. Starting from the ground up, what can founders do to begin that relationship building process with enterprise buyers and CIOs? What can a startup do to establish that trust in the mind of large buyers? How much of a role does VC backing provide in comforting enterprise buyers?
• What would Ed advise founders contemplating the debate of going SMB up to enterprise or enterprise to SMB? What role should product play in this decision-making process? What are the leading indicators in testing the product that founders should observe for and guide their direction? Where does Ed most often see founders make mistakes here?
• How does Ed think about discounting? Would he agree with a previous guest that “discounting is now table stakes”? Rather than the financial element, what does Ed believe the founder should really be looking to get from the buyer in terms of commitment? How does Ed approach and asses pilots? To what extent should they be free or paid? What can be done to set the benchmarks for success and ensure closing?

1. What does Ed know now that he wishes he had known in the beginning?
2. Quality or quantity of logos?
3. What would Ed most like to change in the world of SaaS?

The post On SaaStr Episode 190 discussing the 0 to 1 enterprise stage and first customers first appeared on BeyondVC.

We at boldstart ventures have regular dialogue with Fortune 500 IT and business executives who are at the forefront of creating more agile organizations. Along those lines, I’ve been exploring new storytelling mediums and have put together a few different Series on Medium (best on mobile) sharing some of our thoughts on how CIOs should think like VCs and move earlier stage to partner with startups. Read here for the full story…

The post Be Bold or Go Home – Fortune 500 Innovation first appeared on BeyondVC.

Look at the Dropbox IPO which priced above its initial value and came out white hot at the end of one of the worst weeks in stock market performance. Couple that with Mulesoft being bought for 21x TTM revenue (see Tomasz Tunguz analysis) at $6.5 billion and Pivotal’s recent S-1 filing and you can see why the enterprise market has everyone’s attention again. However, I’ve been around the markets long enough to know that this too shall pass.

The real story in my mind is about what’s next. It’s true that Salesforce and Workday have created some of the biggest returns in recent enterprise memory. And with that, VC money poured into every category imaginable as every VC and entrepreneur scrambled to create a new system of record…until there were no more new systems of record to be created. My view is that we will see many more of these application layer companies go public in the next couple of years and that will be awesome for sure. There will also still be some amazing companies that raise their Series C, D and beyond funding rounds with scaling metrics. There will also be the few new SaaS app founders who have incredible domain expertise reinventing pieces of the old guard public SaaS companies.

However as a first check investor in enterprise startups, the companies that truly get my attention are more of the infrastructure layer companies like Mulesoft and Pivotal. We are at the beginning stages of one of the biggest IT shifts in history as legacy workloads in the enterprise continue to move to a cloud-native architecture. Being in NYC working with many of the 52 Fortune 500 companies who are undergoing their own migrations and challenges makes us even more excited about what’s ahead. The problem is that as an investor in infrastructure, it’s quite scary to enter a world where AWS commoditizes every bit of infrastructure and elephants like Microsoft and Google are not far behind. Despite that, it’s also hard to ignore the following facts:

1. Enormous spend and growth for public cloud and app infrastructure, middleware and developer software of $50b (Gartner, Pivotal S-1)
2. Rise of multi-cloud
3. Fortune 1000 digital transformation journeys still in early innings
4. Most legacy workloads are still locked on-prem and not moved to any cloud infrastructure
5. Every large enterprise is a software company which means developer productivity is paramount
6. Infrastructure market moves way too fast and more software needed to help manage this chaos
7. New architectures = new attack vectors and security needs to be reimagined
8. Serverless technologies…

and many more threads which can create new billion dollar outcomes. Key here is tying this all to a business problem to solve and not just having infrastructure for infrastructure’s sake.

SaaS to Infrastructure, Salesforce and Mulesoft

Salesforce clearly sees the future and it’s in moving a layer deeper into the infrastructure stack, and combining the world of application with back-end and cloud with on-prem. The irony is that the company that led the “no software” movement is the one that bought Mulesoft, a company where 1/2 of its revenue is from software installed on-premise. What Salesforce clearly understands is that in the world of enterprise, integration becomes king as organizations constantly look to get disparate applications, databases and other systems to talk to each other.

“Every digital transformation starts and ends with the customer,” Salesforce CEO Marc Benioff said in a statement. “Together, Salesforce and MuleSoft will enable customers to connect all of the information throughout their enterprise across all public and private clouds and data sources — radically enhancing innovation.”

It’s a digital transformation journey, one that every Fortune 1000 is undergoing. In a world where Gartner predicts that 75% of new applications supporting digital businesses will be built not bought by 2020″, you can see why Mulesoft’s integration platform helps Salesforce future proof itself and embed itself in a future where developers rule.

The Pivotal Story and Digital Transformation

If you are looking for a story about how large enterprises digitally transform themselves into agile software organizations (to the extent they can), then I suggest reading Pivotal’s recently filed S-1 on Friday. Their ascent over the last 5 years mirrors many of the trends we are hearing about on a daily basis; cloud in all forms — public, private, hybrid, and multi; agility; rise of developers; monolithic apps to microservices, containers, continuous integration/deployment, abstraction of ops and infrastructure, and every Fortune 500 is a software company in disguise. Their growth to over $509mm of revenue from $281mm 2 years ago is a case in point. What Pivotal understood early is that there is no digital transformation and agile application development without infrastructure spend. Benioff clearly understands this which is why he paid such a high multiple for Mulesoft.

For those that don’t know what Pivotal does, here is what they do in a nutshell:

PCF accelerates and streamlines software development by reducing the complexity of building, deploying and operating modern applications. PCF integrates an expansive set of critical, modern software technologies to provide a turnkey cloud-native platform. PCF combines leading open-source software with our robust proprietary software to meet the exacting enterprise-grade requirements of large organizations, including the ability to operate and manage software across private and public cloud environments, such as Amazon Web Services, Microsoft Azure, Google Cloud Platform, VMware vSphere and OpenStack. PCF is sold on a subscription basis.

I’ve been fortunate to have a chance to watch closely through my first check into Greenplum many moons ago which ultimately sold to EMC and spun back out as Pivotal (along with some VMWare assets). I also remember the journey the founders were taking on when they decided to sell into P&L units at Fortune 500s charged with making a more agile company. Instead of selling infrastructure to IT, they were able to sell a vision of how P&L units could deliver on their goals faster. Difficult in the beginning, but proved out over time. These P&L units were the one’s charged with creating the bank of the future, the hotel of the future, the insurance company of the future, all centered around a better customer experience driven off of one platform that allowed developers to be more productive and delivered on any cloud.

My only fear about all of this enterprise infrastructure excitement is that like the SaaS markets of yesteryear, this attention will attract way too much venture capital, driving up prices, and reducing opportunities to create meaningful exits. It’s great that enterprise infrastructure is top of mind, but part of me prefers for it to stay in the background, stealthily delivering amazing results.

Previously published on HackerNoon on Medium

The post The Enterprise Strikes Back first appeared on BeyondVC.

Our initial journey goes way back as we were investors in Guy Podjarny’s previous company, Blaze.io, which sold to Akamai in 2012. For the next few years we collaborated on several co-investments and what ultimately attracted us to Guy’s new company (along with co-founders Danny Grander and Assaf Hefetz), was their bold vision to create a new platform for securing open source components with a dev-first focus. At the time we seeded Snyk in late 2015, open source library usage was growing significantly and solutions were either security first which slowed down dev or dev first but not with enough security built in. With the movement towards continuous integration and deployment, it was clear a new solution was needed.

In a little over two years, Snyk has gone from “founder market fit” to “product market fit” and this new round will allow the company to build out is product offering and expand its Fortune 500 customer base.

With over 120,000 developers using the platform, 100,000 projects protected, 350,000 downloads per month, and notable partnerships with Heroku, JFrog and Microsoft Sonar, Snyk has proven it can get developers to fully adopt a security solution, and the importance of having the strongest database of known vulnerabilities in open source

Funding rounds are always a great opportunity to look back and see how the company’s initial thesis has held up and what has improved or changed. See below for Snyk’s initial vision from late 2015, much of which remains the same today; developer velocity increasing, security isn’t dev-friendly, how do you bridge the gap, esp. in open source world where much of it is third party code.

There have clearly been some tweaks to the model since then, but what is most exciting for us is watching Snyk go from idea and vision in a non-existent market to one where the question of how developers are securing open source components is becoming mainstream. And given some high profile security breaches like Equifax in Sept. 2017 where it was due to unpatched open source vulnerabilities, you can see why the interest in solutions like Snyk’s are gaining rapid adoption.

While the need for dev-friendly open source security may seem obvious today, especially with the stats above, how did we frame our initial investment? Here‘s what got us excited back then, much of which has come to fruition in the 2 years since:

1. Solving a huge pain point in an emerging but potentially massive market — we were witnessing the move to continuous integration and deployment spreading to the enterprise combined with the growth of open source and third party components; the thinking was that if you could make it dev-friendly then it could be a massive business
2. Dev first business model with budget from security — we love bottom up, organic models but always question where the bigger budgets are coming from, and what we saw in Snyk was an opportunity to go bottom up with developers and then access the security budget for bigger dollars.
3. Founder-market fit — GuyPod previously was Chief Architect at Sanctum/Watchfire Security, developers of one of the first web-app firewalls, ultimately sold to IBM. Danny Grander had significant security engineering experience starting in the IDF where he met Guy and into Skybox Security and as CTO of Gita Technologies. Assaf had a Sr Research role at Skycure which Symantec bought last year. This team had the technical and product skills and understanding to go after this opportunity.
4. Repeat founders — we are always thrilled when founders we backed previously give us thefirst shot to invest in their new company. In this case, we had backed Guy before when he co-founded Blaze.io which was sold to Akamai. He eventually became CTO of the Web Experience Unit at Akamai.
5. We like to work with founders well before they leave their current roleand start a new company. In Guy’s case we had regular dialogue over a couple year timeframe to both brainstorm and also vet the idea with our Fortune 500 relationships. We also introduced Guy to fellow founders like Tom Preston-Werner from Github (see blog post on Snyk) to help refine the story.
6. Time to value — incredibly easy to get up and running, authenticate via github, bitbucket and Snyk starts scanning, monitoring, and suggesting fixes
7. We love being able to help accelerate time from “founder-market fit” to “product-market fit” to which we accomplished by helping Snyk secure some of their early on-prem Fortune 500 customers.
8. We are purpose built to double and triple-down in our portfolio as they hit milestones and scale their GTM team.

Once again, we couldn’t be more excited about leading this new round of funding and look forward to continued success for the team.

Also on Medium

The post Snyk, from first check to leader in dev-friendly open source security first appeared on BeyondVC.

The post boldstart in 2017, enterprise tech in 2018 first appeared on BeyondVC.

It’s taking over the ethereum blockchain and despite all of the ideas for enterprise smart contracts and tracking assets on the blockchain, cryptokitties is the first killer app (outside of the currencies) showing end users how they can create unique assets on the blockchain and create, share, track, trade and sell digital goods. To date, estimates have transaction volume of over $10mm and individual kitties selling for over $100k. Yes, those numbers sound insane but my point is that decentralized apps like this open the world to the power of the ethereum blockchain.

According to the crytokittie site:

CryptoKitties is one of the world’s first games to be built on blockchain technology—the same breakthrough that makes things like Bitcoin and Ethereum possible. Bitcoin and ether are cryptocurrencies but CryptoKitties are cryptocollectibles. You can buy, sell, or trade your CryptoKitty like it was a traditional collectible, secure in the knowledge that blockchain will track ownership securely.

To get onboarded, we need to start with a Metamask.io plugin to connect our browser to the ethereum blockchain and the world of distributed apps. It’s pretty simple and once you get up and running, you need to add some Ethereum to your account via Coinbase or direct transfer. Once you have Ether in your account, you can buy a kittie and enter the world of blockchain without even knowing it.

So despite all of our discussion on putting car titles, real estate titles, and other unique assets on the blockchain, cryptokitties, a fun and addictive game, is the one application showing how powerful the blockchain can be for asset tracking and ownership. And it’s not so far a leap to think about what other enterprise digital assets can be similarly put on the blockchain.

The post All Platforms Need a Killer App – Cryptokitties is the one for blockchain first appeared on BeyondVC.

Lately after every conversation, I feel like the world is being divided into two camps and there is a massive battle going on in terms of who is going to own them and how. To oversimplify, I’ll call it pre-customer and post-customer domination. And there are companies looking to blur both of those categories as well.

It’s pretty hard to create a new system of record these days as Salesforce, Marketo, Gainsight and the like are building tighter lock-in around their products. That’s not to say it can’t be done as those companies have larger fish to fry, mainly huge enterprise customers and $1mm + deals. Opportunities abound in the SME (small, medium enterprise), and we’ve seeded a number of founders going after that space.

The Race for the Customer – Owning the Central Repository for Customer Data

After every pitch, I seem to hear one thing – we will be the central place where all customer data resides to make intelligent decisions. Forget about web analytics, marketing automation, email platforms, customer support, customer success, and sales intelligence. The world is moving towards an all-in-one place and holistic view of the customer. This is the blending of tons of different SaaS segments and every company is adding more data to their approach. With APIs everywhere, this is making it easier for companies to start integrating data from multiple sources. Doing that is not the hard part; getting in the mind of the end user of these apps and ensuring seamless workflows will be much harder. At the end of the day, the more you know about your customer, the easier you can understand their mindset, and increase their happiness, and thus your revenue.

Data-driven platforms like segment,  looker, and mixpanel have an interesting view as a central repository for customer data which feeds into apps. Mixpanel, it seems, is going one step further trying to capture more value from their customers by creeping into customer success. App players in various segments like zendesk want to move beyond customer support and into proactive marketing campaigns. Gainsight is pitching how to operationalize the customer lifecyle with cross-functional collaboration and proactive marketing. I can go on and on. This race also plays into another theme, automation and intelligence. Once the data is clean and in one place, it is easier to analyze and make predictions. We made an investment in March of 2013 in Preact, a SaaS platform for customer success which sold to Spotify. The company never completed its mission but big on Gooley’s mind was proactive intelligence. I now believe we have the tools and customer understanding to start to pull this off.

What Are Buyers of SaaS Doing?

As this is happening, more forward-thinking companies I’ve been speaking with are starting to organize their teams around a total customer happiness experience. What this means is onboarding to success to renewals and expansion are starting to fall under one leader. In addition, they have 3-4 various systems where customer data resides and separate teams for success and support and marketing are attempting to integrate data for their workflows. Lots of money and time is wasted and these companies are looking for a better way. Some more technical startups are even building home-grown solutions to solve this problem.

This all makes sense because at the end of the day what companies really want is a holistic view of their customer. This includes every touch point from first web site visit to email conversion and sign up to onboarding to customer success and expansion and finally to customer support.  All channels should be monitored and when a support rep answers an email, call or chat, all of that information should be at their fingertips with no hunting around. When a marketer wants to send out a new email campaign, they should be able to segment based on how many interactions with the customer support team, customer success team, and sales and drive a better data driven email. When looking to expand account size, customer success or reps need to understand every touchpoint and interaction, they need to know the sentiment, and have that all in one place to convert.

Who is Going to Win?

My bet is that a startup will win this battle, one that is not burdened by legacy customers, one that can be Switzerland sitting on top of all of the other platforms, and one that will build real intelligence (using machine learning) with the data they are extracting from all other systems. It may start from an application first view solving a specific problem (customer support, customer success, CRM, email) with expansion into gathering more data or from a data platform/analytics first approach with further expansion into applications. Ultimately though, what’s needed is not just a unified data layer but also a single pane of glass to allow any workflow to seamlessly communicate with customers. As the team at kustomer likes to say, “customers are the atomic unit” and all decisions should be driven off the customer as the unique ID and not tickets or other tech jargon.

Whoever wins this race will surely be a massive company, and I look forward to watching this play out over the next few years.

The post Blurring lines in enterprise SaaS; the race to own customer data first appeared on BeyondVC.

I fully acknowledge and love AWS for the opportunity to fund so many amazing founders who are fully leveraging the power of the cloud platform and services. What I also greatly fear is that Amazon and AWS have proven that they are amazing at taking markets that become hyper competitive and just blowing them up overnight with the lowest cost and good enough offering. AWS has also proven that it will continue to move upstream in the stack from the pure infrastructure layer to the application layer.

Here are a few examples:

1. Amazon Quicksight (launched 10/15) –  fast, easy to use business analytics at 1/10 the cost of traditional BI Solutions
2. Amazon Chime (launched 2/17) – frustration-free online meetings with exceptional audio and video quality – companies like gotomeeting (Citrix) made a smart move selling to LogMeIn
3. Amazon Workdocs (1/15) – fully managed, secure enterprise storage and sharing service, users can comment on files, share, etc – box, dropbox watch out

There are many more examples in the infrastructure space like identity management, API gateways, etc. To be clear, this does not mean that AWS will win everything as those products above have not seemed to make a meaningful dent in competitors, but at the same time, we also can’t ignore the power of AWS. Advantage wise, I would say startups will clearly have the ability to go premium, offering a much better and more comprehensive product but prices will eventually come down.

So as I think about where the world is going, I am constantly reminded of the mid-2000s and now when retailers were/are concerned about being “Amazoned.” As an investor in infrastructure software, I have always been fully aware of this same phenomenon. It’s just now that I can also clearly see that we need to think about which SaaS apps are the next in line to be disrupted. AWS won’t win and own every market, but they sure as hell can disrupt pricing and make life difficult for many competitors.

also published on Medium

The post Why I love and fear AWS first appeared on BeyondVC.

As we move to a cloud-only world with instant-on capabilities and low friction in onboarding customers, why does professional services revenue keep increasing year over year for these enterprise cloud businesses. Secondly, as the world continues to move to the cloud, why does on-prem software exist any more?

Looking at both S1 filings, it’s clear that AppDynamics and Mulesoft have caught on to what Salesforce already knows – if you want to be a massive business you also need to sell professional services. As these tech companies get larger and larger, their target customer also increases in size as these vendors look to move from 6 to 7 figure deals. In order to support continued ARR growth upstream, some of the best companies successfully use professional services as a weapon and make implementation, support and training part of the sale. See Jeff Leventhal’s post (boldstart venture partner and Workrails cofounder/CEO) on why services continue to matter for cloud vendors.

Same goes for why on-prem. In both S1s, we can see Mulesoft and AppDynamics discussing the need for multiple delivery models as many larger customers have regulatory and compliance needs, esp. in banking, insurance, and health care. On-premise and hybrid cloud deployments are not going away despite the continued adoption of the cloud. There is a whole world of what being enterprise ready from a product perspective looks like, and how SaaS companies can use new technology like Docker to have the best of both worlds, SaaS and on-prem without multiple code bases. If interested, take a look at EnterpriseReady.io curated by Replicated (full disclosure: boldstart is an investor).

Professional services drives subscription revenue

From a customer and revenue perspective, Mulesoft has continued to move upstream as their average selling price was $82k in 2014, $105k in 2015, and $143k in 2016. For AppDynamics, the best I could find was total number of customers at end of October 2016 of 1,975 with revenue of $158mm for average selling price of $80k.

From both filings, we can see that professional services revenue became a bigger part of the revenue pie. And in both cases, it’s pretty clear that professional services exist to drive the recurring subscription growth. In other words, neither group is making tons of gross margin and in fact one is almost breakeven while AppDynamics is losing money.

Here is a deeper dive into the importance of professional services revenue at Mulesoft and AppDynamics:

from Mulesoft S1 Filing:

Increasingly, our platform has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our platform for use in such deployments. We must often assist our customers in achieving successful implementations of our platform, which we do through our professional services organization. The time required to implement our platform can range from three months for smaller deployments to six months or more for larger deployments.

from AppDynamics S1 Filing:

The AppDynamics platform is much easier to get up and running, and thus, professional services is a much lower percentage of overall revenue. However, since 2014 the percentage increased from 4.1% to 7.8%, and we can expect this number to keep going up in the future.

Our ability to sell our applications is dependent upon the quality of our professional services and customer support services, and our failure to offer high-quality professional services and customer support services could have an adverse effect on our business and operating results.

Once our applications are deployed, our customers utilize our professional services and customer support services and those of our partners to resolve any issues relating to the implementation or operation of our applications. Our sales process is highly dependent on the quality of our applications, the reputation of our business and positive recommendations from our existing customers. If a customer is not satisfied with the quality of work performed by us or our partners or with the interoperability of our applications with their IT infrastructure, then we may incur additional costs to address the situation and our customer’s dissatisfaction which could damage our ability to sell additional applications and adversely affect our revenue and operating results.

Flexibility of delivery model is huge for large customers – cloud, on-prem, hybrid

As you move upstream in your customer base to larger enterprises, the harder it is to just sell cloud -only as a delivery model as these larger customers demand on-prem or hybrid versions to meet regulatory and compliance needs. Here is a deeper dive on why on-prem or hybrid:

from Mulesoft S1 Filing:

“Our platform is deployed in a wide variety of technology environments, both on-premises and in the cloud. Increasingly, our platform has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our platform for use in such deployments.

from AppDynamics S1 Filing:

We offer a full range of deployment options across most of our applications, including public cloud providers, such as Amazon Web Services (AWS) and Microsoft Azure, on-premises and hybrid approaches. We deliver the same core platform irrespective of the deployment option chosen, which helps ensure that our applications align with the needs of our customers.

What does this mean for startups?

If you are a startup selling to large enterprises, it’s an expensive endeavor. Once you get the first few pilots implemented and convert to paying customers, I would consider bringing someone onboard who can get customers up and running successfully without taking away from executive or developer resources. Professional services is not a dirty word, especially if you remember that it’s there to enhance the growth of your recurring subscription revenue. And while the cloud is continuing to dominate in growth, there are still many huge enterprises in regulated industries that require some form of on-prem software. If you want a shot at those customers, then I suggest early on you consider how to architect your systems in a way to make it easier to do down the line. Examples could include not locking yourself into a full proprietary AWS stack like Dynamodb.

also published on Medium

The post Thoughts from Mulesoft and AppDynamics IPO Filings first appeared on BeyondVC.

When you get down to it, AI is going to be huge in the enterprise but you need to make sure to focus on solving real business problems. Watch to learn more on our discussion about “applied AI.”

Here are some nuggets of wisdom:

Companies are removing #data silos. This will enhance usage of applied #AI

— @keithbrisson @edsim  on #CxOTalk

There’s lots of hard work to make #AI easy for the user

— @sychou @wearecatalytic on #CxOTalk

Great #AI is invisible to user.

— @sychou @keithbrisson @edsim #CXOTALK

AI is like water. Every company will have it eventually. i like to talk about “applied AI.” What problem does it solve? ~ @edsim #cxotalk

also published on Medium

The post Building AI on CXOTalk first appeared on BeyondVC.

The initial Pivotal Cloud Foundry sales pitch was that it gave big companies a way to build new applications that run in a public cloud (rented space on Amazon (AMZN, +0.47%) Web Services, Google (GOOG, +0.34%) Cloud Platform or Microsoft (MSFT, +0.62%) Azure) or private cloud (flexible infrastructure that runs in a company’s own data center.

The need for faster, better software deployment resonated with older companies facing competition from smaller, newer rivals that already use cloud computing. You could argue, for example, that Hilton (HLT, +0.05%) and Hyatt (H, -0.47%) hotels should worry more about Airbnb (AIRBNB) than about each other.

This is yet another sign how large companies are embracing cloud technologies and microservices to be more agile. At the end of the day, it’s not about buying Cloud Foundry because of infrastructure savings, its the ability to quickly and scalably deploy new applications quicker to meet business needs. That’s the bet Pivotal made many years ago, and it’s paying off.

Remember if you are selling infrastructure – stop, sell apps to the heads of business who have a huge sense of urgency to get things done. Most of them also have pretty sizable budgets as well. The byproduct of all of this is saving money but that is not what moves the needle.

Apps selling infrastructure was all around today – see the Fortune Term Sheet note (scroll to middle) on CA’s $600mm purchase of Veracode in the secure dev ops space:

Forrester analyst Amy DeMartine put it nicely when she said that “along with most large technology companies, CA Technologies is on the digital transformation bandwagon and touts that applications are at the center of this transformation,” as she wrote in a recent report covering the impact of the deal. “With the acquisition of Veracode, CA Technologies gives credence to the basic need of companies to secure their applications before release.”

And the Information put out a story (sorry paid subscription) on Google Cloud and how Diane Greene understands how to sell to large enterprises – guess what – apps drive infrastructure spending!

Google didn’t have much traction in the cloud market when Ms. Greene joined, and she has helped the company understand how to sell to corporate customers, said Patrick Moorhead, an industry analyst. “That said, Google Cloud Platform has a ways to go before they can be looked at in the same way as Azure and AWS,” said Mr. Moorhead.

There are signs Ms. Greene is trying a new tack by getting into the market for business applications—such as human resources or customer management software. Google recently advertised for a sales manager for Bebop, the startup founded by Ms. Greene and acquired by Google in 2015, to “lead and grow the dedicated sales team for a new solution at Google.”

Once again, remember if you want to sell infrastructure, sell apps first!

also published on Medium

The post Apps sell infrastructure first appeared on BeyondVC.

1. There are way too many cyber security startups. A record $3b went into these companies in 2016 and $2.5b in 2015. Many startups are features or products and not businesses. Each category and mini category used to only have a few vendors and now you can expect up to 10. Lots will struggle and go out of business and industry consolidation is ahead.
2. That being said, cyber security budgets keep increasing! Banks like JP Morgan spent $500mm on security and yet they are still not secure. While many large cos will still buy from best of breed startup vendors, the landscape is changing as Palo Alto Networks and Symantec keep incorporating new tech and provide an integrated seamless stack.
3. Which leads me to my next point. One CISO of a large bank told me that his team met with over 300 vendors last year. Large companies can’t possibly integrate all of these disparate technologies and the more you have, the more false positives you have.
4. Rise of Nation State attacks – more sophisticated and deadly – many are targeting the largest financial institutions.
5. There is a huge skills gap as there isn’t enough amazing talent to meet the demand.
6. If you look at security market into 3 phases, before, during and after an attack, most money used to go in before phase. Now more is going into the during and after phase.
7. Hackers are also using machine learning and so it is a cat and mouse game.
8. Despite all of this, the weakest link is still people and social engineering. Simple fixes like patching vulnerabilities and 2 factor authentication can go a long way in preventing some of this mess. Getting rid of passwords can also help – biometrics? Anti-phishing, employee training?
9. Assume you are breached – find needle in haystack – better use of machine learning to automate work flows on incident response and back end vs playing cat and mouse game of guarding the gates.
10. US more at risk of cyber attacks than other countries – critical infrastructure is not state owned and we are more interconnected than many other countries – we have more to lose.
11. Seeing more and more folks come out of NSA and our offensive and defensive cyber teams to start new companies – reminds me of all of the startups with IDF alumni.
12. Does move to cloud change security landscape – do we need security purpose built for that or can old box vendors, etc adapt to this world of changing end points.
13. Dev Sec Ops finally getting attention – as we move to world of continuous integration and deployment, incorporating security as early as possible will be critical and this means with the developers.
14. Is PII and GDPR real? The more conversations I had it sounds like there will be some teeth and huge penalties for not following these regs.
15. Security is now a business issue – corporate boards are aware and want to understand their risk posture.
16. All is not lost! Funding for security startups will slow down this year from last year’s $3b, but there will still be plenty of cash flowing for those lucky few who can show escape velocity.
17. Just don’t tell CISOs that all the stuff they bought is junk and they need a forklift upgrade – find a way to add value to existing layer and you can always weave your way deeper into their processes and infrastructure.

Also published on Medium

The post Thoughts from RSA and the Climate for Security Startups first appeared on BeyondVC.

1. Slack – bottom up, adding enterprise features, but not on-prem yet, many early adopter enterprises but can they bridge gap to more traditional
2. Microsoft – Teams, product not as fleshed out but starting with bases of thousands of enterprise clients due to enterprise company licenses, does that mean adoption?
3. Box/Dropbox – coming at it from a technically commodity base layer of file sharing and storage, trying to add stickiness on top with Paper by Dropbox and Notes from Box
4. Google – has Gsuite for Google Cloud – do they add a collaboration layer or do they just buy someone else?
5. Salesforce – has Quip, do they keep adding layers on top?

and many others…

Dom NiCastro from CMSWire has a great article on this: Don’t Expect Slack to Dominate Enterprise Collaboration — Yet

My personal opinion on the matter as quoted in Dom’s article:

Ed Sim, venture capital investor and founding partner at New York City-based boldstart ventures, questions the Microsoft adoption numbers. If a “huge company” with a $20 million Microsoft contract includes departments that don’t use Teams, does that count?

“Slack does have an opportunity here but it has to move quickly and launch those features companies want,” Sim said. “And at some point they may have to look at hosting on-premises if they’re ever going to get there. You have a host of companies that need their own control over data where it’s located.”

Speaking of SaaS and on-prem, I would recommend taking a look at Enterprise Ready and what it means for SaaS vendors to build for enterprises vs. just sell – shameless plug – portfolio co replicated can make this happen and let you still manage one code base!

Lot of lessons to be learned for startups:

1. Consumerization of the enterprise is real and Slack is finally getting there
2. Dropbox and box approached the enterprise with the same model bottom-up model and now are fully enterprise focused with lots of direct sales reps
3. Watching if an incumbent like Microsoft can leverage its massive installed base to win or not. Only time will tell…
4. Funding – all started with small seed rounds (slack $1.5mm even though different biz, dropbox $1.2mm, box $1.5mm A round – and all have raised greater than $500mm in private capital) – so the nail it then scale it model of enterprise SaaS certainly applies here

If history is any indicator, Salesforce did a phenomenal job of attacking enterprises from the bottom up and now going after $1mm plus deals many years later. Slack has the opportunity for sure, and it will be interesting to see if they can move from early adopter enterprise and to the mainstream. Regardless, this is the classic model many startups in SaaS employ – beautiful, easy to use, elegant and incredible time to value, start with bottom up adoption and expand from there.

As the war for adoption continues, the other battle will be adding an intelligent layer, helping companies actually get work done – reading the messages, routing folks to appropriate experts in the enterprise, creating business processes and workflows – keep an eye out for this as Slack continues its collaboration with IBM Watson and Microsoft approaches with its own tech stack.

The post Enterprise Collaboration Wars first appeared on BeyondVC.

If you’re serious about building a company around open source software, you must walk a narrow path: introduce paid features too soon, and risk curtailing adoption. Introduce paid features too late, and risk encouraging economic free riders. Stray too far in either direction, and your efforts will ultimately continue only as unpaid open source contributions.

I would say same goes for any developer-focused company whether OSS or some other hybrid free/premium model. It is truly an art form when it comes to striking that steady balance between developer and community love versus generating revenue and potentially alienating those who supported you.

This is also an important question as it relates to fundraising for dev-focused startups. Introduce your pricing page too soon and that is the metric that Series A investors will track religiously. Bet the farm on developer love and metrics only and you may never get enough traction to get to that next round.

From what I have seen in our portfolio, goal #1 is always to build an amazing community, focus on developer love and track the metrics and tweak. Without the developers, you have no customers.

Optimizing for Price at Seed Stage is a Mistake

Next step is where the art comes in – do I just put a “contact me” form for anyone wanting team or enterprise features or do I throw up a pricing page like below:

My perspective would be you are better off putting a “contact me” page early on to learn as much as possible about who your potential buyers are, your users, budgets, and willingness to pay. Going after revenue too early can be distracting and also take away from building an amazing product. One of our portfolio companies, replicated, has done a great job with this:

Taking your time and learning as much as you can about your community and users also gives you ultimate flexibility into what you charge for and what business model to pursue.

Give Investors a Reason to Believe

There is no 100% sure way to go from Seed to Series A but assuming you have an amazing product, the timing of when you implement pricing is critical to getting to that next level. From my experience, the investors at the Series A stage who truly understand infrastructure software will agree with this approach of optimizing the developer metrics and usage and showing what an inbound funnel may look like versus focusing on the pure revenue.

That being said, it is becoming more and more difficult to solely get the developer metrics (downloads, registrations, projects/services created, any other adoption number) needed to raise a Series A. Lately I have seen success with a hybrid model where you emphasize developer love and then take the amazing enterprise leads reaching out to you and converting a few of them into customers. You don’t need to close a ton, and you don’t have to have a locked down pricing model. However, you do need to demonstrate a steady pipeline of inbound leads and potential customers and give investors a reason to believe that these inbounds are real and not just tire kickers. At the Series B stage it is a whole different ball game.

also published on Medium

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SaaS 2.0, reinventing for the mobile first workforce will continue to remain robust. We also see older school SaaS companies being rebuilt with more flexible back-end technologies like microservices and reimagined with a more responsive and beautiful UI.

While we continue to be excited about opportunities in SaaS startups, it is clear that the game has changed substantially since 2010. Despite the amazing productivity gains from open source, AWS, microservices and other new technologies, we have seen the time to launch extending and the cost of getting a minimally viable product (MVP) out the door increasing. So why is this the case?

1. Most SaaS categories have multiple players and to build a transformative SaaS app means the bar to what a “minimally viable product” is much higher than it was 5 years ago. In other words, a MVP of 5–6 core features may now need 8–10 core. This takes more time, money, and resources. Founders need to make tough decisions on what their definition of feature parity is and what that one unique product angle will be to rise above the noise (more to come in a follow up post).
2. The competition for talent has and continues to be fierce so as tech costs go down, human capital costs continue to increase.
3. Cost of getting message to market has increased due to the noise from the many competitors in a particular space.

So what can a founder and investor do in this changing world?

1. Go niche — pick a vertical, say old archaic tech and SaaS-ify it — my friends at appfolio have done a great job of this rearchitecting property management software, secure documents, and legal case management and they are growing nicely.
2. Go big — you can’t be afraid to go after incumbents in the large markets because as they grow they can lose focus and underinvest in their technology and platforms. Salesforce is 15 years old and Workday is already 11 years old. We’ve taken this approach by investing in experienced founders with unique takes on old school large markets in certain categories like email, CRM, BI, or BPM and going after the big players from the bottom up. Many of these companies start with a simple wedge
3. New category killers — make bets on the next potential category killers and SORs (systems of records) like collaborative data science, enterprise PII, or SaaS for professional services.

With respect to #2 above, we have always been believers in the idea that technology moves in waves and cycles. The larger an incumbent gets, the more it is tied to the short term public markets which moving upstream to larger customers and losing focus on product. Key to this is going bottom up, having an amazing product experience, and growing from there. Neal Conlon who used and loved salesforce at 8 different companies sums it up nicely in a recent post:

So a few months ago when I needed to invest in a CRM for my latest business it only made sense that as the CEO I #eatwhatIsell and reach out and get SalesForce. Like I love, love, love SalesForce. The easiest deal to close ever.

And yet the process for onboarding, the regurgitating of mundane process when I’ve asked for help, and the fact that the sales team knows nothing about me even with all the above mentioned data points are available just makes this customer journey painful. Nobody even looked up my social profiles during the buying process to get some insights.

This is happening across the board at these incumbents — small accounts don’t matter, they need to extract more money from their customers, and they need to get larger customers. This is all great news for startups.

Our approach at boldstart has been to go after 2 and 3, but we know many other investors that have done quite well going after 1. Whatever happens over the next few years, be prepared to spend more money and to take more time to get a product out the door.  The bar is substanitally higher to deliver a MVP and also for raising funds.

Be prepared for a shifting landscape on the feature parity front again in 2017 as we see an intelligent layer weaved across existing platforms, SaaS 3.0:

SaaS 3.0, many of leading SaaS companies are 8–10 years old on archaic platforms, opportunity to rebuild with new stack from back-end to front-end and go after large incumbents (our pitch in 2016 and continues in 2017). SaaS 3.0 is adding an intelligent layer to this new platform.

The post Thoughts on SaaS in 2017 first appeared on BeyondVC.

Before diving into the standard year-end predictions on the enterprise, I thought I would share some data on our firm and our founding teams from 2016:

1. we welcomed 9 new enterprise founding teams to the portfolio including Workrails (started by venture partner Jeff Leventhal), BigID, Hypr, Init.ai, and 5 stealth companies
2. Thematically our new investments include 5 infrastructure/dev platforms, 3 security, and 2 SaaS; 4 are using some form of AI or machine learning; geographically 4 are in NYC, 3 Bay Area, 1 Canada, 1 Chicago
3. 8 of our portfolio companies raised follow on Series A rounds with > $70mm raised and an average size of almost $9mm — announced rounds include Kustomer, Robin, Emissary, Replicated and Front — geographically 2 in NYC, 3 Bay Area, 1 Canada, 1 LA, 1 Chicago
4. 4 of our portfolio companies raised Series B financings with close to $70mm raised and an average financing size greater than $17mm — announced rounds include security scorecard, handshake, and wevr — geographically 2 in NYC, 1 LA, 1 Canada
5. fund iii had an oversubscribed closing of $47mm

Enterprise tech in 2017:

1. We are pumped about the NYC enterprise tech ecosystem! When you have local Fortune 1000 IT execs who are looking to buy innovative technology combined with NYC enterprise startups and west coast VCs and founders building a presence here, you get an amazing recipe for a killer 2017.
2. Fortune 1000 companies continue their slow but steady march to the cloud unlocking significant $$$. Yes, AWS and Azure will garner a bulk of this, but still requires significant new investment to easily monitor, manage and secure this sprawling infrastructure. Concurrent with this move will be microservices/container tech moving from dev environments to production and more $$$ spend being unlocked to support this transition. Abstraction layers and avoiding vendor lock-in are huge.
3. Enterprise companies get more comfortable purchasing from startups. Many are already using open source (numbers range from 70–90% in certain tech stacks) and more and more Fortune 1000s are creating new positions like Chief Innovation Officer, Chief Digital Officer, etc., and we expect this trend to continue. Combining the bottom up, user-driven model with forward thinking IT execs has resulted in shortened enterprise sales cycles across our portfolio and some phenomenal reference customers.
4. AI is table stakes for any enterprise app, not a separate market but weaved into every app from SaaS to infrastructure like CRM, BI, BPM, monitoring and security.
5. Edge computing will come back — data everywhere — can’t do everything in cloud, edge computing and edge intelligence will reemerge — hybrid architecture with secure edge appliances to do analytics for any application where latency is mission critical from industrial (jet turbines, plants) to consumer facing like streaming video and all things between; we have a stealth investment here with more details to come in 2017.
6. SaaS 3.0 — many of leading SaaS companies are 8–10 years old on archaic platforms, opportunity to rebuild with new stack from back-end to front-end and go after large incumbents (our pitch in 2016 and continues in 2017). SaaS 3.0 is adding an intelligent layer to this new platform. One area we are excited about is bringing back Business Process Management (BPM) in a lightweight way, DIY manner by leveraging AI and APIs. In addition, there will be opportunities to create new systems of record for emerging categories like data science and PII data.
7. On-demand startups make deeper push into the enterprise as large companies augment their teams in areas like professional services, research, development, sales intelligence and more.
8. Security will continue to remain white hot — new infrastructure = new attack vectors = new security approaches — areas we are keen on are securing open source at the dev level, managing security policies in enterprise for microservices architecture, IoT security, and biometrics. And let’s not forget about the ongoing rise of government sponsored attacks, a trend that will only proliferate in 2017.

Would love to hear your thoughts as well and here’s to a great 2017!

(published previously on Medium)

The post boldstart in 2016, enterprise tech in 2017 first appeared on BeyondVC.

When Microsoft announced the purchase of LinkedIn an overlooked element of the story was how they planned to give users the ability to find experts while inside of all office apps. Imagine being in powerpoint and having a sidebar to find expert designers who are connected to you for hire or sitting inside of Microsoft word and looking for some editing help from a contact of yours. This is going to be big and disruptive.

One of the key trends we have observed in our portfolio is that larger enterprises are looking to augment their teams using on-demand/freelance labor. We are seeing this across the board in companies like Wonder (on-demand research), Workrails (on-demand software consulting), Emissary (on-demand sales intelligence) and Crew (best freelance mobile designers and developers). We must all be wary of linkedin but I do believe there will be opportunities for incredibly focused startups to thrive in this space as LinkedIn and Microsoft make this more mainstream in the business world.

The post 2017 will be big year for freelance economy first appeared on BeyondVC.

This is a story about starting an enterprise seed fund called Boldstart in 2010 and our journey in enterprise since 1996. Despite our firm being a little over 6 years old, our individual stories go further back. We each independently fell in love with enterprise software 20+ years ago as seed investors (cos like gotomeeting/Citrix, greenplum/EMC, livperson/IPO LPSN) and founders (workmarket, onforce/Adecco, spinback/buddymedia/salesf0rce) and are now benefiting from the ecosystems, knowledge and network that we’ve collectively developed.

What seemed like a big bet in early 2010 was only us pursuing our passion. Our goal was to be the best first check partner for enterprise founders, bringing the value add of a VC firm while moving with the speed and conviction of an angel investor. We set out to build boldstart at the height of mobile app mania and viral growth and were faced with questions about our focus on enterprise and NYC. At the time there were only a handful of micro-VCs in existence, and despite going against the tide, we felt that the opportunity to build the first and best enterprise seed fund was a dream worth pursuing.

Today, we are super excited to announce our final close of $47mm for fund iii. This was oversubscribed from our initial target of $30mm and mirrors not only our growth but also the power of NYC as a hub for enterprise technology. As part of this final close, we are thrilled to have value added LPs like Knollwood Investment Advisory (anchor investor) and Top Tier Capital (institutional lead) join our mission. We are also grateful to our awesome investors who believed in us since day 1, especially Stillwater and KNC Holdings (Jeff Citron family office), our initial anchors. Most importantly, we wanted to thank our amazing group of founders that we have had the privilege to partner with over the years.

This is awesome not just for us but also for enterprise startups in NYC. To have institutional investors the quality of Knollwood and Top Tier Capital seeking an allocation to seed and NYC enterprise shows the tremendous progress we have all made. We still need to generate that first $1b exit, but I have no doubt that is coming, and we will certainly do our part to help make that happen. Our vision of bridging the west and east coasts is also becoming a reality, and it is no longer our secret that there is real enterprise tech in NYC. West coast founders now fully understand why having a NYC investor on their cap table pays huge dividends and west coast VCs are regularly leading Series A and B rounds in NYC.

Having more capital will only further our mission, not change it. Fund III is an evolution of our initial model to be a first check and partner for enterprise founders through their first 18–24 months. The big difference is that we now lead and co-lead seed rounds, write bigger initial checks of up to $1mm (from $300k in fund ii), and reserve significantly more capital to participate in follow on rounds.

1. Core to our ethos has always been to put founders first, not with words but by actions. While it is nice to say these things, what we are most proud of is that in our 6 year history, we have already had 3 incredibly successful teams from Fund I (exits to salesforce, akamai, linkedin) choose us to be their first check and lead partner in their next startups. Add 4 more repeat founding teams we backed prior to boldstart, and another 8 entrepreneurs we backed who are also advisors with carry, and you can see why we believe in the power of founders and building a family.
2. We continue to have the courage to be first on your cap table and the conviction to move swiftly to close rounds.
3. We are 100% aligned with our founders when it comes to raising the best Series A financing as our model is not to lead these rounds but follow on with our pro rata.
4. We will always work side-by-side with our founders and be with them every step of the way as they build their first product, hire their first employee, close their first customer, and realize their full potential.
5. We remain focused on investing in the whole enterprise stack from back-end to front-end including security, smart data, developer platforms and productivity, and game changing enterprise SaaS startups (see our enterprise outlook for 2016 and our current Fund III “announced” portfolio below)

Team Boldstart

Ed Sim, Eliot Durbin, Jeff Leventhal

The post our journey to an oversubscribed fund iii for first check enterprise first appeared on BeyondVC.

Related to this, the question I am often asked is “what metrics do I need to hit” to get that next round. While super important, I always like to understand where the business is in its lifecycle before answering. Having spent the last week in several meetings with startups going from seed to A, I thought I would break down the various types of A rounds and the major ??? to success:

The 4 kinds of A rounds:

1. No A round. Sucks. — self explanatory
2. Vision A round, super hard — raise on the promise and pre-launch, on the vision, huge market with the killer team that can build and scale. sometimes easier to raise on the promise and the expectations of amazing success than after the launch
3. Metrics A round, easier — killer metrics, repeatable growth and predictable sales model, used to be $80–$100k MRR/$1mm ARR, the bar is raising…
4. Hybrid A, toughest — this is where you are between 2 and 3 and the hardest to get done.

So let me break down the thought process on each one and how to put your best foot forward.

1. No A round — cut burn, survive at all costs, we call that cockroach mode if the nuclear winter is coming, and you need to do whatever it takes to survive — never fun to do
2. Vision A round — sometimes it is easier to raise on the promise of what you are going to launch, then launching and having investors wait for the metrics. These rounds, in many cases, are done through inbound leads and warm intros from your existing seed investors and from your network. The narrative is usually the same as well, we are not raising now, but if you are interested and want to get something done now rather than in 3 months, we are open to the conversation. Since this is inbound, you skip many of the initial steps and get right into your business. There may only be a few investors that fit these criteria, but ? is selling them on the big vision and how you and your team have the confidence and experience to get it done. Note, this is not a high probability round but one that can happen and only reserved for the most experienced entrepreneurs. It is especially harder to pull off in these economic times.
3. Metrics A round — you are cranking, have hit the MRR/ARR numbers and have a repeatable selling process. If your market is huge and team solid, then this is one of the easier A rounds to get done, although the bar to success is rising. ? here is to aim for a 30% plus month over month growth rate). If you hit the absolute numbers without a high growth rate, you can’t get this done. Note, this has the highest probability of success but in these times you will need higher metrics to raise the same size round as 6 months ago.
4. Hybrid A round — this is, I suspect, where many startups find themselves. This is one of the harder A rounds to get done as you are caught between a rock and a hard place. You launched your product, the numbers and product look solid, but not the exponential growth you are looking for. So how do you get this round done? If you don’t have the MRR metrics, then you need to think about other metrics you can provide as an alternative proxy to revenue — it may be number of enterprise pilots, number of installations, users at large companies, etc. Yes, it is tougher, but you need to show a story of success and growth the best you can. Also you need to layer on some of the vision pitch as well — this round will require talking to a number of investors and require the most work to close your Series A. My strong opinion is to do whatever it takes to make your company become a metric-driven round. This includes raising additional capital from existing seed investors as an extension to give yourself more runway to realize your goals.

I hope these thoughts are helpful and as you are in your next board meeting, ask yourself if you are a vision, metrics, or hybrid round and figure out how to put the best story together to make it happen.

The post The 4 Kinds of Series A Rounds in Enterprise first appeared on BeyondVC.

Wait, isn’t user engagement more of a consumer metric? It is, but it is equally as important to focus on this metric in the enterprise. No matter what business you are in, you need to ensure that your ultimate customer (the end user) is happy and absolutely loves using your product. I have seen countless situations where a startup extracts initial dollars top-down from an enterprise but ultimately cannot get traction because the end users don’t love the product. Without love of product there is no user engagement, and without user engagement, there is no long-term customer.

This is especially important in the age of SaaS as switching costs are quite low for substitute solutions. This is also the reason why next to VP of Sales, I would argue a VP of Customer Happiness/Success is a crucial hire. One is for generating new revenue and the other is for expanding existing customers and reducing churn. It is also why a number of companies have been created to help understand and monitor user engagement in the enterprise to proactively determine issues before they happen (totango, gainsight, and preact — full disclosure, my fund is an investor)

What is user engagement in the enterprise? When understanding initial customer traction, we like to understand how a product/solution can/will become a daily habit for the user. It is pretty clear that the more an end user interacts with the product the more important it becomes and ultimately the more value it provides. Another important metric to optimize for would be expansion of users within an existing account. In other words, how do you sell into one user and create viral loops (sharing dashboards, etc) and expand the active user base for the product. Once again, this sounds like a consumer metric but quite an important one —the more people that use it the more it becomes part of the ingrained workflow creating more value.

The challenge sometimes is that many enterprise tech companies are designed to work in the background, invisibly to automate tasks or aggregate data to reduce noise. If your tech is seamlessly analyzing data in the background, you need to find ways to show the user how awesome your product is by either sending alerts or creating some other eye candy to remind the user that your product is working and important. I have seen a few of our portfolio companies implement some simple changes regarding this and see their usage increase significantly.

So to recap, revenue matters but the path starts with optimizing for the end user in the enterprise and focusing on engagement. Once you create happy end users who love your product, the revenue will follow.

The post First enterprise customers – revenue or user engagement? first appeared on BeyondVC.

Her answer was quite simply “make the product delightful.” She continued: “I want to iterate to continue to make the product faster, better, and easier to use. I want to get the user to the “a ha” moment even faster.”

And with that I knew that she got it. The company paid user base is already growing rapidly but rather than focus on a couple of features that can boost MRR in the near term, she would rather focus on the longer term.

This reminds me of a quote from Yossi Vardi, founding investor in ICQ (creators of IM and sold to AOL).

“Revenues kill the dream.”

It may sound counter-intuitive but what Yossi is really saying is don’t sacrifice long term opportunity for short term revenue…

The post Revenues kill the dream first appeared on BeyondVC.

I bring a unique perspective to this conversation having been a VC based out of NYC for the last 19 years (wow — am I dating myself!). While I have had my fair share of failures, I have also been a first round investor in many enterprise successes both in and outside of NYC, including leading or seeding the first round in LivePerson ( NYC, current market cap of $650mm), Greenplum (sold to EMC, now Pivotal), GoToMeeting (sold to Citrix, now Citrix Online doing over $600mm+ revenue), Divide (NYC, sold to Google), blaze.io (sold to Akamai), GoInstant (sold to Salesforce.com) and a few others.

Necessity is the mother of invention

As I think about common characteristics of great enterprise startups that I have had the pleasure to work with in NYC, I think about entrepreneurs building companies based on great pain, a deep understanding of the customer problem because they are customers themselves, and from that, using their computer science backgrounds to engineer a better and more scalable solution. Many of these great founders are simply hidden in larger companies, developing software for non-tech firms and functioning where tech is more of a support role versus front and center in terms of driving revenue growth. This is much different from entrepreneurs leaving established software vendors wanting to create a bigger, better, and cheaper mousetrap with a “great technology in search of a problem to solve.” While starting with a customer pain is great, the big question for many of these startups is whether or not this pain is a one-off or a market problem that is massive enough to attack.

Success Breeds Success

Divide

When we first met Andrew Toy and Alex Trewby in mid-2010 they were VPs Wireless at Morgan Stanley and experiencing a huge pain point — employees were bringing in their iphones and android devices for personal use while still using their blackberrys for corporate purposes. Like any great entrepreneur, they asked the question, how do I solve this problem with software and allow companies to have the peace of mind and security policies needed for them while also allowing employees to use their existing devices. The challenge was to create a separate sandbox that could be easily used and understood. Rather than forking off android, Andrew and Alex built an App, something consumers could easily understand and yet make it easy for huge enterprises to deploy. The big bet in 2010 was that we would move to a BYOD world and that Android would become a dominant mobile platform (at that time, it was a big bet!) Hence Divide was born and 4 years later sold to Google and now branded as Android for Work with a stated goal of being on a billion devices. Pretty cool for two ex-technology execs at a financial services firm!

Security Scorecard

We first met Alex Yampolskiy and Sam Kassoumeh in-mid 2013. They were both formerly Chief Security Officers at Gilt Groupe and were experiencing major pain in their day to day jobs. They were in charge of auditing the security of every vendor that touched the Gilt platform and all of it was done manually through intensive Q&A and when in doubt, via an expensive security audit from a consulting firm. As Alex and Sam spent many cycles on this method, they asked themselves if they could continuously scan the security of their partners in a non-intrusive way. It was already clear that software was moving to the cloud but less certain was the belief that a company is only as secure as its least secure partner and continuous monitoring would be imperative. From this, security scorecard was born. SecurityScorecard provides precise global threat intelligence and risk awareness continuously and non-intrusively so businesses and their partners can collaboratively predict and remediate data security issues. Fast forward 15 months from the initial seed round, and they have landed several large customers and closed a $12.5mm Series A with Sequoia Capital, founding investors in some phenomenal, multi-billion dollar security companies — netscreen, palo alto networks, and fireeye.

I could go on and on about many other great enterprise companies in NYC, but you get the point — find a massive pain that you are experiencing and living with first hand and create a software solution around this. It is this unique understanding of the customer that we will see time and time again as new enterprise-related startups in NYC are launched. It is also this deep domain expertise and understanding of the customer that will allow many enterprise startups in NYC to flourish, especially as we live in a cloud-based world where switching costs are not as high as they once were.

Bottom Line

The idea of NYC enterprise startups succeeding should no longer be a laughing matter. We have great entrepreneurs, companies, talent, and investors ready to capitalize on Willie Sutton’s vision — NYC is where the money is (see Jonathan Lehr’s great overview on NYC Enterprise Tech). We at boldstart ventures feel quite fortunate to be invested in a number of enterprise related startups in NYC like security scorecard, divide, truly wireless, handshake, yhat, and bowery.io and are excited about the future of enterprise tech in NYC. We have seen more success stories in the last 3 to 4 years versus the 10 years before that, and we expect this rapid innovation to continue. While many of these companies are engineers coming from large Fortune 1000 type companies here in NYC, we are also increasingly seeing founders leaving the more established tech companies like Google, OnDeck Capital, and Gilt to pursue their dreams.

As I write this I am wondering who the next entrepreneur will be that is hidden in the bowels of a more established company, feeling massive pain everyday, and ready to launch the next unicorn like MongoDb. Is that you?

(reprinted from my post at Medium)

The post One VC’s take on NYC and Enterprise Tech first appeared on BeyondVC.

Here is our attempt and then I will break down how it all ties together:

boldstart’s messaging
We have over 20 years of experience backing bold founders with big visions. Our founding team has led first rounds in market leading enterprises such as LivePerson (LPSN), GoToMeeting (sold to Citrix), Greenplum (sold to EMC), and 24/7 Media (TFSM). BOLDstart helps founders at the seed stage accelerate their growth from idea/ alpha phase to product market fit and successful Series A round. With a focus on seed investing in the mobile, agile, and smart enterprise and business models that harness the power of network effects, our entrepreneurs have successfully been able to raise over $200 million of financing following our initial seed investment. Founded in 2010, we have backed 27 awesome teams including Indiegogo, divide.com (sold to google), goinstant (sold to salesforce), blaze.io (sold to Akamai), thinknear (sold to telenav), Plain Vanilla Games (quizup), rapportive (sold to LinkedIn), and klipfolio.

ok, so let’s break down the key elements of our message:

“We have over 20 years of experience backing bold founders with big visions.”
That is pretty self explanatory. However, to add to this, we love entrepreneurs who have big visions but of course, start with an incredibly focused product. This means we invest in product-driven engineering teams where all of the development is done in house and where rapid iteration is a key to success.

“helps founders at the seed stage accelerate their growth from idea/ alpha phase to product market fit and successful Series A round”
While this sounds simple, there is a ton of work that goes into helping our portfolio companies get to a successful Series A. This includes thinking through what milestones the startups will need to hit to make them attractive for an A round and ensuring there is real plan with enough cash (typically 18 mos) and runway to get there. Since most of our companies have a product that is in alpha stage (super early, buggy), we like to help our entrepreneurs get more market data and customer feedback through our relationships to help them further refine their product.

We also help our teams find key engineers, and sales and marketing folks who can help build and refine the gotomarket strategy for the entrepreneur. Finally, we try to prewire the Series A investment by getting our portfolio companies to meet with the right partners at the right firms early on before they even need money. Getting feedback from smart Series A funds helps the entrepreneur further hone their message.

“focus on the mobile, agile, and smart enterprise”
The big trend in technology today is the growth of mobile. The other force we always hear about is the consumerization of technology meaning that much of the innovation in design, applications, and user interface is driven by consumers first (think Facebook, twitter) and then brought into the enterprise or business after the fact. Yammer would be a great example of a Facebook like feed being brought into the enterprise and then being sold to Microsoft for $1.2 billion. Here at BOLDstart, we believe we are still at the very beginnings of this consumerization trend in the enterprise and hence our focus on the “mobile and agile enterprise.” Many of our portfolio companies in BOLDstart II reflect this theme such as Truly Wireless and handshake .

The other big theme is one of big data. As you know, we believe big data is passé and the real trend is smart data or what you do with the big data that matters. Storing and scaling tons of data cheaply and efficiently is already done. Smart enterprises are analyzing all of this data to make better decisions, increase revenue, and improve operating performance. Making sense of that data with algorithms and other software is the next wave and is reflected in investments like Coherent Path, klipfolio, security scorecard, and preact .

“companies that harness the power of network effects”
we are really investing in companies that can scale rapidly with zero to limited to market costs. Another way we think about this is that we fund products or companies that derive most of its growth by users recruiting other users. In industry terms, this means we looks for companies that have a high viral coefficient. Since we can’t predict the future, our investments in these types of companies are driven by small data sets that we can extrapolate to determine the potential opportunity and usage. For example, when we funded Plain Vanilla Games (Quizup), the team had launched a small test app in Europe called Eurovision Quizup where they were able to sign up 10,000 users in a week and one month later still had 30% of the users come back up to twice a day for 30 minutes a day. Given that other analogs like Words With Friends (scrabble) and Draw Something (dictionary) were quite successful and that no one had done Trivial Pursuit in the right manner, we decided to back the company in the seed round. As they say, the rest is history. We have taken this same approach with other networked investments like memoir.

finally, this theme is also applicable for b2b…
There is also a b2b theme as companies like ooomf and emissary.io are leveraging network effects, viral marketing, and growth hacking to ramp up their user base in the enterprise side. In addition, many enterprise software companies are exposing their functionality/service via APIs so other developers can easily build upon their platforms. APIs are the new business development models for these companies and once again represent many of the elements of consumer platforms. Companies like yhat, zillabyte, and goinstant fit this model.

In the end, we believe that we are better investors in the agile and mobile enterprise because of our front row seat investing in innovative, networked consumer companies. Companies like Plain Vanilla Games and Memoir help inform our thinking on what may/may not work from an enterprise perspective. The long term trend in the enterprise that we have been investing in for years is bottom up marketing. Instead of selling at the C-level, companies are better off getting one user in a department to use a product and then building in viral hooks and loops to help bring other employees on board. This is yet another example of the consumerization of tech. One of our most recent investments which is in stealth mode (will be announced shortly) is a great example of this – 3 users began to use the enterprise product and within 2 weeks, 42 of 45 employees were using the service and were interacting with it at least twice a week over a period of a couple of months. Now there is a backlog of over 200 companies waiting to use the system (we will give more detail in the next newsletter).

We hope this gives you a better idea of how we are thinking about opportunities and building our portfolio in 2014 and more importantly how to approach and what types of companies and teams in which we like to invest.

The post boldstart ventures in 2014 – our ethos first appeared on BeyondVC.

It reminds me of the old kids game “telephone” where one player starts with a message and passes it down the line and in the end the last player repeats what they heard.  Many times the message is completely different from the initial version.  Obviously if you think of messaging in terms of the game “telephone” you will quickly recognize that the crisper and simpler it is, the harder it will be to get lost in translation.  You want the next degree of relationships to be able to explain just as easily as your employees – this is how great buzz builds.

At Cisco, it was “we network networks” or at Tableau Software which went public today “we help people see and understand data” Obviously what goes into sentence 2 can provide a little more detail on how or why you are special (see my blog post from 2007 on why vision statements matter and how to craft one.  In Tableau’s case, it is “we help anyone quickly analyze, visualize and share information.”  And sentence 3 is the build and ah-hah moment – “More than 10,000 organizations get rapid results with Tableau in the office and on-the-go.”  Yes, that is strong messaging to the outside world and in the written word but it can also be simplified for strong messaging from employees in the spoken word.

So remember when it comes to messaging and positioning, keep it simple, easily remembered and to the point. What is your message and does everyone on your team know it? When your startup is out in the market meeting with customers and VCs, will everyone you meet be able to say the same message – “yeah, i met this cool company today and they do “x”.  If so, you off to a great start!

The post Branding first starts with your team first appeared on BeyondVC.

So what does camping out have to do with selling? Let me explain.  In sales I am sure you have heard about all of the various models to prospect, push leads through a funnel, and get to closing.  One underestimated method is the “camp out sale.”  What is it and how do you do it?  Well quite simply, when things begin to stall you basically pick up the phone or send an email and tell the prospect you will be in town the next day or week and would love to come by.  You then “camp out” and don’t leave until you get an answer, presumably yes.  I have to warn you that you need to employ this method selectively and have the right criteria (relationship with sales prospect, size of deal, timing, etc) in place because if done the wrong way you can waste a ton of money and time trying to close deals.  Email, phone calls, and video chats are great, but sometimes you just need to be there to move a process forward.  I have seen this done right many a time and can’t tell you how effective just showing up can be.

To that end, I was on the phone with an entrepreneur yesterday who was trying to get their round closed.  The investor wanted to set up a call to meet the other co-founder before making a decision.  Like any great entrepreneur would do, he simply said I will be there tomorrow and proceeded to book a flight for first thing the next morning.  I will let you know how this story ends but I can assume that an entrepreneur who shows that kind of hustle and willingness to walk through walls to make their company a success will surely leave a great impression regardless!

The post Camping out and closing deals first appeared on BeyondVC.

How about the Essentials +5 or the Essentials.  As I sat in on the sales call, what I remember most about selling knives was that it was a tough and lonely job and my friends teased me the whole summer about being little more than a “door-to-door” salesman flogging kitchen utensils.  Looking back on that experience, I recognize that I learned so many valuable skills about selling and more importantly about myself in terms of constantly being rejected but still having the optimism and fight to move on to the next opportunity.  I am sure by now you are thinking, what does selling knives have to do with startups?I strongly believe that every entrepreneur should take a sales job at one point in their life, even for a summer.  Whether you are a tech guy or product guy or executive, you have to remember that you are always selling – not just to the external world like customers and VCs and partners but also internally as well, drumming up support, getting the team to buy into your ideas, and much more.  I believe there is sometimes a stigma for being a sales person but in reality no business can ever succeed without someone selling your product or service.

Selling Cutco Knives was great because I went through sales training which at the time seemed incredibly cheesy, became enamored with trying to win salesperson of the week and month, and learned how to use referral based lead generation to create sales appointments.  I learned about creating a great script to use on the initial sales call (great understanding for understanding the life of an inside sales rep), how to use a presumptive close (can we meet this Wednesday at 3 or 5), how to properly make a sales call, how to read my potential customer, and ultimately how to manage my own personal sales pipeline and funnel.  From that experience I went on to start my own window washing business and develop a deep appreciation for sales reps and how hard their job really is.  And I find myself selling every single day in my life as a venture capitalist – selling to potential investors, selling my value add to startups, selling to portfolio company CEOs on why they might try another way to accomplish a certain goal, and selling my own partner on why we should or shouldn’t do a certain deal.  If you are wondering what happened at the end of our sales call, my wife and I ended up buying the lovely Homemaker +8 and gave our rep a boatload of referrals.

The post Cutco Knives and startups first appeared on BeyondVC.

1. We look at the team and the product and market first

2. We like to think that all of our investments have IP.

3. IP does not mean patent.  IP in our mind is your “secret sauce” for doing what you do better, cheaper, and faster than anyone else. Its great if you filed for a patent but that is a long process taking 18-24 months and by the time you get a patent the market opportunity may have already passed you.  Focus on building your product and market share, not on patents.  That is your best protection and competitive advantage.  Waiting for the patent office to tell you that you have a patent is a nice to have, not a must have.

4. Even if you have a patent, it takes tons of time and shitloads of dollars to defend.  Trust me, I’ve been there, and it seems to me that the only person making money in these cases are lawyers.  In addition when defending patents you will inevitably fight with the big boys with billion dollar balance sheets so that is not a place to spend your time and money.

5. Don’t start a company where there is already a patent battle brewing like email on phones.  We are looking for innovations, the next big thing, not yesterday’s way of doing it.

Hopefully that gives you a good perspective on our view on IP, patents, and startups.

The post Startups and Intellectual Property (IP) first appeared on BeyondVC.

In several meetings with founders during the past few weeks, they would have been better off answering like Spicoli rather than giving me some hollow answer.  I want to make it very clear that I don’t expect founders to have all of the answers questions, especially in the early days as startups are a series of hypotheses that need to be tested.  In fact, many questions I have may not have an answer today so “I don’t know” will be the best answer. My one caveat is that the “I don’t know” is followed by a how might you figure out the answer or a when might you figure it out.  This line of questioning is really just another way to test how you think and determine how our working relationship might be were I to invest.  I would rather have the honest “I don’t know but I’ll figure it out” then a made-up answer that will never allow you or your investors to really understand what is driving your business.

The post What founders can learn from Jeff Spicoli first appeared on BeyondVC.

Let me explain.  Many entrepreneurs will take this same “never give up” attitude with the sales process or raising financing.  On the one hand this attitude is what is absolutely necessary to get things done but on the other hand it can be quite detrimental.  What entrepreneurs need to do is learn how to qualify their leads and to do it quickly.  The worst outcome for an entrepreneur i to spend countless cycles on trying to close a deal that is not closable or spending way to much time on a lead only to end up giving away the farm to make it happen.  Never giving up may actually prevent you from finding the next great customer or funder.  I have seen this time and time again from many companies and what is problematic is that time is precious for a startup.  You only have so much time to hit your milestones so use it wisely.  When you are meeting with potential prospects make sure to qualify them in  the first meeting and understand if they really do have a need for what you are selling, the decision making process, the timeframe in which a decision is made, and ultimately the potential budget.  If the information does not meet your needs, move on quickly.  You can take your “never give up” attitude by trying to qualify as many prospects as possible rather than “never giving up” on one or two.

The post Never give up but move on quickly first appeared on BeyondVC.

This is happening because there are way too many companies raising seed capital but not enough executing their way to a Series A.  This can happen for many reasons including not raising enough capital in the seed round to begin with and of course not getting your product out the door.  So what does an entrepreneur do when caught in this predicament?  Many try to do an additional seed round or add-on to the prior round.  While not a bad idea, this is rarely successful because many seed funded startups have way too many investors who are more apt to write off the investment then to bridge more seed money.  Secondly many angel investors would rather invest in that shiny new car or first seed round then add more capital to a used car or startup that did not “get there” on its first seed financing.  Smarter entrepreneurs are increasingly doing two things to make sure they don’t caught in “No Man’s Land.”  First, rather than getting 20 great names as seed investors, they are making sure to get at least 3/4 or more of the round invested by a couple institutional seed folks that may have deeper pockets and more ownership in the startup to really care about what happens in the future.  Secondly, the smarter entrepreneurs are really thinking carefully about what milestones need to be hit to raise that first Series A round and work backwards to determine how much financing they need to get there.  While not an exact science, it is imperative to think like this as you don’t want to be one of the many seed-funded companies that will linger in “No Man’s Land.”

The post Startups getting caught in No Man’s Land first appeared on BeyondVC.

Rather than go in-depth on each Techstar company like Alyson Shontell or Ryan Kim already have, I wanted to highlight some overarching thoughts on the NYC market having been an investor here for over 15 years.  As mentioned above, what I loved most about yesterday was not only catching up with many new friends, but also many old ones who were an integral part of NYC 1.0.  Besides talking about the interesting pivots that many of the Techstars companies took during their 3 month program, many of us simply could not resist talking about how the energy was similar to the mid-90s but why this felt different.  In fact, I would liken the 90’s Silicon Alley scene as one of discovery but also one where you could argue that the “Emperor had no clothes” meaning that there were lots of great entrepreneurs and startups but no real lasting value created.  Look, New York had to start from scratch but 15 years later what makes this different is that we can see a much better result-the same energy combined with real operating and entrepreneurial chops, real succceses and failures, real IPOs and multi-hundred million dollar exits, and a focus on the entrepreneur and product, not on the spreadsheet. So why will this be different this time around:

1. Stronger Ecosystem-accelerators like Techstars, DreamIt, and NYCseedstart have real entrepreneurs and VCs with real experience advising these startups – the pivot and changes from many of these startups from DemoDay was quite impressive and evidence of a stronger ecosystem

2.Real technical experience-what everyone of these startups had in-common was a strong core team of technical founders, rather than business folks outsouring development.  And with that, it was clear to see how much these startups could accomplish with so little capital and just sweat equity.  These entrepreneurs understand the concept of lean startup and as opposed to entrepreneurs of the past who hailed from big media/ad agencies/big companies, this new generation of startups starts with the tech guys, the way it should be.

3. Financial support system-now you have Angels and VCs who get it.  I remember the number 1 complaint in the mid-90s, New York VCs don’t get it.  They are risk-averse and spend too much time on spreadsheets analyzing the nth detail on a financial model instead of focusing on the talent and product/market.  15 years later, we have many Angels who are former entrepreneurs and many VCs who get it that are in NYC.  Add VCs from Boston and CA and elsewhere and you have quite an experienced plethora of investors to work with.

The next inevitable question from this rah rah post will clearly be is this a bubble where yesterday further showed the frothiness of the market?  I can’t comment on the public markets but what I can tell you is how these Techstars companies raise capital and at what valuations and timeframe will surely provide us with some leading indicators.  Hopefully they all get funded but I also hope that these entrepreneurs maintain their confident yet humble approach to building their business the right way and not get too caught up in chasing the highest valuation they can get.  All in all, what a great day yesterday and I hope to see many more awesome startups build real businesses out of the New York area. Regardless of what happens, we now have a history of failures and successes which means that we all have more experience to help guide us as we continue to move forward to solidifying NYC as a go-to place for startup activity.

The post The New York Startup Market Rocks and is REAL first appeared on BeyondVC.

While many times I find doing this reflection further confirms our reasons for passing, I also find myself from time-to-time sending up a follow up note to check in on these near-misses or doing a quick Google search to see how the company has progressed since our last communication.  Inevitably, there will be a few that “got away” and seem to be doing quite well.  No one is perfect and looking back every quarter gives me an opportunity to better hone my investing acumen and further refine my understanding on what separates a potential winner from a loser.  Many times we are so busy that we can only look forward to the next new thing or next hot deal, but I encourage you to occasionally take a step back, look in the rear-view mirror, and learn from your past history.  I promise you that this reflection will only make you a better investor in the long run.

The post Reflecting on passed investments first appeared on BeyondVC.

That is ok as that is how markets work.  If you are in this position, all I can say is don’t give up but also be honest with yourself and team.  Assess your strengths and weaknesses, dive into the market and opportunity, and be as lean as possible to give you as much time to get to where you want to go.  If you decide to fight through it and pivot and have the support of your existing investor base then great.  Many companies have been successful that way.  If you decide it is time to move on and capture whatever value you can for the assets then great as well.  Just make sure that you have this conversation with your investors earlier rather than later to ensure you have enough time to execute on the new path. In the end, this process is not unlike what The Gambler from  Kenny Rogers song had to go through at the table.

You got to know when to hold `em, know when to fold `em,
Know when to walk away and know when to run.
You never count your money when you`re sittin` at the table.
There`ll be time enough for countin` when the dealin`s done.

The post Know When to Hold ’em, Know When to Fold ’em first appeared on BeyondVC.

“The paradox in business, especially at a public company, is, ‘When do you focus on growth, and when do you focus on money?’ ” said Mr. DeWolfe. “We focused on money and Facebook focused on growing the user base and user experience.”

This a question that we constantly struggled with at Answers.com years ago and now have found to have struck the right balance.  I remember some of the management and board meetings where we would all intensely debate whether to add an extra advertisement or not on a certain page and how that would impact the user experience vs the revenue line.  While this sounds like minutiae and too much detail, I would argue that if you don’t have this debate internally that you may be tilted too far in one direction.  In the end user experience won, the page views continued to grow, and consequently revenue improved significantly.  Over my 15 years of investing, it is pretty clear to me that the users are in control, keep them happy, and they will come back for more!

The post Put your users first! first appeared on BeyondVC.

Andy Rubin just Tweeted that Google (GOOG) is activating 300,000 phones a day. That passes Apple’s (AAPL) iOS, that passes Blackberry (RIMM). That even matches any figures that Symbian has ever put up. Google is closing in on an astounding 10 million phones per month. Recall that Apple just had its biggest quarter ever with 14.1 million iPhones sold

It is no secret why every mobile company I have seed funded through BOLDstart Ventures is either already on the Android platform or soon will be.  This whole battle of licensing the OS vs. maintaining control of the full ecosystem from OS to hardware reminds me of the early days of Microsoft and Apple.  We all know who won back then – Apple had the best damn product but Microsoft had more distribution.  I am not saying it will play out the same way but looking at the early numbers it is pretty clear that the Android OS will eventually be in more hands.

This brings me to another point.  Right now we are looking mostly at consumers but what about the enterprises?  RIMM is still the dominant player in large enterprises like banks, etc but as well know RIMM does not have a fighting chance.  Smartphones are entering the workforce and enterprise whether IT likes it or not so how best to deal with it?  Will Apple or Google focus their efforts here?  I just made an investment in a stealth company that solves this problem for Android.  By downloading an app, a user can now run another instance of Android on their device which is secure and can be managed through the cloud by IT with various policies.  Think of it as a virtual machine running on the handset.  This can be great for corporate as now their employees can buy their own Android smartphones, use it personally, but also live within the confines of IT policy by simply clicking on the App and entering work mode, for example.  More to come on this in the future.  Why not start with the iPhone?  Well Apple’s strict policies for applications prevented the company from doing so.  Either way, this will be a great battle to watch in the future.

The post 2 horse race in mobile – iphone and android first appeared on BeyondVC.

In order to help our new CEO, I reached out to all of the other investors, and we all agreed that if we all spoke to him a few days a week about the same information that he would not have time to run his business.  In addition, this would be redundant for the CEO since most investors were asking for the same basic information.  In the spirit of streamlining information flow, we worked with the CEO to put together a weekly email to provide us with the key metrics the company tracked along with departmental updates on key high priority projects.  We weren’t asking the company to create something they shouldn’t already have (key metrics, departmental priorities, cash balance) but rather we just wanted the data shared on a timely basis.  Over time, we all found that when we did speak with the management team that we did not have to spend a half hour gathering information but rather we could get right to the point and actually discuss the whys or hows on certain sales numbers, metrics, or prospects.  In the end, we were all much happier and more productive since we had the same baseline of information and could focus our energy on productive and deeper conversation on the business stategy rather than gathering basic data.

Over the last 6 months I have made a number of seed investments and have shared the following company update with them. Each CEO has had their own minor tweak but this should give you a sense of what investors may be looking for and how it can help you streamline your communication and focus on how to extract value from your many investors.  If you choose to update weekly then obviously it will most likely be a shorter piece with maybe only the cash burned and current cash on hand as the financials.  If you choose to send out a report monthly then it may be more like the form I have uploaded on docstoc.

One other important note I forgot to highlight is that since many companies I invest in are web-based and therefore many of them have real-time metrics I can track.  Michael Robertson who started Mp3.com and Gizmo5 (sold to Google Voice) had one of the best real-time dashboards for tracking his business.  I could see number of downloads, minutes used, new paying customers, etc. whenever i wanted to by logging into the system.  Other companies have created an investor wiki or use status.net (full disclosure-a BOLDstart seed investment) or other communication platforms for investors to share ideas and information.  I only imagine this will even get only better in the future.

Anyway, enjoy and I hope to hear some feedback on what is missing or what may be too much information.

The post Standard investor update for startups first appeared on BeyondVC.

It is pretty evident that FreshDirect took its time to understand how to enter a market, serve it well, and make it profitable.  In other words, FreshDirect spent its time to build a repeatable sales and market entry model before moving on to other locations.  In addition, its expansion is still local based-close to its distribution point in Long Island City, NY.  You don’t see the company going out to San Francisco – rather, it is slowly expanding outside of its first core market, NYC.

As an entrepreneur, you should take the same approach before expanding too quickly.  Whether you are hiring a sales force for the first time or expanding territory for your product or service, make sure you have a repeatable sales model before conquering the world.  More often than not, I meet entrepreneurs who raise too much money too fast and expand way too quickly before having a product that is fully baked and ready for primetime and before the company knows who it is selling to, how it is selling to them, and what the core value proposition is.  Get everything right in your first market like FreshDirect and you will build a great company and avoid monumental disasters like Webvan.

The post Don’t build an empire overnight – lessons from FreshDirect and Webvan first appeared on BeyondVC.

What makes a startup team great early on in terms of getting product out the door and rapidly refining and honing the product from live market feedback can also lead to issues down the road if companies and employees are managed on a similar basis.  What is easy to roll out in a 5 person company gets harder to manage in a 25 person and even harder in a 50 person company.  Take the test – ask your key executives what the 3 key company goals are for the month?  Are they the same or not?  How will they help contribute in each of their functions to delivering on the 3 key company goals?  If they are not on the same page and you have trouble getting them together, you may want to continue reading for some thoughts on how to improve communication and accountability.

Here are some simple steps you can take to create a more fluid organization.  First, institute a weekly management meeting.  Yes, like you, I have an allergic reaction to the word meeting, but believe it or not, simple processes can help tremendously.  It is a great way for the CEO to get input but also guide the team to focus on the same company goals for the month or quarter.  Secondly, have key team members provide a weekly dashboard report and list of key goals to accomplish for the following week.  At every weekly management meeting, have each team member discuss progress against his/her team’s goals and what they will be working on for the following week.  How does each of the departmental goals contribute to helping the company meet its goals?  Once again, this all may seem simplistic and a giant waste of time versus managing the next product release, but you will be amazed at the number of companies I meet that have not gotten to this point and consequently seem to have different ideas of what the business is and how to get there.  In addition, having weekly management meetings and clear weekly goals with simple yes/no criteria goes a long way towards creating an action-oriented culture of getting results.  If a VP doesn’t deliver consistently, all of the other executives know and they also know it is time to make a change.  No one wants to be the manager that is known to overpromise and not deliver.  There is also a real difference between a manager having weekly individual meetings with their CEO vs. openly discussing theirr priorities and completed tasks with their peers.  With respect to cross functional communication, rather than complaining about engineering, for example, sales and marketing can now understand engineering priorities and what it may take to adjust and rearrange some of them to meet the revenue targets for the quarter.  Trust me, there are many more factors to a company’s success and failure, but please don’t make an allergic reaction to scheduled meetings and a simple lack of organization your cause for execution problems.

In fact, we can skip the word weekly report, and instead just say lay out the 3 things you were supposed to do this week and where you stand on them.  One other important point to note is that make sure that everyone on your team understands if they hit a roadblock on any of their goals to come to you immediately to tell you what the roadblock is, a couple ways to potentially resolve the issues, and then to discuss with you.  Clearly this is a methodology that can scale as you grow your team and business.  Good luck and remember to keep it simple.

The post Scaling your management style first appeared on BeyondVC.

Given these facts, I was quite saddened to read the blog post today from Todd Agulnick, Co-Founder and CTO of Xmarks, Inc.  In the post which I believe is a must-read for all entrepreneurs, Todd lays out how he started the company, built it, and tried multiple times to create a revenue model from the incredible number of users and data he amassed over a few years.  As Todd states:

We spent the next year turning over every conceivable rock looking for ways to use the data in our corpus that would prove compelling to our users and revenue-generating for us. Some of these ideas, like SearchTabs, saw the light of day; others never made it out of the lab. Our “SearchBoost“, service was an upsell to advertisers: pay us a fee and we’ll add a mark to your ad when it’s displayed to our users, showing the bookmark rank of your site. Our tests showed that we could boost ad click-through rates by 10%. We built it and it put it front of potential advertisers. Many were interested, but ultimately the feedback was negative: our user base was too small to be worth their time and attention.

As evidenced from above, it sounds like Todd and his team tried every conceivable way to build a business out of their awesome product.  If you are an entrepreneur you have to remember that building a consumer Internet business is not easy!  Even though Xmarks  jumped over 3 of 4 huge hurdles -building a great product/service, amassing users, and growing quickly, it was still not enough to build a scalable revenue model.  Does this mean that I expect entrepreneurs to have a sustainable revenue model from Day 1?  Definitely not but on Day 1, I do want to hear about the various ways you may generate revenue in the future.  I also want to point out that advertising will most likely not work for your business unless you can generate a significant amount of traffic, way more than you even think you are going to need today.  And finally like Xmarks, it may not work the way you dreamed it would but please take all of those lessons learned to your next startup as you will be all the wiser with the experience you had.

The post The consumer Internet business is not easy first appeared on BeyondVC.

Little do people know that when Dawntreader first funded Dali Media along with Impact Venture Partners and Primedia Ventures that the company was called Dali Media and then Metapa, standing for media to all places.  This was the year 2000 and the idea was that Metapa would allow any company to send any media asset over any content delivery network and our service would automatically transform the asset for viewing anywhere.  We did have some large initial customers but quickly realized that we were far from capital efficient in a market crash and that we would have to refocus and restart.

Enter Phase II where we made a number of changes and ended up using our software for some data anaytic projects.  Frankly we did this to keep ourselves around long enough to figure out what to do next.  Luckily we had a number of large paying clients that allowed us to sustain ourselves with a little extra cash from the founders and my fund.  Enter Didera (backed by Hudson Ventures) which had a database clustering solution which would allow us to take our data analytics solutions on to commodity clusters.  We bought that company in 2003 and invested some more capital.

We launched an initial prototype, landed a few customers, and brought in Mission Ventures as a new lead investor for the restart of the company.  A few months after closing that round, we changed the name to Greenplum.  This is also when we had to stare at the abyss for the third time.  Although we had a couple of great customers, we discovered that our software would not scale to the desired level.  I vividly remember the day that Scott Yara and Luke Lonergan came in to the room to tell us that we had serious problems and that we would have to start development over and scrap the old architecture for a new one.  Our initial reaction was disbelief and then anger as we saw our venture money and the team’s efforts go down the drain.  However, what we also saw was a founder and team full of integrity so Mission and Dawntreader along with the founders decided to pump some more money into the company.  It was a painful process as we had to let go of the sales team that had built initial momentum and we had to hunker down and restart.  However I see that moment as the critical turning point for the company as well.

9 months later we had rebuilt the architecture, relaunched, and landed a couple more great customers.  Enter Sierra Ventures and our first big round of capital which also allowed us to bring Bill Cook as CEO.  The one moment that stands out in my mind was when we were interviewing Bill for the CEO position.  Since he was based on the west coast, he had already met with the other investors.  We started with a phone call and within 15 minutes, Bill decided to get on a redeye and meet me for breakfast to continue our interview.  What I saw in Bill and the rest of the team was how to get deals closed and the desire to do what it takes to make things happen.  Needless to say Bill brought that same culture to the company which took us to where we are today.  Eventually Meritech came in and led a new round and then we were off to the races. 

However, the moral of this story is that sometimes your startup won’t grow in a straight line and many times you may take one step forward, two steps back, and then 5 steps forward again.  Secondly, from personal experience, if you have the right team who is passionate and understands how to be flexible in the face of difficult market conditions, you can still build a great company.  When we sold GoToMyPC to Citrix, we also restarted the company from the initial business model that we had and did a complete 180 degree change.  I am not advocating that you try to do this but only proving the point that entrepreneurs will probably fail on their initial model and may have to make changes to their business.  Success can be attained in a big way under that scenario so don’t quit.  The guys at Dali Media, Metapa, and Greenplum surely did not and created a phenomenal exit for all involved.  Best of luck at EMC building a killer business in this new era of Big Data!

P.S. There is much more to this story and many more lessons to be learned – I will do my best to share some other tidbits in the future such as how companies are bought and not sold, how our partnering strategy helped us grow, how we dealt with competition, etc…

The post EMC buys portfolio company Greenplum – more behind the story first appeared on BeyondVC.

1. Yes-Man: This is pretty self-explanatory.  Whenever the board tells the CEO to go into a certain direction, he/she does.  If it means the board telling the team to launch a Facebook or iPhone app just like everyone else, then they do it.  Initially for the VC this may seem great but in the long run this can be quite detrimental to the company and value of the business.  If the VC/board member is dictating everything from strategy to product features, then what is the CEO and management team doing?  At this point, you are running the company and not the entrepreneur.  What this means is that it is time to get a new CEO.

2. No-Man: The No-Man is the CEO who gets ultra defensive whenever a board member asks for information or provides thoughts on how to help create more value for the business.  He/She always says no at any board suggestion and many times does not even have a good reason for saying so.  They say no simply because they don't give a crap about their board and they want to run the show and take zero advice. Saying no is not necessarily a bad thing as many board suggestions may end up having you chase your tail but as a CEO I would encourage you to use some tact when dealing with your board.  That is where CEO behavior #4 comes into play.  In the end, if a CEO is a No-Man then ultimately the board will replace him/her in the long run because it will be impossible to work with one another due to the hyper-defensive stance taken by the CEO.

3. Yes but No: This is one of the worst behaviors.  The Board asks the CEO to research a certain path and the CEO agrees.  The Board checks in 2 weeks later and nothing has happened.  The CEO consistently tells the Board it will do something but his/her actions are the complete opposite.  In fact, this inaction is really a Big F-U to the Board and tells us the CEO has no spine to disagree with the Board and probably does the same with his management team.  This kind of behavior is simply unacceptable and ultimately results in dismissal as well.

4. Open-minded: This is the best type of behavior.  This type of CEO usually says No immediately when something doesn't make sense and gives reasons why.  When he/she agrees with a suggestion, it is duly noted as well.  Finally, when this CEO does not understand something, he/she agrees to research further and get back to the board.  No our feelings are not hurt if you say no.  In fact we will respect you.  At the same time, we may have a few nuggets of wisdom to share as well so keeping an open mind is beneficial to all.  And if you don't know whether you agree, researching further can only help get a better answer.  This behavior is definitely conducive to a strong board relationship and will keep you in the CEO seat longer.  Yes, this does not mean that you can execute but this is definitely one measure of the many that board consider in their CEO success profile.

Ok so I outlined 4 CEO behaviors when dealing with boards, only one of which is positive.  At the end of the day, the Board-Entrepreneur relationship is a give-and-take one.  Both sides have to be willing to express their thoughts (diplomatically) and have an open dialogue.  The Board does not know your business better than you and if you disagree, tell us immediately.  If you agree, tell us immediately as well.  We all don't have time to waste and dancing around a topic does not help anyone get a better result.  As an entrepreneur, guide the board as well-tell us where you need/want help.  This relationship will have friction at times but don't let it get personal.  Friction is good-that is how everyone gets to a better decision point.  I hope this helps.  Remember the management team is running the business, not the board, and the board is there to help guide you strategically and make sure you don't make the same mistakes we have seen from numerous other companies.

The post 4 Types of CEO Behavior when Dealing with Boards first appeared on BeyondVC.

I truly believe the next battleground will be based on scaling the back end and more importantly mining all of that clickstream data to offer a better service to users.  Those that can do it cheaply and effectively will win.  The tools are getting more sophisticated, the data sizes are growing exponentially, and companies don't want to break the bank nor wait for Godot to deliver results.

Ok, clickstream data and data mining sound kind of geeky, but with every one of our calls, clicks, and purchases being tracked and logged it is an important topic.  My friend Scott Yara, co-founder and President of Greenplum (full disclosure-my fund is an investor), wrote an interesting post the other day which is more mainstream calling this ongoing revolution the "Your Data" revolution.  

The point here is that data can be a wonderful thing if used the right way and if controlled by us.  For example, Scott points out;

Your Data can lead you home with turn-by-turn directions on Mapquest. It can find you love by sorting through the profiles of 20 million other lonely hearts on eHarmony. It brings you up-to-the-second stock prices, sports scores, and flight delay alerts. It helps doctors fight diseases and engineers design safer cars. It gives environmentalists the power to track the movements of endangered animals and biologists the tools to map the structure of our genes.

Your Data, in short, is transforming everything.

However, with all of this data comes great responsibility and opportunity.  As Scott points out:

We also need to make sure we can use all the information we're collecting. That means better schools that will turn out kids who are able to cope with the age of Your Data. And we need better, cheaper technologies to enable companies of all sizes, as well as organizations and individuals, to get all the information they want and do something useful with it.

Knowledge is power, and we know more than any previous generation could even conceive. We're moving into a world of infinite information. The challenge we face is turning all that information into insights, conclusions, and revelations — in other words, turning that knowledge into wisdom, without letting it be turned against us. We need to make sure Your Data doesn't oppress us, but serves us. And we need to do that fast, because the revolution is well underway.

From a VC and entrepreneurial perspective, what excites me is that we are just scratching the surface of what to do with all of this data and how to turn it into actionable, meaningful insight.  In order to make data and insight more accessible to everyone we first need the back-end technology that makes data storage and analysis better, faster, cheaper (enter companies like Greenplum-ok, shameless plug ).  We then need great entrepreneurs to continue to build new services that help end users seamlessly and implicitly help everyone make better decisions, discover new things, and empower and motivate us to do more.  In addition, we also need to consider cultural factors.  For example while privacy still needs to be at the forefront of the Your Data revolution, we also need the ability and power to choose what we want to share and when with the world.  Little did we know that four years ago, more people than ever would be willing to share their whereabouts through services like Loopt or Foursquare or Twitter and their every thought through Facebook or even their credit card purchasing data through new services like Blippy.  It is clear that the once sacred walls between private and public information are increasingly disintegrating based on these cultural factors. While we clearly have to be careful not to extrapolate too much from early successes like Blippy and Foursquare, we also cannot underestimate the power of these cultural factors as once young start-ups like Facebook and Twitter have exploded in growth.  The question is who will create the next great back-end technologies and new web services that drive a whole new conversation and new way of thinking about what we do with the data that is around everywhere.

The post The Ongoing Data Revolution first appeared on BeyondVC.

To be honest with you, many of the companies I have met with seem like features of a broader product offering.  That is not bad in and of itself as focus is key when starting a company and going to market. As a start-up, you always want to be the innovative player with the new easy to use technology.  However, just being the mobile version of what is already existing in the market is a cause for concern as it doesn't take much for a larger competitor to replicate that effort and use its marketing muscle and existing customer base to freeze a start-up out.  Sure, you may get some customers early on as you are the only one, but in the long run you need to think about what broader feature set you will offer to be a true standalone product. 

A product is typically a couple key features tied together to solve a problem for a customer.  This means that you can provide more value to your customer and consequently extract more dollars from your end-user.  The opportunity for many companies that are just features is a quick flip, but the risk is if that doesn't happen the large player may just develop the feature in-house leaving no exit for you.  The more seasoned entrepreneurs know that starting out with a killer feature is just a launching pad to bigger and greater things.  They know it is just a go-to-market strategy that is part of a larger vision and a step towards a broader offering down the line.  These entrepreneurs know that they may never get there, but also understand that without this they have a limited market and return opportunity.  yes, I know start-ups are inherently uncertain and many times it is difficult to even calibrate how big the market is, but don't forget to lay out the broader vision beyond the initial killer feature when building your company.

On the flip side, what I don't advocate is coming out of the gate as a complete and whole product solution.  This brings you right into the crosshairs of large, incumbent players and makes your life much more difficult as you have to sell against a much larger salesforce with significant marketing muscle.  While your goal may be to grow to that kind of solution, start highly focused, features are ok, but have a broader vision to show a path towards building a great company.

The post Is it a feature or product? first appeared on BeyondVC.

For those of you who are not familiar with the Quadrant, you can read more about it here.  In short, it is Gartner Group's proprietary methodology to rate IT vendors in a particular market based on Ability to Execute and Completeness of Vision.  In the end, every market is broken out into 4 quadrants, Leaders (top right), Challengers (top left), Niche Players (bottom left), and Visionaries (bottom right).  For the most part, Leaders and Ability to Execute comes down to number of customers and customer references that Gartner has done and the size of your company and ability to go to market.  Based on this criteria, you will never see startups in the Leaders quadrant on Day 1.  However, what you should expect from a startup is a visionary position meaning the company has some phenomenal technology that fits a market need and is leading the future of the industry but at the same time does not have the customer base or resources to go after the big boys today.  If you are in the niche category then good luck.

So how does a start-up navigate the Gartner waters?  First, I would read this overview from Gartner to understand how they think and rate vendors.   Secondly, I would contact the relevant analyst to set up a meeting to discuss further.  Given my experience, I must say that developing a relationship with the analyst is key to helping you improve your standing in the quadrant.  This means buying a subscription to Gartner and then hiring the analyst for some consulting.  As with any business, you will have some impressive analysts and others who are not as strong.  Regardless, I have found that by sharing your ideas and vision for the market with the analysts early on can help them synthesize their views of the market.  If you can have your Gartner analyst take your thoughts as his own then you know you have really done a great job in discussing the market.  What many companies don't know is that you also have to be proactive about the Magic Quadrant.  As you sign up new customers and partners, share them with Gartner so they can call every new customer and partner in advance.  Many times companies wait until the last second and inundate Gartner analysts with numerous calls and information and many times these analysts cannot process all of that info which means it will have to wait until the next release of the Quadrant.  So all in all, be proactive, don't be afraid to pay as you may learn something and it is a necessary evil, and build a relationship with your analyst.  I hope this is helpful and I would love to hear your thoughts and comments on this subject.

The post The Gartner Magic Quadrant – a necessary evil in IT first appeared on BeyondVC.

You see, it is always hard for a startup to enter a market with an end-to-end product positioning as most customers expect large companies to cover this territory.  What most customers expect from startups is innovation and breakthrough offerings, not end-to-end solutions.  Going back to the call, my humble suggestion was for the management team to complete their beta test with their handful of customers and figure out which 2 or 3 features were the most compelling and differentiated offerings with respect to their competition and market.  They should then plan their go-to-market strategy with a more focused approach that emphasized a new and innovative offering instead of a "we do it all for you" approach.  In the long run, if successful, the startup could always add another feature or two as they grew their customer base but keeping the message simple early on is imperative to drive a successful product launch.

The post Market positioning for startups – focus, focus, focus first appeared on BeyondVC.

Either way, I would like to caution those start-ups out there who are looking to aggressively ramp up their sales based on a great quarter (more on this from a post in 2006 on when to hire a vp of sales).  Yes, it is imperative to keep the momentum building but before you get too aggressive with your growth plans make sure you can answer all of these questions about your go-to-market strategy:

1. Do we have a clear value proposition and know which market we are selling into and who we are selling to in the organization?

2. Do we have the right product and are our customers satisfied? – selling is one thing but if the product has serious issues in production then ramping up sales could put a severe strain on the business moving forward

3. Are our sales repeatable or one-offs which means lots of customization of our product on every deal?

4. Is our quarter based on one or two lucky huge deals or based on a broader swath of customers?  Do we have a continually growing sales pipeline or did we run it dry for a big Q4?

5. Do we have a solid understanding of the full sales cycle from lead generation from marketing to the closing of the sale – it is important to get good metrics here to make sure that marketing is spending wisely and targeting the right areas of the market to build the pipeline.  You need to feel confident that if you spend more on marketing, you will get more leads which will lead to more sales.

6. How can we build a more leveraged sales model through resellers, partners, or OEM relationships – you can't do this without answering #1 above.  If you are solely reliant on direct sales then think long and hard about how to add more leverage to the model

In short, if you can answer these questions and the data and anecdotal evidence from the field points you in the right direction, then by all means ramp up your growth.  If you can't answer all of these questions in a highly positive light, then cautiously ramp your sales.  Too many times I have seen portfolio companies get overexcited about their growth prospects and then realize the product is not ready for primetime or that the pipeline has run dry and subsequently the startup overspends and needs to go through a layoff.  Overhiring and then cutting back can be quite negative for morale and can also be a huge cash drain and distraction for management.  Just remember to take a step back and do some analysis before you bet the company's future based on a good quarter or two.

The post When to ramp sales first appeared on BeyondVC.

Given my experience with SAAS based companies like GoToMyPC (Citrix Online now) and LivePerson (Nasdaq: LPSN), we also spent some time discussing key financial metrics for SAAS businesses that he should pay attention to as he ramped up his business.  Once again, no startup spreadsheet is going to accurately predict the future, but it is imperative to understand some of the key variables that will drive your business so you can prepare early on to have the right people in place and the right focus.  In my mind some of these key variables include new bookings, growth of deferred revenue, churn rate, cost of acquiring new customers, and obviously cash.  New bookings are a better indicator of sales growth for a SAAS company because typically contracts are signed for 1 year or more and the revenue is recognized monthly as the service is delivered.  So if a SAAS company signed up $1.2mm in bookings for December, it may only recognize $120k each month.  The remainder would go into deferred revenue.  Another area that is quite important is churn rate.  If your company churns or loses 5% of customers every month, then during the course of the year the company will have to replace a significant number of customers just to maintain status quo.  What this tells a company is that they while focused on adding new customers, they also have to make sure customer satisfaction is up to snuff and that they keep their existing customers happy.  Also if your cost of acquiring a new customer is high and breakeven is longer than the contract length, then your company will never be financially stable if you cannot keep your customers on board.  Finally cash is an important metric for all startups – watching the burn rate and being proactive about it can keep you fighting through the lean times and prepared for growth.  While many SAAS companies may collect cash monthly or quarterly, some collect annual fees by offering discounts by paying upfront.  This is a great way for SAAS companies to keep the cash coming in earlier so they can use it to fuel growth.

The post Startups and financial models for SAAS companies first appeared on BeyondVC.

At the end of the day consumers don't care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications.  What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity? 

Between 2006 we definitely had some ups and downs but through it all two big decisions helped us get here today.  First, we drastically cut the burn rate before the nuclear winter and decided to focus on getting to breakeven.  Being capital efficient and reliant on viral marketing certainly helped us grow our business and stay lean and mean.  Secondly, when Grand Central came out with their single phone number we decided to integrate Gizmo5 into their service.  Of course since both Grand Central (now Google Voice) and Gizmo5 were SIP compliant and based on open standards it certainly made that process quite trivial and easy. 

Fast forward 3 1/2 years to today, and all I can say is that I look forward to seeing what Google Voice will bring into the future and whether true openness can trump Skype's proprietary protocols.  It also seems like the vision of one number for PSTN, VOIP, or cell identity I wrote about long ago will become a reality.  One last thanks goes out to Maurice Werdegar and the team at Western Technology Investments (WTI) who provided Gizmo5 with venture debt and worked closely with us in the tough times to restructure our payments.  I would work with these guys any time.

The post Google acquires portfolio company Gizmo5 first appeared on BeyondVC.

Phase 1 – Consumerization of IT – all internal corporate users are consumers first and then employees second.  we have all seen how consumers have gotten used to using browsers and SAAS-based applications and how successful startups have been able to provide web-based applications that users can pull into the enterprise environment starting at a department level rather than having to go out and sell and push technology into enterprises.

Phase 2 – Rise of open source – I would call Phase 2 the rise of open source software over the last 10 years – most of which is hardcore infrastructure type software such as databases, virtualization software, and the like.  IT folks leveraged the web and Google not just for applications but also to download core software to help run their internal operations.

Phase 3 – Googlization of IT – have as much of your infrastructure as you can run like Google's – distributed, commodity-based, and in the cloud on a private basis.

Phase 1 and 2 are ongoing and Phase 3 is where I see a few of the more forward-thinking IT departments I have met with over the last few months going.  I am not just talking about Google Apps (like email, etc) but about how companies can run their infrastructure internally like Google.  If Google can deliver a number of highly scalable web-based apps by clustering commodity servers, then how can enterprises do the same for themselves.  This is not about getting sucked into buzzwords on the cloud but really understanding the cost savings and performance benefits a company can get from transitioning some of their infrastructure to a Google-like model. 

One company in my portfolio that is leading the charge in the data warehousing space is Greenplum.  A customer can buy our data warehouse, cluster commodity servers like Google, and get petabyte scale and much better performance for less than the cost of maintenance of many existing solutions on the market today.  In addition, large global companies can have these nodes accessible to anyone anywhere in what we call the Enterprise Data Cloud.  One of our large customers said that data was a strategic weapon and that he wanted to make the cost of a running a new query zero.  In today's world and without the enterprise data cloud initiative I can tell you that running new queries in a global organization is an expensive and time consuming task of replicating data, creating data marts, running the processes, etc that can take months to get going and days to run reports.  Another company in which I am an angel investor is called Eucalyptus Systems whose tagline is your hardware, your data, your cloud. Eucalyptus is an open-source system for implementing on-premise private and hybrid clouds using the hardware and software infrastructure that is in place, without modification.  Eucalyptus adds capabilities such as end-user customization, self-service provisioning, and legacy application support to data center virtualization features, making IT customer service easier, more fully featured, and less expensive.  Yes there are public clouds like Amazon EC2 which is now also offering virtualized private clouds.  But the reality is that many large IT organizations want to control their own data, find ways to make it more easily accessible to everyone, significantly reduce infrastructure costs, and be able to launch new apps or services quickly and cheaply.  This is where I believe many IT organizations will be headed in the next 5 to 10 years creating private and hybrid clouds for existing and new applications, a phase which I call the Googlization of IT.

The post The Googlization of IT first appeared on BeyondVC.

Researching washers and dryers reminded me of several meetings I had years ago with a marketing expert named Richard Currier.  His big thing was to take a basic technology, break it out into a few parts, and to give them sexy names.  For example when Sybase the database company was on the market it was fighting with Oracle and others and ended up capturing a big chunk of the financial services market because it leveraged an innovation it called Two-Phase commit.  Every sales person would lead in with the benefits of Two-phase commit and while other competitors may have had something like it, if it wasn't Two-Phase commit it wasn't good enough.  What Sybase did was take one of its secret sauce technologies (innovative at the time, standard now), named it, and leveraged the crap out of it with its sales force.  While the technology performed as advertised, naming it definitely gave it some cache.  

Coming back full circle, I had a conversation this morning with an entrepreneur who was going after an interesting segment in the online video and marketing world.  The company had some nice revenue for a bootstrapped operation.  However I mentioned to the CEO that it seemed more like a one-off consulting or agency shop versus a scalable VC-backable market opportunity.  As we dug into his technology deeper and as I started to understand some of the magic behind his platform, I recommended to him that he think long and hard about figuring out what the secret sauce in the backend was and how to name it so he could better market his services and compete against others.  While naming it won't in and of itself help him land more customers, I can guarantee that it will help his company sound more exciting and innovative versus companies that do not.  And in the end whether the deal is closed the sales prospect will certainly remember and question how important TrueBalance Antivibration and WaveTouch controls are to his purchasing decision.

The post Washers, dryers and secret sauce – why naming your technology is important first appeared on BeyondVC.

Google Inc. is teaming up with Visible World Inc., a well-known New York technology company that uses software to create multiple versions of a given ad, in its push to offer TV advertisers more targeting options.

Google will combine the technology with its Google TV Ads, an automated auction-based system for buying TV ads by choosing which shows best fit the advertised product or service. The idea of such "addressable advertising" is to send a TV ad promoting a sale on minivans to a household with children, for example, and the same basic ad with a promo for a sports sedan to a childless household.

Pioneering a new way of doing things is expensive and tough, but I am glad to see Visible World's efforts starting to pay off.  A lot of companies are starting to look at the hundreds of billions spent on television advertising, and I can bet that we will see as much innovation in the next couple of years as we have seen in the last ten years in this market.

The post Future of television advertising (continued again!) first appeared on BeyondVC.

This to me can kill a company before it even gets off of the ground.  Expectations are too high too early, companies will ramp up too quickly, and any misstep is seen as a failure.  Secondly, companies that have too much capital usually try to do too many things and lack focus.  It sounds like Joost was building a client, negotiating with media partners, and building out its own ad serving technology and had its own ad sales staff.  It sure sounds like a big operation. 

Another point to add is that companies founded and led by rockstar entrepreneurs are not enough to drive success.  Rock star founders and CEOs will definitely open a ton of doors and drive lots of media attention, but the company still has to execute.  In addition you want your rock star driving much of the execution rather than hiring a huge staff with layers of bureaucracy.  Many of these famous entrepreneurs will typically have their hands in a number of different projects at once.  Finally, having been successful before, you really need to assess how hungry these rock stars are for success.  Hunger and passion do play a huge role in driving company DNA and creating a winner.  I have had just as much success funding entrepreneurs who have had modest wins but were still seeking the big exit.  Bottom line is that Joost had a ton of promise but may have been better served by raising much less money at the start and staying highly focused on the task at hand with a much leaner operation.

The post Lessons from Joost first appeared on BeyondVC.

Sure, we can clearly see the impact of the Now Generation on consumers and new web applications.  A substitue product or application is just a click away.  If you don't like the user interface, if the product loads too slowly, or if the registration process is too burdensome, you can do another Google search and instantly find a substitute.  But what does it mean for the enterprise, for the corporate IT professional and startups selling into these companies.  I have always believed that the old way of selling enterprise software products with expensive sales forces and complicated installations is dying.  Buyers no longer want you to push software that they may or may not need.  They are empowered and can easily do their own Google search and download open source software or fill out a short registration form to trial a web-based app.  They, like my own son and his friends, are increasingly seeking instant gratification.  They are not just consumers but prosumers who are pulling new products into their departments and potentially into their enterprise.  I wrote about this instant gratification in 2006 and it is happening faster than ever.  The kids who were in college 5 years ago are the very same ones in the IT department tasked with coding new products.  They are used to doing more for themselves, doing their own research, and being able to trial new applications in real time.  If you are an entrepreneur selling into an enterprise and don't see this trend now, you will be toast in the future.

The post I want it NOW, I want it REAL TIME first appeared on BeyondVC.

From a VC fund perspective, there has been much discussion about how venture funds have become too large to deliver outsized returns.  First with the lack of an IPO market it is much harder to generate $1.5b for investors on a $500mm fund then it is to deliver $300mm on a $100mm fund.  Secondly having too large a pool forces VCs to invest much larger amounts of capital into companies pushing up valuations and also exit hurdles for success.  Finally, as I have written in the past, I have learned firsthand the problem of giving companies too much money too early.  It can lead to a growth at all costs mentality, a lack of focus which means chasing too many opportunities at once, and a lax attitude on how to generate revenue. Enter Occam's Razor as it seems that the new trend is for smaller groups of GPs to form smaller funds to be able to invest in earlier stage companies.  With the new operating model of capital efficiency, a little amount of money can go a long way and help VCs generate excellent returns at much lower valuations.  Having a smaller fund allows VCs to write smaller checks and take advantage of the current market.

From an entrepreneur's perspective, Occam's Razor can be applied to many different avenues. As we all know, a great entrepreneur must be able to effectively allocate his scarce resources of time and money to fulfill a market need.  The longer it takes to develop a product that the market wants means that it will cost more money and that it also opens the door for a competitor to step in before you.  If you look at the current Internet and SAAS market, the idea of "release early and release often" certainly fulfills the Occam vision.  Rather than spend cycles creating the perfect product with every bell and whistle, many nimble startups have focused on a more reductionist theory of releasing an often simpler product quickly with the idea of getting market feedback for the next iteration. 

Occam's Razor also applies to how an entrepreneur should operate his business.  Don't pursue too many markets at once, focus on what is delivering the most return for the dollars invested, and hire people and scale your business when you absolutely have a repeatable revenue model.  I have been burned like many others by aggressively building out a sales team too early without a repeatable sales model.  In addition, from a sales and marketing perspective, we have seen a movement to more of a frictionless sales model where there is less hands-on interaction with customers selling and delivering a product.  This would include customers being able to go online and sign up for free trials or download software versus having an expensive direct sales force sell million dollar licenses and one month of professional services to install a product.  Finally and most importantly, the idea of less is more certainly applies to raising capital. With the rise of open source software and cloud computing, companies can now get started with less dollars and scale more cheaply and efficiently than before.  As all entrepreneurs know, raising less capital means retaining more ownership.

In summary, it is becoming increasingly clear that Occam's Razor and the idea of less is more will continue to spread as the cost of technology continues to decrease, as entrepreneurs get even more efficient in building businesses, and as a non-existent IPO market and the factors above lead more VCs to create smaller more nimble funds to capitalize on the new market realities.

The post Occam's Razor and the current state of venture first appeared on BeyondVC.

What I love about the message is that entrepreneurship is not about making money but about pursuing a passion and doing your part to make great products to make the world a better place.  OK-it may sound a little hokey but I remember during the bubble how entrepreneurs would come in talking about how much money they would make for everyone but have no passion for their product.  And guess what, many of these monetary focused entrepreneurs were the first ones to quit when the world got tough.  Without a bigger sense of purpose, it is hard to be an entrepreneur and stick through the inevitable tough times that will come your way.

The post Inspirational video for entrepreneurs first appeared on BeyondVC.

That is what it seems like is happening to Cassat Software. Forbes has an article about Cassat nearing the end.  On the surface it seems like the company was built for the right place at the right time helping enterprises save tons of money and run their internal data center like a cloud.  However the first funding went in 6 years ago and has totaled around $100mm since then.  Here is a quote from their founder and CEO:

For many years, Coleman acted as something of a prophet for cheap computing via the cloud, but he also thought it would mean a sharp drop in pricing with which the big companies would not be able to compete.

"The big guys copied my story," says Coleman. Cassatt, he adds, was upended by a slowing economy and by customers skittish about closing big orders or changing existing ways.

The post Pioneers get arrows in their backs first appeared on BeyondVC.

A personal example that sticks with me is of former portfolio company GoToMyPC which is now Citrix Online.  We had our huge exponential growth years from 2000-2004 during a difficult time in the technology markets.  And yes, we did increase our spending on ads and at one point in time became one of the largest advertisers on the web.  However, what we did was negotiate for pay for performance contracts where we would only pay if we signed up new customers.  While not a novel idea today, it was quite novel back in the day.  Subsequently we were able to turn a fixed cost that could have been a huge cash drain on the business into a variable cost.  In addition, our ads had tremendous impact because every other competitor was not advertising and our brand became quite recognizable.  Were it not for our creative and aggressive approach to acquiring customers, I would argue that while we would have been ultimately successful it certainly would have taken a lot longer.  So reread the article and think about ways that you can creatively grow your business by turning a fixed cost into a variable cost based on revenue growth and you may find a way to efficiently grow while managing your precious cash.  Remember in times like these, everyone is willing to negotiate and what may have been a hard deal to come by 2 months ago may be possible today.

The post Growing your business in a recession first appeared on BeyondVC.

Fast forward 6 weeks from that last conversation, and we ended up having a meeting with a "friendly" VC to receive some market feedback on where his company stood and what needed to get done to raise capital.  And sure enough, it didn't take long for my friend to be questioned on the revenue model, potential market size and opportunity, and how long the cash would last.  Of course, he did have some strong answers but they were not what the VC was looking for – it was not quantitative enough.  We all know that coming up with market sizing and revenue forecasts for a startup is as accurate as the weatherman predicting the weather.  That being said, VCs want to understand the logic behind the numbers as much as the numbers themselves. 

Overall the meeting went as I suspected it would – a VC who was very interested in the product but also highlighting the fact that the revenue model was not clear.  The kiss of death for me on the revenue side was when the entrepreneur said that he would monetize the company like Facebook and Twitter.  Hmmm?  We all know that Facebook and Twitter are unbelievable web phenomenons and suck up incredible user attention.  And yes I am sure that Twitter will find a way to monetize the stream of data flowing through the system and I am sure that Facebook has tremendous value.  That being said accumulating users and worrying about revenue years from now is yesterday's news.  Unless you have tremendous scale when you show up at a VC's door, then don't bank on ad revenue as your only revenue source.  We have seen the market numbers-overall online ad revenue declining but search revenue increasing.  In addition we all know that social apps on the consumer side have incredibly low CPMs and that you need massive numbers to turn into a business.  So if you want to get funded, you better have a clear answer on how you will make money and either be implementing that model today or in the short-term.  What VCs are looking for is a revenue model today that makes sense – this can include premium subscription revenue, analytic revenue, and even lead generation revenue, but don't ptich massive scale and advertising as your go-to revenue souce 24 months from funding.  You will be shown the door quite quickly.

The post Cover the basics before you raise capital first appeared on BeyondVC.

"Sun anticipates that the cloud scene will feature many clouds, both public and private, that are interoperable and driven by different application types. Applications eyed for deployment on Sun Cloud include Web 2.0 applications, social networking systems, gaming applications, and anything that needs the scale of the Web, said Tucker. Departmental applications are envisioned as well.

"What we're introducing in New York here is we're talking about our public cloud," for developers, Tucker said. Sun has seen a lot of interest in cloud computing from enterprises, he said. "It’s getting very rapid uptake at least in the large enterprises today," said Tucker.

What is interesting is that their is a little known startup with great open source technology called Eucalyptus which is helping drive some of this initiative. Eucalyptus will be the software that will allow the Sun cloud to interoperate with other platforms and services.  With this open source platform, companies can now deploy apps on their own cloud and use Amazon or other cloud services for high availabilty or extra storage without vendor lockin.  Congratulations to Rich Wolski and team as they have made tremendous strides during the last 6 months.  I was just with them in New York yesterday and believe they are on to something big.

The post Hybrid clouds are coming first appeared on BeyondVC.

"Beginning with 500,000 homes in Brooklyn, the Bronx and some New Jersey areas, Cablevision will use its targeting technology to route ads to specific households based on data about income, ethnicity, gender or whether the homeowner has children or pets.

The technology requires no hardware or installation in a subscriber’s home, so viewers may not realize they are seeing ads different from a neighbor’s. But during the same show, a 50-something male may see an ad for, say, high-end speakers from Best Buy, while his neighbors with children may see one for a Best Buy video game.

The post Targeted television advertising is finally here first appeared on BeyondVC.

As we all know, in a distressed environment prices come down.  So while now may not be the best time to sell your business as multiples and valuations have come down significantly, it could be a great time to pick up technology to expand your product line. In a world where everything is cheaper, those who are strong enough to make moves can find some great opportunities.  One of my portfolio companies, netForensics just did that as it picked up High Tower Software in an asset purchase.  What this does is allow the company to offer its customers the ability to manage the entire security compliance lifecycle – from log management to a complete security operations center – for all sized organizations, from the smallest departmental installation to the largest enterprise.  In other words, this filled a huge gap in our product line and on our product roadmap and allows us to deliver these capabilities ASAP. 

So in a world where everything is cheaper, you may be able to pick up some great assets at great prices as long as you have your house in order.  Rather than being a distraction, this fit right into our product roadmap and accelerated our product strategy.  One other way to take advantage of this environment is by hiring great people.  There is lots of talent in the market, and it is clear that expectations for total compensation have come down over the last year.  Be on the lookout for these A players so you can continue building your business and be prepared for when the tides turn.

The post Taking advantage of the horrible environment first appeared on BeyondVC.

"As word of Cisco’s debt sale hit Wall Street, the standard chatter surrounding possible targets began anew. As usual, companies like EMC, NetApp, Sun Microsystems, Red Hat and BMC were discussed as desirable properties."

Regarding Cisco I have heard the same acquisition rumors.  On the smaller private company side, my two cents would be platform consolidation opportunities in the security space (software that can help tie their disparate security products together), bolstering their Scientific Atlanta acquisition by adding more interactive and ad targeting products for the digital set top box, and tuck-in acquisitions for their EOS or social networking initiative (see CNET article for more on this initiative)

I would love to hear your thoughts on this as well.

The post Cisco raises another $4b in cash and looking for acquisitions first appeared on BeyondVC.

"Phanfare's Photon is currently the best photo sharing and photo management app on the iPhone. It is important to note that Photon puts less emphasis on social feature than other services like Radar, which we reviewed last week. Instead, it concentrates mostly on giving you easy access to all of your photos, while also providing you with the option to share them with your friends.

Phanfare's CEO Andrew Erlichson strongly believes that the iPhone and other smartphones will disrupt the traditional point-and-shoot photo camera market in the long run and will allow new players like Apple to get a foot into this market. This app is Phanfare's first step in following the market in this direction by marrying the iPhone's camera feature with a very capable cloud storage and photo sharing service."

I first started using Phanfare in late 2004 and have been a fan since.  Andrew and I go way back as I invested in his first startup, Flashbase, which we subsequently sold to Doubleclick a year later.  As I wrote back in 2004, Andrew believed in the idea of client software which was network enabled and sought to create an iTunes like environment for photos with smart caching and local manipulation of media with smart synching so albums and photos could be viewed from anywhere.  As the online photo sharing market has become more competitive, I have watched Phanfare evolve from a pay only service for sharing photos with small groups to a more wide open version with more community and collaboration.  And now Phanfare has staked its claim in the mobile market with its iPhone app (get it here).  Once again, what I love about the iPhone app is its rich client interface which also has smart caching so my albums and videos can pull up almost instantaneously with limited wait time.  So Andrew's vision of rich network connected clients have moved from the desktop to the next battleground, the mobile handset. As you know, seasoned entrepreneurs know how to be flexible and make course corrections in their business model and distribution strategy as the market evolves. Andrew has clearly done that over the years and it will be interesting to see how his bet on the smartphone market and the iPhone in particular pays off.

The post Best iPhone Photo App – Phanfare Photon first appeared on BeyondVC.

IMHO, a great pitch deck is concise (15 slides) and highly focused.  And in the deck I like to see the following points covered (yes, this is my preferred order):

1. One/Two sentence pitch for company -value proposition (1 slide)
2. Brief history – founded when, capital raised to date and from whom, capital needed in new round (1 slide)
3. Who/Team – give me some context of who you are, your backgrounds, success/failures so I can get an idea of your ability to deliver and surround yourself with experienced talent, also include any board members or advisory board members that may be relevant (1 slide)
4. What's the problem? – too often I see pitches where the entrepreneurs dive right into the product and I scratch my head thinking why in the world we need another lifestreaming service or social network or ad network (1 – 2 slides)
5. How do you UNIQUELY solve the problem? – solving the problem just like everyone else is not exciting.  You need to show how you solve the problem UNIQUELY and ultimately deliver a 5-10x improvement for the customer in terms of ease of use/functionality and cost.  What this boils down to is your simple product pitch. (1-2 slides)
6. Product/Tech – make sure to tell me about your secret sauce or core tech that enables you to deliver a unique service – screen shots, overview, etc – could be good time to go into demo in a live meeting (1-2 slides)
7. Customer traction – is product in hands of customers?  if so, how long in market and share some data on users or beta customers or customers (1-2 slides).
8. Market size/Competitive Overview – how big is the market and how do you come up with that number – how are you positioned in the market – show graphically maybe by offering or value proposition (this is where you get your typical top right hand corner Gartner like quadrant).  A sin is to tell me you have no competition (1 – 2 slides)
9. GoToMarket Strategy – how will you grow quickly and in a capital efficient manner?  How will you sell your product – online, direct, or indirect sales?  any potential partners signed or game changing partners that will help you deliver?  (1 slide)
10. Business/Revenue model – show me that the economics of your business work – note that single digit gross margins will get you thrown out the door pretty quickly (1 slide)
11. Financials – yes I know for early stage customers it is at best a guesstimate but give me an idea of how this will grow, what the revenue numbers look like over the next 3 years to give me an idea of how the business scales, and ultimately it helps me understand the true cash needs for the business to get to breakeven (1 slide)
12. The financing round – lay out the dollars you are asking for, how it will be used, and how long the cash will last (1 slide)
13. Milestones-what milestones have you hit so far and what do you plan on realizing during the next year with the new cash (1 slide)

Ok, pretty basic and that's it.  For those of you have triskaidekaphobia or fear of the number 13, it's ok as it is a lucky number in our house since my wife was born on the 13th.  Anyway, if you cover all of these points the deck should be about 15 pages in length and provide a great overview for potential investors.  One other point that I want to highlight is that how you position your business is key.  Take a look at this post from April 2004 titled What Aisle, What Shelf. You need to make sure that your audience gets where you fit in the ecosystem quickly and how you are different from what else is out there.

UPDATED: One item I forgot to mention: in this world of constant digital bombardment, you must figure out how your product or service becomes a "must-have" versus a "nice-to-have" solution in a customer's daily life.  If you are a "must have" with minimal substitute products then people will clearly pay for what you have.  If you are a "nice to have" in a world of many substitute products even though you may get some usage you will never be able to monetize that base. 

The post Positioning and pitch decks for startups first appeared on BeyondVC.

Josh started Jupiter Communications which during the mid-90s was the go-to research firm for market growth numbers for every startup business plan.  As a VC, you couldn't believe them, but it didn't stop every entrepreneur from using the hockey stick projections in their business plans.  Anyway, he went to start Pseudo.com, one of the first production companies for webisodes and streaming media.  In an old New York Magazine article from 1999 Josh proclaimed that ""The potential for a company like Pseudo is to start from a Website and replicate the success of ABC, NBC, or CBS — a long shot but an enormous payoff." He then went on to wire his house with heat sensing cameras so that his and his girlfriend's every move would be streamed live over the Internet."  Anyway, Pseudo.com went under in 2000 and Josh subsequently disappeared in isolation for quite awhile. 

As the writeup for the movie mentions, Josh "proved how in the not-so-distant future of life online, we will willingly trade our privacy for the connection and recognition we all deeply desire.  Through his experiments, including a six-month stint living under 24-hour live surveillance online which led him to mental collapse, he demonstrated the price we will all pay for living in public."  While his predictions were dead on in many respects, it is also quite tragic to see the pain that it inflicts on his own life. Who would have thought how quickly our private lives have become public as we leave a digital trail of ourselves, our loaction, our videos and pictures, and our thoughts all over the web, social networks, and Twitter.  The question we should all ask is where will all of this connectedness leave us 10 years from now.  I hope you enjoy the trailer and more importantly my brother-in-law's music

The post Sundance and a movie about a web pioneer you may have never heard of first appeared on BeyondVC.

The post Going old school – how to reach people effectively first appeared on BeyondVC.

So is this the year that mobile computing becomes mainstream and that mobile software/service companies become a household name?  More importantly, will there be any grand slam venture capital opportunities in wireless?  Through various forms I have been involved from an investment perspective in wireless-related companies since 1996 when I made an investment in a company called AirMedia.  It was way ahead of its time in the sense that it had a hardware device that connected to a paging network to deliver email alerts, stock quotes, and breaking news.  From a business model perspective we had it nailed…or so we thought…buy the hardware device at cost and we would make money back by selling a monthly subscription service.  It raised an additional $30mm of venture capital after we invested and subsequently was long on buzz but short on customer adoption.  I learned a lot from that investment.  The first lesson I learned is that "pioneers get arrows in their backs."  In other words, we were way ahead of the market and were bleeding edge.  Wireless was thought of as the next big thing, but we were way too early and also had to get people to adopt a new device-virtually impossible!  Secondly, I learned that you can't invest in a technology in search of a problem to solve.  It was surely cool stuff but no one really cared and in order to get people to care you had to spend lots of money to define not only a new product but also a new category – the wireless Internet connected device.

Here we are 13 years later and I have seen very few successful wireless pure play software/service related companies.  I wonder if 2009 is the year that some wireless startups breakthrough.  Trust me, I am a big believer in being connected anywhere and anytime but at the same time I am skeptical of how these startups plan to make money.  What is different in 2009 versus 1996 is that we do have a user base, we have some awesome devices that are cheap, powerful, and easy to use, and we have all you can eat service plans with unlimited data.  However the same fundamental challenges still remain as it is still difficult for wireless startups to get their products to the market.  You can either go on-deck through the carrier channel and their walled gardens or off-deck through the web where you will need to have an incredibly viral product or spend lots of money on marketing.  You can also reach users through handset manufacturers like the iPhone marketplace or through Nokia (one of my portfolio companies Gizmo5 is also distributed through Nokia) but in these cases you are either still under one company's complete contrl (Apple) or have to spend incredible amounts of time negotiating with a large company like Nokia.

So even with a huge user base of wireless devices and users, the odds are still stacked against pure-play wireless startups.  If anything, I see wireless as just a natural extension of any web-based product or service.  Take Cisco's Webex as an example.  Even though their users have wanted a mobile app for awhile, they just launched an iPhone app that let's users schedule and join Webex conferences from their device.  Why do we need a pure-play wireless conferencing play if the big guys can easily extend their functionality? So while we read about increased wireless usage it is clear to me that either many folks are still using the lowest common denominator on their devices (taking pictures, sending SMS messages, doing a simple web search) or mostly using the large incumbents' technology like Google Maps or GMail or Yahoo on the Go or Microsoft Search or Facebook.  This is a tough market for startups to break into and while we may see some products get strong adoption out of the gate like a flatulance app on the iPhone, this doesn't mean that these are real businesses.The bottom line is that as more apps become delivered over the cloud, the delineation between a desktop play and wireless one diminishes rapidly unless you are a mobile only location-based service.  Wireless is just a technology and 2009 will be a year where wireless and desktop continue to blur as people only care about what web service they use and always expect to get it from any device over any network.

The post Is 2009 the year of mobile computing? first appeared on BeyondVC.

Some of the companies that fit this parameter include Rightscale (founded by Thorsten von Eicken, a cofounder of former portfolio company GoToMyPC) and one that I am looking at in the email archiving and compliance space which has a number of OEM partners reselling its service. Rightscale is an on-ramp to Amazon EC2 and other clouds and provides automate systems management.  It kind of reminds me of a next generation Tivoli or Openview.  The beauty is that the whole sales cycle is quite frictionless and all web-based which means an oppotunity to scale quickly.  There are a number of other recent players I have seen including one for BI in the cloud (not exactly sure what the killer app here is yet) and many others.  Of course the trick here is not to get enamored with the word "cloud" but to really understand the business problem that is being solved and why leveraging a cloud computing platform offers better economics, scale, and competitive advantages.  As I dig deeper into some of these companies, it is clear to me that software purpose-built from the ground up to live in a cloud has a huge advantage since it is hard to retrofit off-the-shelf software to leverage all of the benefits offered by Amazon, Rackspace, and the like.  Secondly, many of the better companies have built some slick tools and services to solve difficult problems like how to make customers feel like they have their own privated, dedicated systems while still keeping costs low.  Finally, from a go-to-market perspective, a number of the companies I have spoken with have not gotten the question of whether or not they could scale as they quickly point to their backend provider and move to the next objection.  So, if you have an application targeted at the SMB market that is taking advantage of cloud economics, please feel free to contact me.

The post Cloud computing for SMBs first appeared on BeyondVC.

It goes back to my one of my themes about building a business – focus on what you can control and don't try to find a savior by looking at external forces.  What this means is figure out what your core business is and take a scalpel and lop off the areas where you do not see an immediate return on investment.  If you believe you will find a strategic partner to buy you, forget about it because every other private company that has been funded during the last 5 years is trying to do the same.  In addition, I can also promise you that any large or small company looking to buy a startup does not also want to pick up a large burn rate.  Even on a private-private merger, most of these VC-backed companies will do nothing unless the deal is cash flow positive on Day 1.  Do yourself a favor, build an expense line where getting profitable can happen with the cash that you have.  This way you can control your own destiny and also even make yourself a more attractive strategic partner to any company in the future.  One other point for all of those advertising related startups-go find some other revenue streams like becoming a platform for partners via cobranding or hosting fees which scale with usage or find some other premium model because the ad market is drying up and the dollars will flow to some of the larger, more established platforms.

The post More reasons to watch your burn first appeared on BeyondVC.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that spectrum as well.”

The post A ray of light in this environment? first appeared on BeyondVC.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before.  As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related.  It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality.  For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses.  Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market.  Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

The post Be prudent but don't panic! first appeared on BeyondVC.

The post Delivering on Q3 forecasts! first appeared on BeyondVC.

In our experience, media recessions typically develop in three phases. First, marketers reduce spot market activity and eliminate quarterly budget flushes. Then, marketers begin canceling "up-front" commitments and previously signed advertising contracts. Lastly, marketers begin to rationalize/reduce budgets for future years. Our research suggests that we entered phase two of the current media recession during 3Q. Our recent conversations with online publishers revealed a significant number of advertisers that have cancelled contracts or significantly reduced commitments for the second half of 2008. The majority of industry contacts we spoke with this quarter said fundamentals weakened from 2Q to 3Q.

Trust me, I am not a doom and gloom guy and on the contrary believe that now is a great time to invest and build for the future.  That being said, it is also time to be smart and highly efficient. It is a great time to look internally and think about your priorities, your processes and whether or not you can do things better. 

In this backdrop, I had a couple of board meetings last week and as you might have guessed, one of the recurring themes was needing more resources.  While the companies were quite different, I seemed to be in the same meeting with each department head giving an overview and goal tracking from the previous quarter and each presentation ending with, "I need more resources."  It’s not that I am against hiring more people for portfolio companies, since I am all for it.  My only point for all entrepreneurs and managers is that when you put together the hiring plan to make sure you think about the fact that you should always be under resourced and have more things to do than can get done.  What this really means is that you have to do an incredible job of prioritizing your goals. Always ask yourself how you can do more with less and you will find that you and your team will become incredibly resourceful and stretch your dollars a lot farther than anticipated. 

Speaking from experience, I have repeatedly seen situations where managers ask for additional hires, we tell them to wait a quarter, and then they miraculously are able to manage for the quarter. In fact, I was joking at one meeting the other day saying that it was incredible that we had half the staff from a year ago and have more revenue today that we did before.  If we cut in half again, I mused, perhaps we could grow even more.  OK-that is quite extreme, and we did agree to end up hiring a few more resources in various departments.  What really struck me was the fact that when we hit the wall over a year ago everyone thought we weren’t going to be able to make it and grow our business.  What changed was that management became maniacally focused in prioritizing opportunities, not chasing every customer, being ruthless about how they spend their time, and consequently reengineering a number of their internal processes.  We are now a much healthier company with a better operational platform that merits more investment.  While I am not advocating that you starve your business and recognize that every company is different, I am suggesting that doing more with less is a mantra that you should subscribe to regardless of the economic environment and that in the long run it will yield tremendous results for you.

The post Doing more with less first appeared on BeyondVC.

Frictionless sales means reducing the pain for customers to adopt and use a service/product and consequently reducing the cost of sales and marketing to get a customer and generate revenue.  As I mention in an earlier post, "The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow." The lowest friction sale can be a user clicking on a web page and the content owner getting paid for it.  The highest friction sale is spending lots of money on marketing and trade shows and having a large, direct sales force of expensive reps pounding the pavement for months trying to close a large deal with an enterprise customer.  Follow that with a 3 month implementation process to get the customer happy.  There are various grades of friction between these two extreme points like open source business models, software as a service, and reseller/OEM-type models as other forms of packaging and delivering a product/service.  And of course, each of these models requires a different methodology and way of marketing and selling to a customer. Ultimately what you want is sales leverage where every $1 you spend on sales and marketing equals multiples of that in terms of revenue.

The perception that it is much easier to scale definitely holds true if you are selling to consumers, small businesses, and workgroups within large organizations.  However, it seems that many public on-demand vendors are feeling the pressure to deliver growth and ultimately need to feed the revenue machine by going after larger customers.  And what many companies are learning is that no matter how on-demand your software is, if you are selling to huge enterprises you are going to have to spend huge dollars in sales and marketing.  Sales cycles are long no matter how you slice it and even if there is no massive hardware and software installation, many large companies want to have their service customized and integrated, even lightly, with other systems.  in other words, many of these high flying on-demand vendors are starting to look more like the old software companies they are trying to replace.  As per a Wall Street Journal article today, it seems that many of these public on-demand companies are finding out the hard way that no matter how frictionless your sales process is, the bigger the company you sell to, the more it is going to cost you. 

There is nothing to install, so workers can start using online software without the aid of the tech department. That makes it easier for companies that sell online software to get into a business than their on-premises competitors.

Seizing on this, investors bought into online-software companies in a big way. During the first 10 months of 2007, shares of 15 online-software companies tracked by Thomas Weisel Partners increased in value 61%. Since then, however, these companies have lost about a third of their value.

Wall Street has realized that it isn’t enough to simply offer online software—you have to have a sales strategy that can make your offering a corporate standard. It is possible to get individuals, project teams or small businesses to buy online software through word-of-mouth marketing, but it is hard to make money from these groups—at least the kind of money necessary to become a billion-dollar company.

In order to get there, they can’t operate like an Internet start-up, letting their technology spread virally as end users hear about it. They need to sell to the same executives and information-technology professionals who made purchasing decisions before online software was an option. Businesses have a lot riding on the decision to use one product or another. And while having pockets of workers advocate for a particular piece of software is a plus, the execs who sign the big checks still want to see demos, vet the seller and do all the things they have always done when they buy software.

So if you are an on-demand vendor, either stick to your focus of scaling with SMBs and consumers which requires a completely different sales and marketing approach more rooted in traditional online budgets and telesales or be prepared to spend some real dollars if you truly want to go after the big guys. 

The post Selling to large enterprises costs big dollars no matter how frictionless your sale is first appeared on BeyondVC.

While I can offer you no protection from this happening to you, all I can say is to be prepared and skeptical, be willing to walk away, and make sure that you both do enough diligence and meet with the right decision makers before you sign any term sheet and embark on the extended process.  Once the term sheet is signed, run like hell to get the deal closed because the longer a deal lingers the more opportunity there is for it not to happen.  Keep the hammer down and always have next steps and a defined timetable.  In addition, to the extent that the strategic acquirer has made other aquisitions in the past, I would try to leverage your personal network to reach out to some of the VCs or entrepreneurs involved to get a flavor for how the strategic will run their due diligence process and what doozies or surprises the strategic throw at you.  Before you start spending your money from the acquisition, remember there is a lot that can change and that probably will change so keep that in the back of your mind as you go through the process.

The post M&A – it ain't over till it's over first appeared on BeyondVC.

Even though there is uncertainty in the credit markets, a stalled IPO market, and few billion-dollar plus M&A transactions, the investment activity level and appetite for quality businesses in the middle-market continues to be vibrant. Venture Capital firms continue to invest in companies that are providing answers to key disruptive market forces and are exiting those investments via M&A. The Jordan, Edmiston Group, Inc. (JEGI) solicited a handful of key VC executives for their responses to the following questions:

1. What are the key market forces you believe will impact your venture activities through 2010?
2. How do you envision capitalizing on or responding to these market forces?
3. How is the environment changing for deal exits (e.g., IPO vs. M&A)?

(My answer is pretty consistent with what I have been blogging about during the last few years.  Here is an excerpt from the briefing and if you are interested in reading more and some of the other VCs responses, you can get it here)

We are continuing to move to a broadband connected world, where everything that we do on a device increasingly lives in the cloud. Our business applications, our music, our videos, pictures, and messaging will be easily accessible from any device, any time, and anywhere. We will continue to see new cloud-based applications and services, and data-driven services will play a larger role in this new world. There will be some great opportunities to invest in companies that take existing data and run algorithms over these streams of data to deliver better and more targeted advertising, personalized recommendations and search, and better overall services for end-users.

One of the next phases of growth and large revenue opportunities will be driven by what is captured every time you click on a page and move from site to site. How companies use this data to improve a user’s online experience is the next game changer. What I love about these kinds of opportunities is that algorithms scale, have high gross margins, and are highly defensible. With our computing world living in the cloud, there will be a whole new generation of mobile applications that leverage the increased computing power and faster broadband speeds that are offered today.

Mobile carrier voice revenue is declining, and data revenue is the next huge growth area for carriers. However, data revenue cannot increase without applications that drive usage. Obviously, there are concerns about carriers’ “walled gardens”, but I see a future where carriers increasingly provide open access to allow innovative apps to drive data growth. In addition, as mobile devices become better, cheaper and faster, we will see an increase in the number of users accessing the web from their wireless devices, as often as they do from their home PCs.

Capitalizing on Disruptive Market Forces
Dawntreader Ventures will capitalize on these disruptions by investing in the entire food chain, from infrastructure layer to the apps and services that touch the end-user. This includes investments in companies like Greenplum, which is powering the back-end data warehousing for a number of high profile Internet companies for targeted advertising; and Peer39, which provides semantic advertising solutions by using natural language processing and machine learning. This technology enables the company to go beyond keywords to understand page meaning and sentiment, to deliver the most effective display and text advertising to end-users.

Exit Strategy

Unfortunately, the market for IPOs is currently “dead”, but it may reopen in 2009. M&A continues to be strong for the right companies that fit a strategic hole in an acquirer’s portfolio. In the end, I continue to tell my portfolio companies that if you focus on what you can control (growing and managing your business), then the external factors (exit strategy) will take care of themselves. However, if you try to force the issue and shop your company, that shows a sign of weakness and more often than not will result in a fire sale. Companies are bought and not sold. For strong, well managed companies, opportunities will always present themselves, as long as you can avoid making desperate decisions.

To read some other VC responses and to get an update on the state of Interactive M&A, I suggest getting the JEGI briefing here.

The post What do I see in venture through 2010??? first appeared on BeyondVC.

The post Data wars heating up – Microsoft buys DATAllegro first appeared on BeyondVC.

In my opinion, the best way to deal with reference calls is to carefully manage the process.  First, I would identify the 4 or 5 best references (customers/partners/personal) and have a call with them to make sure they are willing and have the right attitude and to pre-screen them with questions to make sure they convey the right information to the interested party.  Secondly, I would make sure that you don’t inundate your references with too many calls as they may tire of helping you after awhile.  Finally, I would also set expectations and be quite clear with the VC or potential customer about what to expect from the call.  For example, I was talking to a CEO yesterday, and he mentioned that our strategic partner would take a call from a VC but that the partner was not the most effusive individual and would clearly state the facts but nothing more.  Well, if that is your only reference for that partner, make sure you convey this to the interested party to set expectations (see my earlier post about that). 

As a side note, a couple of my portfolio companies gave pretty big discounts to their first customers but also made sure that as part of the deal they would serve as lead references for other prospective customers and for VCs.  The discounts got the customers to take the leap of faith to buy the portfolio companies’ products and also got them quite excited to freely promote our technology to others.  The point is that you should always think about your reputation, who will be your best reference, and then to cultivate them to really make sure that they can help you grow your business.

The post Your reputation matters – how to handle reference calls first appeared on BeyondVC.

Let me explain. Like any other VC, I love to invest in companies going after big markets with huge revenue potential. That being said, I also like to see plans grounded in reality as well. Rather than get me excited, showing a revenue ramp from $1mm to $17mm to $65mm will actually do the opposite for me, raising more questions and concerns than general excitement. Along those lines, it is also imperative that when you share your plans with investors that you are pretty confident that you will realize your milestones or hit your numbers in the next 6 months as investors like to see if you can deliver on your promises. One cardinal sin is being overly optimistic in the near term and falling flat on your face in the due diligence process. It is much better to position yourself in a way that you can meet and exceed expectations during the due diligence process than the other way around. When this happens the rest of your forecasts become more believable.

The post Raising capital and meeting expectations first appeared on BeyondVC.

I truly believe the next battleground will be based on scaling the back end and more importantly mining all of that clickstream data to offer a better service to users.  Those that can do it cheaply and effectively will win.  The tools are getting more sophisticated, the data sizes are growing exponentially, and companies don’t want to break the bank nor wait for Godot to deliver results.

My first meeting was with a well known research analyst covering Internet stocks.  While we discussed the usual topics such as how the Internet was taking share from traditional advertising budgets and how the top brand advertisers have not really embraced the web yet, our most lively discussion centered around next generation advertising technology which all centered around increasingly complex forms of data analysis.  To that end, I mentioned one of the fund’s portfolio companies, Peer39, which is using natural language processing and machine learning to create highly precise matching of commercial offers and user generated content.  As you might guess, the secret sauce is the algorithms that the company has created.

Later in the day I had lunch with a friend who we had funded years ago.  What was interesting to hear was how many of the future product lines that we discussed a few years ago were finally starting to emerge as real revenue drivers for the business today.  Years ago the company’s first data center cost around $20mm and the latest one which has orders of magniture more customers cost only $3mm.  Clearly, any data-driven opportunities a few years ago were cost prohibitive in the first place and too early for the customer to understand in the second place.  That was the case because many businesses were just worried about not getting Amazoned and today they are all on the web thinking about how to drive better results.  That is why our discussion led to a massive data warehousing project his company was working on to take all of that data across his huge customer base and to help them better monetize their sites.

What I love about these kinds of opportunities is that algorithms scale, have high gross margins, and are proprietary and defensible.  The next generation web is not about what you click and see but what is happening behind the scenes every time you click on a page and move from site to site.

The post The next generation web – scaling and data mining matters (continued) first appeared on BeyondVC.

CNET’s been very disappointing for past few years. What are your strategy for improving CNET revenue growth, margins?

CFO: We think that they have the asssets to do that, they’ve revamped a number of the sites. Combining with us is good because there’s very little overlap with our advertisers (auto, pharma, etc), but CNET audience demo very attractive to our advertisers. And then they reach advertisers (electronics, etc) that we don’t. Other efficiencies: One public co instead of two. Combining some ad platforms, etc.

Given MSFT/YHOO, other consolidation, does this make you big enough on the Web?

Les: We just tripled our digital platform. Are there possibilities to do tuck-ins? But right now, we have taken a major leap forward. We are very happy with the cards we’re holding now.

CFO: We’re now a top 10 Internet company. Could we be a top 5 over time? Sure. But would be through growth, not acquisition.

Les: Remember! Premium content!

The post Old school content has value…again first appeared on BeyondVC.

Whatever happens it will be interesting to see if true open standards will triumph over closed and proprietary and how long that will take. At the end of the day consumers don’t care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications.  What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity?

The post Open vs. closed networks and Facebook chat first appeared on BeyondVC.

Our new structure is helping  Nokia to be more integrated as we focus more attention on developing new businesses around Internet services. Over time, it will allow us to be faster and more agile in bringing out new products and services, in serving our operator customers better, and in meeting our customers’ needs in different parts of the world.

Our goal is to act less like a traditional manufacturer, and more like an Internet company.

The other piece that Nokia gets is that if they don’t start offering services on their devices, Google, Microsoft, and Yahoo will.  The delicate dance that Nokia is playing is how to fend off the traditional Internet guys while also adding value to its carrier partners.  Despite the fact that Nokia is one of the few companies that sells a significant number of phones direct to the consumer, carriers still matter.  To that end, it will be interesting to see how VOIP plays into this delicate balance.  For more on this, take a look at Michael Robertson’s latest blog post (full disclosure-Dawntreader is an investor in GIzmo5 and I am on the board) on the world’s smallest dual mode wifi phone.  Yes, dual mode wifi means the phone can make VOIP calls over wifi networks.  As MIchael says:

"This is not Nokia’s first wifi phone, but it is significant for several reasons:         

It has a street price of $200-300 (vs $400-900 for previous phones)

Power utilization has improved so it can do ~3 hrs VoIP calls and ~4 days WLAN standby (historically wifi phones have had awful battery life) It’s Nokia’s first s40 wifi phone (the majority of Nokia’s phones are built with s40 parts so it will be very easy to create many more wifi models)

From my perspective, what is great is that the price point is falling quickly for dual-mode handsets, the battery usage/life is getting better, and manufacturers like Nokia are willing to offer innovative services on them through partners like Gizmo5.  2008 will surely shape up to be an interesting year in the wireless industry.

The post Nokia-an Internet company??? first appeared on BeyondVC.

So my advice is that before you place all of your bets on the next product or feature, make sure you put enough effort into crafting the right message and value proposition and that you put just as many resources into getting it out to the market.  In other words, give your product a chance to succeed and don’t starve it to death.  Constantly developing new technology without having a well-thought out plan to get it to market can spell doom!  Developing your way to success can work only if you realize that it is only part of the battle.   

The post Developing your way to success or failure… first appeared on BeyondVC.

The bottom line is that Google Adsense works well for a reason-it has scale-it has tons of eyeballs, it has a huge customer list of advertisers, and is therefore more likely to get you great pricing and ad targeting.  Yes, I don’t disagree that over time you want your own sales team and don’t want to solely rely on one partner for your revenue, but just go into this with your eyes wide open and don’t ramp up before its time.  The direct costs, management costs, and hidden strains on your infrastructure may be more than you can handle if you ramp up too quickly.  Start slowly, figure out what it is that advertisers love about your service or product, figure out what kind of units deliver the best results, and then ramp.  Here is an earlier post on ramping up an enterprise sales team as there are many similarities to direct ad sales and direct enterprise sales.

The post Direct ad sales and startups first appeared on BeyondVC.

The post The economic headwinds are getting stonger first appeared on BeyondVC.

Among the many great examples in Chris’ article, the one paragraph that stood out most for me follows:

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

In a world where everything is free, what is the most valuable asset?  I couldn’t agree more that "attention" and "time" are two scarcities that every company offering "free" services has to overcome.  There is only so much time in the day for all of us to join another social network, add a new widget, and try out a new web service. And this fight is not only for a consumer’s web time but for their overall leisure time – time to spend with their family, time for sports, and time for entertainment.  Given this competition for such a finite resource, you better have something incredible for me to try which will either provide awesome entertainment or provide an awesome utility that gives me a 10x improvement over existing ways of doing things.  Without that, I am sure you will get people to sign up and try your service, but I doubt you will have many active users 6-12 months down the line.

And my final point is that "free" is great and what consumers expect many times, but at some point in time dollars do have to come from somewhere whether it be venture capitalists (who will surely expect a big return on their investment), advertisers who will expect the same, or some other source of capital to sustain the business.  So in concept I agree with the notion that the world is getting cheaper by the second, but on the other hand don’t forget Chris’ points that free only means that dollars do eventually have to come from somewhere to pay the bills.  Oh yeah, one other point-as we move to this world of free, there will be lots of carnage and the road will be littered with many dead companies, as only a small percentage in a growing pie will be able to make this model work and viably consume your time and attention to deliver the money.

The post The "free" business model first appeared on BeyondVC.

Top five overall advisers, 2007

Of course if you break down the numbers, you can see that the average deal size for all of these banks range from $1.75 to 2.75 billion.  Let me translate back for the startup community.  As I have written before, I am a firm believer that companies are bought, and not sold (see an earlier post).  In other words, I am not a fan of hiring a banker to shop a company around but rather find it better when a portfolio company receives an unsolicited offer and you then bring a banker in to leverage that bid to create a more competitive situation.  Assuming you are in this position, every startup I know says, "Let’s go get Goldman or Morgan Stanley."  While in theory we would all love to have these guys as advisors, the chances are that you are not going to get them on board.  First, they typically have high minimum thresholds of exit value typically in the $300mm plus range and secondly even if you fit that criteria you may not get all of the attention you need since a $5 or $10 billion dollar will clearly trump yours.  What I would advise is that you find a banker that has the recent experience selling companies in a price range that you are seeking, will give you the PERSONAL attention that you need to make the transaction successful, and has the network to reach out to the right people on a timely basis.  Based on my experience, I have found that some of the firms like Thomas Weisel Partners and Jefferies Broadview who are not bulge bracket but with strong reputations in the technology markets can be a good fit.  I am sure there are many other great firms that I am missing but you get the idea.

The post Top tech M&A advisors for 2007 first appeared on BeyondVC.

The post What a Microsoft Yahoo deal would mean for startups (continued) first appeared on BeyondVC.

CFO George Reyes said social networking advertising is not monetizing as expected. When questioned further Sergey Brin, president of technology, said: “We don’t talk about individual partners or anything like that.” Brin noted some things were tried that didn’t pan out. While Brin won’t talk about partners it’s fairly obvious that MySpace is an issue. Google is obligated to pay at least $900 million in minimum revenue guarantees to MySpace through 2010. Later, the question was revisited again. He noted that Google also has Orkut and other social networking partners. “We have an incredible amount of this inventory,” said Brin. “I don’t think we have the killer best way to monetize social networks yet. We have had a lot of experiments (and some disappointments).”

I wouldn’t ring any alarm bells yet for social networking sites in general, but it is clear that there is much work to be done to get these sites to monetize.  We all know that social networking sites mean that people are there to interact with each other, not to click and view ads.  I remember one of our portfolio companies in the early days of the web had automated bots for instant messaging where we could insert ads into the stream of conversation.  It sure sounded like an interesting idea but people just did not care.  They were on the system to IM  not to view ads.   The sames goes with social networking sites.  I do agree with Sergey that there is tons of inventory and much more learning to be done to monetize more effectively.  With that much inventory every penny increase in effectiveness per page means big dollars.  Better and different ways of targeting will surely be one of the keys to understanding if there is a there there in making big dollars from social networking.  That means we should all closely follow MySpace’s hypertargeting ad system to see how it performs for the company over the next year as another data point for advertising effectiveness on social networks.

The post Social networking and ads-who's paying attention? first appeared on BeyondVC.

"Alongside Sun’s acquisition of MySQL, our investment in Greenplum is further evidence of our commitment to the open source database community and marketplace," said Jonathan Schwartz, CEO and president, Sun Microsystems. "Postgres has been a critical part of our support offering to customers, and Greenplum’s leverage of Postgres to disrupt the proprietary vendors with breakthrough business intelligence solutions creates opportunity for their investors, and more importantly, our mutual customers."

"We invested in Greenplum because we’re seeing a growing demand for scalable database technologies to support analytical and data-driven applications," said Nino Marakovic, head of SAP Ventures. "From a technology perspective, the Greenplum database is very strong and complementary to our offerings. We share the vision of enterprises harnessing ever-growing data repositories to make optimal business decisions in real time."

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And while we would all love to build our business off the back’s of other brands and distribution, at the end of the day, in order to create a big winner, it is imperative for startups to control their own destiny.  This means that your business has to be able to grow organically and not have its fate FULLY dependent on its partners.

Anyway, Michael Eisenberg also has a nice take on this subject over at Seeking Alpha.

The post Google giveth…and Google taketh away… first appeared on BeyondVC.

So if we are generating zero dollars of revenue from the client applications that we used to sell, well what is our business? Today we generate the bulk of our revenue from enterprise software, which is predominately server products but also includes these client applications (we call them “endpoints”). The fact remains that we actually generate a significant number of enterprise leads from people who are using our client apps and then realize they would benefit from enterprise management products. By that logic, more client applications in use is more enterprise goodness for us.

The post Newsgator – going about enterprise sales the right way first appeared on BeyondVC.

Keep reading this clip and article for more on Evan’s thoughts – focusing on simplicity and radical constraints

clipped from www.economist.com The irony of trying to plan accidents, and orchestrate their frequent occurrence, is not lost on Mr Williams. So he tries mental tricks. One is to ask “what can we take away to create something new?” A decade ago, you could have started with Yahoo! and taken away all the clutter around the search box to get Google. When he took Blogger and took away everything except one 140-character line, he had Twitter. Radical constraints, he believes, can lead to breakthroughs in simplicity and entirely new things.

The post The KISS Method and innovation first appeared on BeyondVC.

OpenSocial is like Java for social networking apps-the promise of write once, run anywhere.  It goes back to my point I made in an earlier blog post – I am completely inundated now from requests from Facebook, LinkedIn, and now PlaxoPulse.  I am having a hard time keeping track of all of my contacts, messages, and the like.  It would be great if I could have a service that sat on top of these apps and allowed me to manage all of my relationships from one place.  Sure, some contacts may only be a Linked in contact, some may be a Facebook and LinkedIn, etc.  Check here if you want your music to be shared on this network and not the other one, etc.  You get the idea.

Of course, I thought that I was dreaming and that it wouldn’t happen anytime soon until I read the announcement today that Facebook, Google, and Plaxo joined the Data Portability Group (see Read/Write/Web).

The DataPortability Workgroup announced this morning that representatives from both Google and Facebook are joining its ranks. The group is working on a variety of projects to foster an era of Data Portability – where users can take their data from the websites they use to reuse elsewhere and where vendors can leverage safe cross-site data exchange for a whole new level of innovation. Good bye customer lock-in, hello to new privacy challenges. If things go right, today could be a very important day in the history of the internet.

The proof will be in the pudding and in the implemenation as it is with Google’s OpenSocial. That being said, this is a great move by Facebook, stemming the negative tide that was building about who owned their data and also, in my mind, locking them in as a defacto leader for years to come.  Facebook is the current gorilla in the space and gorillas do what they want.  However, rather than take on every other player who campaigned on the "open" platform, Facebook has thrown its hat into the ring, and I am sure will play a major role in helping make the standards as well.  Let’s just hope our data is really portable and only when users can run their social networks and share their data from one or any platform easily will we truly be in an open market.  That being said I agree with Marshall that this could be an important day for the Internet, one where the consumer’s voice truly carries weight and one where openness will prevail.

The post Openness and social networking first appeared on BeyondVC.

it is never easy whether it be in business or sports but the comment that stands out most for me is that bringing in an Offensive Coordinator for Coach Billick would have been a band-aid.  Companies and teams don’t need band-aids-they need to make the tough decisions.  So if you think your company needs a COO, think deeply about whether or not that is what you need or if you really need a new CEO

clipped from www.baltimoresun.com Billick’s personality and message had gotten stale, and his lack of discipline contributed to the problems this season. Before yesterday, the Ravens and Billick had agreed to bring in a new offensive coordinator for the 2008 season, but that would have been a Band-Aid. It’s hard to justify having two highly paid coordinators running your team. That would have been another indictment of Billick. What was Billick supposed to do? Go to the first 20 minutes of practice and then take a nap? Billick was on his way to becoming a figurehead, a once-powerful coach who kept losing more control every year since 2005, when Bisciotti publicly reprimanded him. Billick was working in reverse. Over extended periods of time, great coaches such as Bill Walsh and Bill Parcells gain more power and become general managers and presidents as well as coaches. But Billick’s power base was eroding.

The post Changing leadership is never easy first appeared on BeyondVC.

Let me give you a few examples from recent meetings with portfolio companies or friends seeking advice. I was recently reviewing a 2008 budget and was quite excited about the bookings and revenue ramp that the management team had presented. However, as I dug into the model the one point I recognized was that it was all driven by additional sales headcount. That is ok, but what I did not see was any investment in building out our channel or OEM business. Granted, the management had to finely balance their cash spending with their revenue forecast, but my concern was that if we did not invest today to build for the future 12 months out, we would not have any sales leverage in our business. After discussion, we were in favor of sacrificing some near term revenue in order to get the key headcount to start building the channel and partnership model. Yes, these opportunities always take time to build, but if done right can help fuel rapid sales growth 12-18 months down the line. Without any upfront investment, the company was stuck with a 1:1 sales model meaning that bookings and revenue were directly correlated to each additional headcount.

Another example came from a breakfast meeting I had today.  I was catching up with an entrepreneur I have known for awhile and getting an update on his business.  We were discussing the various product lines at the company, and how each line was respectively performing.  What was clear was that the market the company initially set out to conquer had become commoditized, and that his business did not diversify quickly enough to offset this trend.  In other words, he said that while the company was doing well, his biggest regret was not investing enough in the future.  Even though they saw their core market slowly dying, they milked the cash cow as much as they could but did not do enough to build new product lines. It was a classic case of "the exit is around the corner" where the management and board focused too much on prettying up the revenue growth and profitability lines at the expense of positioning the company solidly for the future.  When the exits didn’t materialize, the team had to go back to the drawing board and start building out a new product line.  If they had done that 2 years ago, they may have sacrificed some revenue but they would also be better positioned today.

So the lesson is both cases is to carefully balance your revenue goals with making the right level of investment for the future whether it be in diversifying your go-to-market strategy or building out a new product line.  Yes, we live in a short-term world where every investor is focused on the next month or quarter, but it is imperative for any technology company to balance today’s needs with the future opportunity.  I hope these examples spur some vibrant discussion amongst your management team as you put together your goals for 2008 while keeping an eye out for 2009.

The post Don't forget the long term first appeared on BeyondVC.

Every interaction with your sales prospect or customer is a chance to impress.  What that means is if your user interface is weak or if your product is hard to install or if during a POC process it takes you 3 days to get set up while it takes a few hours for your competitor, you have most likely lost the sale.  If your product is hard to use or set up, then how is the customer going to believe that your product is more scalable?  So take a word of advice, the companies that tend to do well are the ones that have nailed down the first impression – strong and clear value propostiion, great UI, and easy to use and install.  Leading with scalability is a losing proposition.  If someone offered you the opportunity to buy a Ferrari or a Ford Pinto at a similar price, I am sure most people would opt for the Ferrari.  If I told you later on that the Ferrari had a Ford Pinto engine and the Ford Pinto had a Ferrari engine, I would imagine that most would still go for the looks and the Ferrari.  For many buyers in the IT space, first impressions mean a lot and once a sales prospect falls in love with the Ferrari, it will be hard to keep pounding the table saying that your Ford Pinto will outperform the Ferrari by an order of magnitude.  Many times by then you have probably lost the sale. I am not saying that scalability doesn’t matter because it does.  Every customer expects you to scale and every competitor will say they scale. My only point is that if you can scale like no tomorrow but what the customer sees and touches is subpar, you are going to have a hard time generating sales.

One final point-having awesome sales engineers is key to success for any company selling in the enterprise.  These positions are hard to fill as you are typically looking for someone who is not only technically savvy but also strong in sales as well.  Great SEs help you close sales, make the sales prospect feel comfortable, work out the initial kinks in your technology, and provide great product feedback for your roadmap.

UPDATE: I got a few emails from readers who thought that I meant scale doesn’t matter.  It does, just not as the lead-in for why your product is better than your competitor.  It is hard to see, touch, or feel scale in a sales meeting and what you are left to do is make sure that every sales prospect engages with you in a proof of concept so you can demonstrate scale.  And yes, if you can’t install it easily and if the customer can’t use it easily, then scale does not matter.  You have to show them how your product solves their problem and why it is easy to use.  Sometimes engineers can spend too much time on having the fastest engine and not enough time on designing a beautiful body.  Scale matters but not as your main selling point.

The post It's hard to sell scalability first appeared on BeyondVC.

Granted, the opportunity to make money selling picks and shovels during this web resurgence is definitely much harder as developers typically go for free and cheap software and hardware to launch their new companies.  That being said, every click that we make is being stored somewhere and the companies who can better analyze this data to better monetize their sites will be the winners in the next phase of the web.  This is where Greenplum comes into play.  The company is not only playing off of the data volume and analysis trend but also the move towards commiditization.  As Don mentions in his article, the secret sauce is that our customers can deploy massive data warehouses using our software which is built on top of the open source database Postgres and deploy it on commodity boxes.  The benefit is not only in terms of cost but also in significant performance increases over the competition.  As per Don’s article today:

One user is iCrossing Inc., of Scottsdale, Ariz., which provides analytical services to companies that operate Web sites. Analyzing a day’s worth of some types of data once took 20 to 22 hours, said Tony Wasson, the company’s vice president of engineering. With Greenplum’s technology, and some modifications to its own software, the job now takes about an hour, he said.

Anyway, it is nice to see the mainstream press finally getting the fact that data and analytics matter. Yes, plumbing is boring, but without cost effective platforms which can scale and perform under heavy stress, we won’t be able to reach the full peak of monetization on the web.

The post Picks and shovels for the web first appeared on BeyondVC.

If all OpenSocial does is allow developers to port their applications more easily from one social network to another, that’s a big win for the developer, as they get to shop their application to users of every participating social network. But it provides little incremental value to the user, the real target. We don’t want to have the same application on multiple social networks. We want applications that can use data from multiple social networks.

Would OpenSocial let developers build a personal CRM system, a console where I could manage my social network, exporting friends lists to various social networks? No. Would OpenSocial let developers build a social search application like the one that Mark Cuban was looking for?  No.

I agree Tim.  OpenSocial is like Java for social networking apps-the promise of write once, run anywhere.  It goes back to my point I made in an earlier blog post – I am completely inundated now from requests from Facebook, LinkedIn, and now PlaxoPulse.  I am having a hard time keeping track of all of my contacts, messages, and the like.  It would be great if I could have a service that sat on top of these apps and allowed me to manage all of my relationships from one place.  Sure, some contacts may only be a Linked in contact, some may be a Facebook and LinkedIn, etc.  Check here if you want your music to be shared on this network and not the other one, etc.  You get the idea.  It is not hard to view this data in one place by sucking in RSS feeds from the various services but viewing it in one place vs. managing all of my relationships from one place are two different value propositions.  Jeff Nolan has a recent post about this as well.  Of course the challenge is that the value of these services is their proprietary networks which creates lock-in for the user.  Once users can export and manage that data and without visiting these various platforms then the service begins to lose its lock-in. We see this problem over and over again in many web services – the constant battle between closed and open standards and networks.  If you are the big guy, why bother.  If you are the small guy, it makes sense to join up with many of the other smaller players.  Anyway, enough digression here – I would love to hear your thoughts about how you are spending your time managing your various relationships across different networks and what you would like to see.

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The post Wireless and the lowest common denominator first appeared on BeyondVC.

You may be thinking to yourself who cares or why is Ed namedropping?  There is a simple answer – I have known many of these guys for the last dozen or so years since the first Internet wave, and it is simply awesome to see everyone still plugging away, following their passions, getting smarter and better, and continuing to build the New York entrepreneurial ecosystem.  I know we are no Silicon Valley, but it is great to see these entrepreneurs all working on their second and third companies.  It was also great to hear their stories of raising their first or second or third rounds of capital for their most recent companies.  When I started as a VC in 1996 and first met many of these entrepreneurs, it was clear that we were all starting from scratch.  We didn’t know what we didn’t know.  We didn’t have entrepreneurs working on their second and third startups back then.  What we had was energy and passion.  And yes I agree that the whole Silicon Alley movement was pure hype and ridiculous but for those of us who have stuck around we have learned a lot and we are on the cusp of doing some great things.  We now have energy, passion, and grey hair which is a great combination.  I said it before in my NYC 2.0 pitch a couple years ago, but I believe that everyday our world here is getting more and more important as the media companies and advertisers try to make sense of this new era of communications.  As companies like Google and AOL and others continue to build a bigger and stronger presence here, it will continue to make us better.  True to form, I have already seen my first couple of spinouts from the Google New York office, and I expect to see many more.  But it is many of these guys that I hung out with above who were some of the original pioneers in New York that have helped blaze a path for many of the new entrepreneurs we are seeing today.  When the bubble popped, they didn’t quit and go home.  They continued to fight and continued to build new companies and for that we should all be thankful because today the New York ecosystem is building and getting stronger.  The funny part is that it took me being 3000 miles from home to have this revelation again.

The post NYC 2.0 (continued) first appeared on BeyondVC.

clipped from news.yahoo.com The catch, according to some, is that much of the money flowing toward the Internet is concentrated on a few dozen of the most popular sites. That has left smaller, less well-known sites at a severe disadvantage when it comes to attracting advertising money and surviving. In the United States, the top 50 Web sites accounted for more than 90 percent of the revenue from online ads in the first half of 2007, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. The top 10 sites accounted for 70 percent of the revenue.

The post Are there enough ad dollars for the thousands of small startups? first appeared on BeyondVC.

According to Gartner, "A Hype Cycle is a graphical representation of the maturity, adoption and business application of specific technologies."  Similarly, I have graphically represented the choices an entrepreneur has to make in the continuing saga of build or flip.  Let’s call this the "BeyondVC Startup Cycle." According to Gartner, there are 5 phases in a Hype Cycle (my comments in parentheses): Technology Trigger (product launch), Peak of Inflated Expectations (height of buzz), Trough of Disillusionment (this is harder than I thought), Slope of Enlightenment (the broad market is finally ready), and Plateau of Productivity (better have my next product ready).  I believe the descriptions speak for themselves as what usually happens with the adoption of new technology is that the hype builds quickly but it actually takes a lot longer to reach critical mass.  Similarly, one can superimpose a startup lifecycle on the graph.  If you look at the build or flip question in this context, it is obvious that an easier, less risky choice to make is best done at the Peak of Inflated Expectations or height of the cocktail circuit chatter.  Usually at this point in time, an entrepreneur can maximize short-term value as acquirers will buy more on vision and technology than on business fundamentals.  If you decide to build for the long haul and go for the home run, it will take you a fair amount of effort and time to create the same value that acquirers will pay today at the buzz cycle as they will expect more mature companies to have more established products or services and more milestones hit.  Companies that sell at the early stages should understand that while they may forego going big, if they do not sell today for strategic value then they would have to live up to their hype and be bought in the future for real revenue. In other words, as companies mature the valuation of a startup turns from pure strategic value to one where it is based more on actual revenue multiples and market comparable data.   

At this inflection point, an entrepreneur needs to think about whether they want to and can build for the long haul (taking into account the risk and time to do so) or sell today (net present value of your potential expected outcomes in the future). This is the point where you have built a nice service or product, gotten a number of users, but have not really monetized it or created a scalable business model that can drive profits.  Can you really build a company or is this just a feature for a bigger player?  If you choose to go for it and raise VC funding, you have to really believe that the capital you raise will help you create a much larger pie in the end.  Do you want a larger percentage of a smaller pie or a smaller percentage of a much larger one?  Once you take in the money, it requires a ton of hard work to build a team, continue to innovate, and refine your business model.  There are no guarantees and given the amount of time and energy you expend you could just as easily go out of business after 5 years of effort.  One other factor for entrepreneurs to look at is the opportunity cost or the time you spend on one venture. 

Since I never like to make decisions in a vacuum, if I had an offer, I would test the market to get a read from VCs to see what their interest level is in funding my business and also poke around and speak to a couple of other strategics to see if I could extract more value.  In the end, these valuable data points will help you make a more confident decision – if no VCs bite, then it is an easy decision for you.  If some VCs have an interest, try to understand how much capital and at what price they would be willing to invest.  If you really believe in your business then you should either take the money from the VC or get a significant premium from the strategic investor to sell today versus building your business for the longer term. 

At the end of the day, it comes down to two things.  First, what is your appetite for calculated risk – in finance there is a direct correlation to risk and reward.  If you want the big payday, you are not going to get it investing in risk-free bonds.  Secondly, it comes down to your passion.  Building a company is about more than just the money as money can be fleeting – remember the bubble, it sent a lot of carpetbaggers home.  The ones who have made the big payday have focused on a broader and bigger goal, building an insanely great product or service for their customers and keeping them incredibly happy. As you do the right thing for your customers, you will do right for your investors, your employees, and ultimately yourself.

The post Should I flip or should I build? first appeared on BeyondVC.

Quite simply, be wary of performance based earnouts unless you get significant value upfront.  Many times an acquiring company may say that they can’t pay higher than a certain value for your business but if you perform they can pay alot more.  In other words, they want you to put your skin on the line and also incent you to stick around.  That is fine as long as you get more than enough upfront for your business so that any dollar from earnouts is just pure upside.  If you feel that you are not selling for enough and that too much is tied in the earnout, then trust your gut and either rework the deal or walk away. 

Earnouts in theory sound great – the better you perform the more you get.  However in practice it doesn’t always work out well.  First, earnouts could potentially put the acquiring and target company at odds by creating potential perverse incentives for the acquiring company.  Hmm, the company I just bought is doing great but I don’t really want them to hit it out of the park just yet so I may delay giving them their marketing dollars?  You can obviously think of a bunch more examples on this front.  More importantly, though, I feel that unlike a startup, you have relatively little control of your own destiny.  In any M&A with performance numbers, the acquiring company will say it is offering all of these resources and distribution and therefore the revenue, profit, and customer targets should be quite high yet attainable.  In a startup, if you fail it is your fault.  As part of an operating business or larger entity that isn’t always the case as you are most likely dependent on the acquiring company for resources, distribution, and cash to grow and deliver on your promises.  Big companies move slow and you are more likely to not get the support you need in a timely manner meaning that realizing your earnout becomes a very tough proposition.  Even thinking about the ebay-Skype saga, I can remember reading the countless news items and stories about how the 2 cultures clashed, how ebay did not understand the Skype business, and the management changes and reorgs that took place.  All that being said, I am sure the investors are bummed about leaving another $1.2b on the table in earnouts but at the same time they are still ecstatic about the initial $2.6b they received upfront.

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The post Video advertising just got a big boost first appeared on BeyondVC.

Take Forbes.com as an example.  I have always liked the content but over the last 6 months I have basically stopped going to their site or any link that someone sends me from Forbes.  Why?  I cannot stand the in-your-face advertising and the clutter.  First, it starts with a big-ass splash page before getting you to the site and once there a Forbes.com video clip starts with a pre-roll ad.  Once I click on another page, I am confronted with another video ad that starts right away.  Once again, I like the writers but honestly this site has become too revenue focused and consequently too cluttered.  As a user, I feel like I am spending more time dealing with turning off video and audio ads and skipping splash screens rather than reading content.  I am sure the Forbes.com business folks have done their analysis between lost unique visitors versus more revenue per page, but in the long run striking the right balance between usability and revenue is key.  And as I sit down with my portfolio companies, it is also this balance that we all seek to achieve because we understand that what we may gain in short-term revenue increases may hurt us in the long run if our audience base declines over time.

The post The constant battle between revenue and usability first appeared on BeyondVC.

Here is an excerpt from that post:

1. Be prepared: Board meetings are like theater. Like any play, I expect the CEO to have a well thought out and scripted agenda for the meeting. The most efficient way to do so is to lay out an agenda and get feedback pre-meeting from the other board members to ensure that the board covers appropriate topics and allocates the right amount of time for each one. From an update and preparedness perspective, the CEO should always go into the meeting having a complete understanding of where the various board members stand in terms of any major decisions. There should be no surprises. This means that the CEO should have individual meetings and calls in advance of the board meeting to walk each director through any decisions that need to be made and the accompanying analyses behind them.

If all you do is follow this advice then I can guarantee you that your board meetings will run more smoothly.  As for my point on board meeting being like theater, my thought here is that I really believe that much of the work between active board member and CEO happen behind the scenes and not at a board meeting.  Regardless of your viewpoint, I suggest leaving ample time for pure discussion.  The best board meetings that I have attended are loaded with discussion on various key strategic issues and the worst are ones where we are expected to view powerpoint slide after powerpoint slide for simple updates.  If you are interested in hearing more about my thoughts on board meetings, I suggest reading my earlier post.

The post Board meeting advice first appeared on BeyondVC.

• Red Shift refers to companies experiencing exponential growth in demand for raw computing power
• Red-shift companies tend to be Web 2.0 focused like YouTube and MySpace, or big financial, energy, or pharmaceutical companies
• Those companies, Sun CTO Greg Papadopoulos says, will experience similarly high levels of growth in users, revenue, etc., while blue-shift companies will grow relative to GDP
• Along with the cost of powering and cooling in-house data centers, the red shift is driving a surge in utility computing and software as a service

Based on my experience with both consumer Internet and companies selling infrastructure, I can say that this all feels right to me.  It is also no wonder that virtualization which helps IT consolidate servers and increase capacity utilization and utility computing are top of mind again.  Think about Amazon’s S3 and EC2 which I have written about before as utility storage and processing for the masses. I am definitely meeting more and more startups which are starting to offload some of their computing requirements to these services.  And of course, while Greg Papadopoulos is pushing this vision of the red shift, he has put Sun in a great spot to execute on this with new platforms and ways of keeping up with this exponential demand.  The only question as Mark Anderson points out in the article is not if there will be an exponential increase in servers sold but how many of them will be Sun servers running Solaris versus open systems.  Either way, it looks like the stock market has been voting with its feet as Sun has been performing quite well as of late.  And as a VC whether you believe in the red shift or not, we would all like to find companies experiencing hypergrowth where one of the main uses of capital will be for scaling the infrastructure to meet demand.  That is what I call a good problem to have.

The post Do you believe in the Red Shift theory? first appeared on BeyondVC.

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The company saw a 400% increase in traffic this morning, with 4 times increase in sales, calls and downloads of its Gizmo Project software. “It is interesting to see that voice callers are transitory,” Michael Robertson, founder, SIPphone wrote in an email.

So if you are still a frustrated Skype user, give Gizmo Project a try on your desktop or mobile device where you can not only communicate with any SIP or Jabber user but also do metaIM with AOL, Yahoo, Gooogle, and MSN users as well.

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Now it is drafting specifications for phones that can display all of Google’s mobile applications at their best, and it is developing new software to run on them. The company is conducting much of the development work at a facility in Boston, and is working on a sophisticated new Web browser for cellphones, people familiar with the plans say.

The prize for Google: the potential to broker ads on the mobile phones, complementing the huge ad business it has built online. Google even envisions a phone service one day that is free of monthly subscription charges and supported entirely through ad revenue, people familiar with the matter say.

I’d say Nokia is still in pole position right now – the stock is up 7.7% after it sold 100mm handsets in Q2.

"Though sales grew more slowly in mobile phones (+1 percent), and much faster in multimedia (+42 percent) and enterprise (+94 percent) than we expected, margins were way ahead in each case," he wrote.

Notice the phenomenal growth in the multimedia division – that is where the n-series phones, many with wifi and other computer-like capabilities are situated. This is also the division that will reap the many benfits of their software/Internet services acquisitions like Twango and Gate5.

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The post And if you thought getting into Harvard was hard… first appeared on BeyondVC.

— You don’t raise $400 million in 18 months by spending time inside the office. Trying to ambiguously raise that amount of money, while at the same time trying to create something new and different was a challenge that caught up with us in time.
— On the financing, we were learning as we went along. With the amount of cash that we required, it probably made more sense to go with one or two big pockets than a lot of smaller pockets.
— The biggest struggle I had [with the board] was agreement on where the company should go. We had way too many board members and then we had observers at top, and the any partner could dial in, to a point where it became very difficult for the management to manage.

Rather than dive into some of the operational or economic lessons like how a company that raises $400mm can’t get to profitability, I thought I would focus more on the financing side that Peter discussed with Rafat.  In short, some of the lessons learned from Peter include having too many investors and too many board members.  One VC once told me that having a great board did not guarantee success but having a bad board can almost certainly guarantee failure.  Speaking from personal experience, it is pretty easy to see how differences in strategic direction and plans combined with egos can get in the way of real productivity.  The more people you add to the mix and the more complicated and time consuming it can get.  In fact, I remember spending at least 3/4 of my time on one of the weak boards dealing with bickering between other board members instead of spending my time helping management and focusing on the important issues.  The CEO also had to spend just as much time massaging egos and different incentives to keep driving the company forward.  At times, It was close to impossible for the board to come to agreement on a budget, hiring plans, and strategy and ultimately the company missed many opportunities.  I can only imagine what Amp’d board meetings were like when you mix in a number of VCs, hedge funds, and strategics, all of whom invested in different rounds at different prices and with different preferences.  So one of the lessons to be learned is to choose your partners wisely and less is more.  Rather than try to spread out ownership of your business with lots of investors so one or two don’t have too much control, you are better off looking for a couple of investment partners who share the same vision of the business and who you believe will act rational through both good and bad times.  This is where references can help tremendously. 

One other point, every second you spend fundraising is another second you are not running your business.  Companies have to be well prepared and go through a number of meetings to raise $5mm let alone $400mm in 18 months. It is not hard to see how the CEO and management can get distracted and not spend enough time on operational issues when they are constantly raising capital. And of course, the more money you raise, the bigger the exit you need to get investors their 8-10x.  I am not saying this happened in the Amp’d situation, but when capital is abundant and the pressure to create significant returns exist, it can force companies to try to get big fast and try to spend their way to success instead of finding the right mix of organic and inorganic growth.  That is why I have always loved capital efficient business models.

The post Learning lessons from Amp'd Mobile first appeared on BeyondVC.

Taking a step back and looking at the wireless industry overall, one can continue to hear the buzz about Apple’s entry into the wireless handset market with the iPhone.  And as much as analyts and the like want to pit Apple vs. Nokia and others, I see lots of similarities between both companies.  In fact, the more I look at the world, the more I see Nokia taking a page out of the Apple playbook and vice versa.  Apple, as we all know, has done a tremendous job with its vertical integration strategy – developing new products from start to finish, controlling the design, hardware, and software to create insanely great products which are incredibly powerful yet elegant and simple to use.  That is why the Mac gets the margins it does and why the iPod has been doing so well versus the competitors who have solely focused on one piece of the device ecosystem, software, hardware, etc.  Looking at Nokia, it seems to me that the company could clearly go into a couple of different directions – go the Dell route by providing awesome hardware or going the Apple route and providing a full end-to-end elegant experience for the consumer.  What I mean by that is that Nokia can either just be a dumb handset manufacturer with decreasing margins like Motorola or it can try to figure out how to control and provide a seamless and great user experience from handset to desktop for its customers.  What is at stake are significant margins and dollars. 

Given that Nokia has always had expertise in the hardware side of the world, the fact that the company is increasingly buying software companies for its devices (loudeye, gate5, intellisync, and now twango) and integrating it into the handsets shows that it is bulking up and getting ready for the next battleground, the phone as minicomputer and gateway to the Internet. As you know more people around the world access the web from a mobile device versus a PC or laptop.  The blurring of cell phone and mini computer is only increasing as Apple, RIM, Nokia, and others come out with devices that can do more and more-take/share/view pictures/video, listen to music, surf the interent, make VOIP calls, and watch television.  What is at stake is a bigger opportunity that will bring Apple, Nokia, RIM and others head-to-head with the large Internet players like Google, Yahoo, and Microsoft.  At the end of the day, Nokia is more like Apple than you can imagine as it is starting to take control of its destiny and beginning to offer its own web-based and wireless services directly to the consumer. Like Apple, it is increasingly clear that Nokia wants to provide its consumers with a holistic end-to-end experience delivering everything from the hardware to the operating system to the applications that reside on the phone and desktop.  This is an important shift and one that Motorola does not seem to be getting and consequently one of the many reasons its stock has been floundering.  As mentioned in an earlier post, Nokia has acquired Loudeye for a future music offering, gate5 for turn by turn navigation, intellisync for syncing software and email, and now twango for music, photo, and video sharing. Nokia ships around 350mm handsets every year and it can either let the Internet players GYM seize the opportunity or go after itself.  This is an interesting transformation that will take years but think about how much money Nokia could make if it could extract an extra $0.50 or $1 per month from a customer.  Of course the carriers won’t like that but this is why watching the wireless Internet market is so fun.

The post The wireless Internet is heating up first appeared on BeyondVC.

"The acquisition of Lexico is a transformative event for us," explained Robert S. Rosenschein, Chairman and CEO of Answers Corporation. "We are excited about applying our experience in monetization to significantly increase Lexico’s 2008 revenues and EBITDA. Lexico’s suite of popular brands, steady direct traffic and loyal users are valuable assets that we believe will reduce our products’ reliance on search engine-driven traffic. Post-transaction, we estimate that over 70% of our total traffic will now be direct from end users or people searching specifically for the term ‘dictionary’ in search engines. Our combined size and available ad inventory should provide greater exposure among online media buyers, which we expect will lead to increased advertising sales."

As I have mentioned in earlier posts, scale matters in the Internet space and becoming a Top 28 web property in the US (according to our combined 22.5m monthly unique visitors in June based on Comscore) will provide the company with an even better opportunity to monetize our reach.

If you are interested in learning more, here are a couple of other highlights from the press release:

Lexico is a leading online provider of reference products and services, which attracted approximately 11.5 million unique monthly users in the U.S. during the month of June 2007, according to comScore Media Metrix.

Lexico is a highly profitable company that strongly complements Answers’ user base. In 2006, it generated revenues of $7 million, EBITDA of $2.9 million and net income of $2.8 million. This strategic acquisition drives Answers to a leadership position in online information publishing.

    Key benefits of the acquisition include:

    – Page Views: Lexico’s Web properties currently generate approximately three times the total page views of Answers.com.

– Monetization: Lexico’s Web properties currently monetize at approximately one-third the rate of Answers.com, presenting material revenue upside.

– Direct Traffic: Over 85% of Lexico’s traffic is direct from end users or people searching specifically for the term "dictionary" in search engines. The resulting shift in traffic mix should significantly reduce Answers.com’s current reliance on search engine algorithms.

– Market Leadership: Based on the June 2007 comScore data, the addition of Lexico’s Web properties will increase Answers reach to over 22.5 million monthly unique users, which would rank #28 in the top U.S. properties.

The post Answers.com to acquire Dictionary.com for $100 million first appeared on BeyondVC.

Starent Networks: $100mm pre-IPO with first VC round in August 2000, $986mm market cap

Limelight Networks: $100mm pre-IPO with the big round in summer 2006, $1.6b market cap

Infinera Corp: $345mm pre-IPO with first VC round in December 2000, $2b market cap

Shortel: $102mm pre-IPO with first round in 1997,

Based on this data, one can see how many of the existing investors generated some great returns on absolute and relative terms.  So while there have been very few Internet companies worth $1b or more on absolute terms, one must look at the capital efficiency of these businesses to understand why companies that raised $20mm or less can still sell in the $200-400mm range and still create tremendous returns for their investors.  At this level of funding the risk/reward balance is just much different than in a traditional infrastructure play.  Sure many of these Internet companies being financed may not be standalone IPO candidates but that doesn’t mean that companies that generate 10-20x for their investors are bad investments either.  However what is beginning to scare me is that valuations for these consumer internet plays are continuing to creep higher.  In addition, many of these "capital-efficient" companies are raising bigger rounds of capital meaning the bar for exiting is getting higher and higher.  If these two factors continue to increase over the next couple of years, this could lead to disappointment for many VCs in the long run.

The post Are all of the venture returns in B2B? first appeared on BeyondVC.

A bad customer is clearly the complete opposite of a good customer – one that requires too much one-off customization, is not a marquee account or potentially a great reference for future sales prospects, and ultimately an account that does not lead to repeatable sales.  In addition, bad customers for the most part will be highly unprofitable as you will probably spend way too much time on the account trying to make it referenceable.  So in the second portfolio company’s case, given that we had a bad customer, I told them that we should go back to them to charge more to at least make some money from the current deal or walk away.  Ideally, if it is a bad customer, you may just want to walk away altogether to go find that good customer which will lead you to many more great opportunities.  Starting your company with a handful of bad customers can kill your business so be ruthless with your time and carefully assess what kind of customer you are about to close.

The post What kind of customer do you have? first appeared on BeyondVC.

The post LinkedIn and Facebook on collision course? first appeared on BeyondVC.

There is also another market metric that is driving a renewed interest in web-based companies for these lenders- they are getting funded by VCs (venture debt lenders mostly like to do deals with strong financial sponsors which increases their likelihood of getting paid back) and these startups are better able to manage their burn rates reducing risk and offering lots of upside.  Sure, while some of these venture debt firms recognize that web-based businesses may not have as much hard and true intellectual property, the fact that they are more capital efficient and can scale more rapidly means they can also generate pretty nice returns from the warrant portion of their deal.  Getting in earlier also allows these venture debt firms to buy more of the company from a warrant perspective than getting in on later rounds.  The trick for entrepreneurs is to look at bringing on debt concurrent or soon after your close of equity financing. 

Why can raising venture debt be great?  It is quite simple –  the dollars are relatively cheap compared to an equity financing  and extending your runway to hit more critical milestones means a potentially better valuation for your company down the road.  And of course if you exit before raising another round, there are more dollars available for the equity holders.  A typical structure for an early stage deal could be an equity raise of $3-5mm with another $1-2.5mm of debt.  From a pricing and terms perspective, you should look for capital which is flexible in terms of use for true  growth capital (growing your business) with no financial covenants or MAC (material adverse change clauses) which can put more risk into the debt equation.   Of course, the more flexibility you have, the higher the interest rate will be relative to other types of loans. Most venture debt deals will have an interest only portion for a short period of time before amortization (monthly payments of principal and interest kick in).  Typically you will see terms of 30-36 months where your lender will get paid his full portion of the loan and interest by that time frame.  In addition, lenders will ask for warrants equal to a percentage of the dollar amount raised (for example, depending on the deal, a 5% coverage for $1mm could be equal to $50k of equity to be purchased at the current share price).

All is not rosy as there are some potential and hazardous downsides to this model.  If you burn through your cash and can’t make the monthly principal and interest payments, your lender can take over your company as their debt is usually secured against your company and intellectual property.  Trust me, a number of companies got burned with this during the Internet boom when their businesses were based on wildly inflated revenue projections and unilimited capital resources.  Just when you needed another month or two to sign that strategic deal, the venture debt guys would come in and pull the rug from under you.  Granted it is not that bad as your lenders are your partners and will negotiate with you, but at the end of the day, if they see their ability to get paid in significant jeopardy, they will do what they have to do to recoup as much value as possible.  For some investors and entrepreneurs, this risk may not be worth the dollars.  For others who are confident in their execution and ability to raise another round, there is no better way to stretch your dollars in the company and create more value with minimal dilution.  So the next time you hear the word "debt," don’t be scared and keep an open mind as you may be able to stretch your resources further and achieve some additional critical milestones driving increased value in your business.  The interest in web-based businesses is there and the competitive market means that pricing and terms are pretty attractive now.

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What makes a startup team great early on in terms of getting product out the door and rapidly refining and honing the product from live market feedback can also lead to issues down the road if companies and employees are managed on a similar basis.  What is easy to roll out in a 5 person company gets harder to manage in a 25 person and even harder in a 50 person company.  Take the test – ask your key executives what the 3 key company goals are for the month?  Are they the same or not?  How will they help contribute in each of their functions to delivering on the 3 key company goals?  If they are not on the same page and you have trouble getting them together, you may want to continue reading for some thoughts on how to improve communication and accountability.

Here are some simple steps you can take to create a more fluid organization.  First, institute a weekly management meeting.  Yes, like you, I have an allergic reaction to the word meeting, but believe it or not, simple processes can help tremendously.  It is a great way for the CEO to get input but also guide the team to focus on the same company goals for the month or quarter.  Secondly, have key team members provide a weekly dashboard report and list of key goals to accomplish for the following week.  At every weekly management meeting, have each team member discuss progress against his/her team’s goals and what they will be working on for the following week.  How does each of the departmental goals contribute to helping the company meet its goals?  Once again, this all may seem simplistic and a giant waste of time versus managing the next product release, but you will be amazed at the number of companies I meet that have not gotten to this point and consequently seem to have different ideas of what the business is and how to get there.  In addition, having weekly management meetings and clear weekly goals with simple yes/no criteria goes a long way towards creating an action-oriented culture of getting results.  If a VP doesn’t deliver consistently, all of the other executives know and they also know it is time to make a change.  No one wants to be the manager that is known to overpromise and not deliver.  There is also a real difference between a manager having weekly individual meetings with their CEO vs. openly discussing theirr priorities and completed tasks with their peers.  With respect to cross functional communication, rather than complaining about engineering, for example, sales and marketing can now understand engineering priorities and what it may take to adjust and rearrange some of them to meet the revenue targets for the quarter.  Trust me, there are many more factors to a company’s success and failure, but please don’t make an allergic reaction to scheduled meetings and a simple lack of organization your cause for execution problems.

The post Transitioning from startup to growth phase – don’t be afraid of process first appeared on BeyondVC.

With AQuantive, Microsoft will get advertiser relationships and a platform from which to build a real online business.  I still think that Microsoft needs a Yahoo or even an AOL to compete with Google but despite that here are some things I would do.  I would go small and focus on building its publisher base where Google gets over 1/3 of its revenue.  I would buy small/medium sized companies that offer free and premium web analytics, feed management and RSS Ads, and potentially even a blogging platform from which to offer MSN AdCenter at the point of creation.  Getting publishers on board will help Microsoft get more data on clicks, increase its revenue base, and also allow the company to build relationships and good karma with the next generation of Internet entrepreneurs.  It already seems that Google is ahead of the curve as it is rumored that it is trying to buy Feedburner, a leading feed management and RSS ad platform (I currently use FeedBurner to manage my RSS feeds and deliver RSS Ads).  Besides the mobile and broadband space I mentioned above, one other opportunity that is huge and here for the taking today is the television and cable advertising market.  Companies like Spotrunner and VisibleWorld (a portfolio company) are approaching the market in different ways but clearly offer advertisers tremendous potential to bring Internet like tools and business models to an analog market.

The post Internet Ad Frenzy – what’s next? first appeared on BeyondVC.

The post Second Life for Kids (continued) first appeared on BeyondVC.

The next step in this evolution of commerce will be social shopping or companies leveraging Citizen’s Media (blogs, podcasts, videocasts, tagging) to drive commerce.  According to Answers.com, "Social Shopping is based on the principles outlined in the wisdom of crowds where a large group of users can recommend products to each other and between them work out what to buy and which ones have the most buzz." I believe this is an interesting area that has not been fully tapped yet.  At the root of it, people want to connect.  Most people I know tend to check the Internet first to research a purchase and also ask friends for recommendations or reviews about products.  The more inefficient a market is, the more opportunity there is to educate consumers and peers leveraging the web.

While the Alarm Clock calls this a roll up in the wine space, I view this as the beginnings of the return of the 3 Cs (content, community, and commerce) with a year 2007 flair.  Speaking of the 3 Cs, I also noticed that Amazon bought dpreview yesterday, a leading provider of digital camera reviews and information.  Amazon acquiring a content site may sound odd but we must remember that one of Amazon’s competitive advantages is its huge database of consumer reviews. As commerce sites begin to recognize the value of content and community again, I wonder who is next on the hit list?

The post Social Shopping (continued) first appeared on BeyondVC.

It is pretty clear what is happening in the market today – Google is dominating and the Internet advertising game is a game of scale.  The bigger you are the more opportunities you have to increase your lead – more users equals more data equals better targeting equals more money per click.  In addition with lots of inventory and excellent targeting, it is easier to attract more advertisers.  And as we all know, much of this whole Web 2.0 (yeah-I hate that term) world is based on advertising, advertising from Google AdSense and other partners.  Why not outsource your whole ad sales team as you can get a pretty good deal from Google without any operating expenses?  If you do the math, startups really do need a fair amount of traffic to merit hiring its own internal ad sales team.  Consequently, we have seen tons of web startups launch over the years as it is really cheap to build a web-based product and costs no upfront capital to start generating revenue. 

I am not sure about your own analysis but based on a number of portfolio companies, I can tell you that Google Adsense delivers the best results bar none in terms of generating revenue.  In a world without a combined Microsoft-Yahoo, it is pretty clear that Google will only get stronger leaving it with a virtual monopoly in the online ad game.  And as you know, monopolies over time take advantage of their position by changing pricing in their favor.  I am sure every company that is generating money from Google Adsense worries about the day when the revenue splits could change.  So on the positive side, a combined Microsoft-Yahoo would hopefully give startups another real alternative to Google Adsense as the combined entity would have real scale like Google and therefore the ability to deliver Google like results.  On the negative side, a combination would mean that there is one less aggressive acquirer on the market. So if the Internet ad game is one of scale, you can bet that in the future there will be a high likelihood of further consolidation. What this means is that entrepreneurs who are starting companies to be acquired better think twice as their chances of winning the lottery will diminish with time.  What this also means is that entrepreneurs need to start companies for the right reason and focus on building a real business versus the quick flip.

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The post Nice Try T-Mobile first appeared on BeyondVC.

In general, video advertising as a trend is pretty firmly in motion. In spite of that, though, it is still very small. There are somewhere between half a million and a million search advertisers in the market, there are probably only a couple to five thousand graphical advertisers and probably less than a hundred video advertisers. There is no reason for that imbalance to exist. So one of our goals is to increase efficiencies with which people buy and sell video advertising and democratize access to the process in the same way that Google has democratized access to the search market…It is going to be easier to buy video advertising, and therefore many more people are going to do it.

I agree with the fact that buying and selling video advertising needs to get easier, but how do you monetize all of that user generated content?  On the making it easier part, I am sure Microsoft has been thinking long and hard about this market as it recently launched Silverlight, a cross-browser and cross-platform plug-in for rich media apps.  In addition it is offering 4gb of free hosting and streaming for its development community.  Think about how easy it will be for Microsoft’s developers to plug in Microsoft Ad center and some broadband video ads into their streaming content especially via an integrated offering tied into the development platform.  I am sure this fact is not lost on Microsoft as it looks to take on Adobe and also vie for leadership in the broadband video advertising market.  Sure Google has locked up search thus far but all of that potential broadband advertising revenue is still up for grabs. 

BTW, these stats on the number of advertisers is not all that surprising as it usually is the big advertisers with the huge budgets that will jump in first and explore new opportunities.  These numbers are also not all that surprising to me since my fund is an investor in Visible World.  As mentioned in previous posts, Visible World is bringing the power of Internet targeting to television:

While I have always been bullish about broadband video advertising, I have never believed that the $60b television advertising industry would disappear overnight.  In fact, before the Internet dominates all advertising why couldn’t one bring the tools of the web to the television world making TV advertising more effective, targetable, and measurable – in effect changing it from a mass media to a more targeted dynamic one.

What this means is that our advertisers who use Visible World can deliver dynamically changing television commercials based on any number of variables including the content, zip code, demographic, weather, etc.  Sure, lots of technology partners have continually stressed the broadband and mobile opportunities which are clearly building, but as Willie Sutton did, we are going where the money is today – helping that $60b spent on television advertising become more effective.  Sure broadband is in our sights and we can deliver that same video commercial or asset over any pipe whether it be broadcast, cable, satellite or broadband but the reality is that broadband can’t pay the bills right now.  In addition, I am of the viewpoint that the broadband video ad itself will have to be much different and shorter than your typical spot today.

So I agree 100% with Dave from Doubleclick (see Valleywag for more commentary).  For other evidence of the early nature of broadband advertising, I suggest doing some analysis and looking at where the bulk of revenue from other ad networks are generated.  Yes, you guessed it – banner display ads and search engine marketing.  Sure broadband has really high CPMs and trust me if these ad networks could build a huge business off of that today they already would have made some acquisitions but there just isn’t enough demand from their advertising customers.  As you guessed it, what that means is the market is still early and there are plenty of opportunities for innovative companies to help move some of that $60b spent on television ads online.

The post Broadband video is hot…where are the advertisers? first appeared on BeyondVC.

The post From Web 2.0 to Business 2.0 – MySpace pulls Photobucket videos first appeared on BeyondVC.

Within weeks of that discovery, the next big thing in our house became Webkinz.  Webkinz is another virtual world for kids but with a twist.  You have to buy a stuffed animal and on that pet there is a special code you enter to bring your animal to life on the web.  I must say that Webkinz is also brilliant and well done.  My kids wake up in the morning asking to log on to feed their pet before they go to school and to also earn some kinzcash to decorate their rooms.  Kids can earn kinzcash by answering math and educational questions, playing games, and answering surveys.  In addition, you can add friends to your buddy list and invite them to your room to interact.  So far Webkinz strikes the happy balance between being a fun and entertaining place for kids without too much marketing.  I could envision down the line branded items for sale through the W Shop but for now the site is just selling generic stuff. 

Together both of these sites have become the hottest destinations on the web for young kids.  As a VC, the big question I have is what is the staying power of sites targeted towards young children as we all know that children are fickle and trend-oriented.  In addition, I am paying close attention to the revenue model as it has been notoriously hard to extract dollars from kids.  For now, ClubPenguin earns cash through the premium model having free users pay a monthly or annual fee for the special privilege to customize and buy items for their penguins.  Webkinz seems to make its money from selling the real stuffed animal which has a virtual equivalent. It also manages its product line and inventory closely by constantly developing new pets so kids can have multiple pets/adoptions.  In fact, to further encourage purchasing of new pets with every 10 adoptions kids earn a "priceless" prize for their room.  All I know is that based on an informal poll I have taken amongst my children’s friends that the penetration of these services is quite high and most users are paying users. And so far through the eyes of my children I can see that the more time they invest in these services the harder it is to extract them.  So from this standpoint there may be some staying power for both services. As a parent, the big question I have is are my kids too young to be on these virtual worlds and what am I socializing them for in the future.  Where do they graduate to after they tire of ClubPenguin and Webkinz?  Being a technology VC, I would be a complete hypocrite if I did not let my children try these services.  While I do question how early is too early, ultimately I have come to recognize that this is the world that my children live in and the best thing I can do is monitor closely, teach them what is real and not, and make sure to constantly educate them in terms of safe web practice.  In addition, there are some educational benefits as well pushing my kids to read and do math.  I know their world today is much different from mine when they tell me to go to Answers.com (full disclosure-I am a board member) or Google to get more information.

Given these factors, it is pretty clear that there will be more virtual worlds for kids created.  From an exit standpoint, I wouldn’t be surprised if one or both of these web properties eventually gets bought by Fox Interactive Media or Disney as a way to reach this young, impressionable demographic, develop brand relationships early in life, and upsell them on various social networking options as they get older.  It is also important for us to realize that we are still just in the second inning when it comes to new advertising models.  All of the groundwork we are laying to reach today’s teens and young adults is just the beginning and my question is how will the world look 10 years from now when today’s 5 year olds are 15 and todays 10 year olds are 20.  What will be the best channel to reach them and with what kind of message and in what medium?  I can bet that wireless will definitely be one big component of that.  Striking a balance, the parent in me will ask how will we be able to protect our children (to the extent that we need to) from overcommercialization and other security issues (this is a huge topic that can be addressed at a later time)?  I don’t have any answers now, but trust me I have a vested interest in monitoring this space carefully for multiple reasons.  I would love to hear your thoughts and opinions on this as well.

The post Second Life for Kids first appeared on BeyondVC.

This brings up another interesting point.  Even if you follow the steps above, this does not guarantee success.  Big companies move slowly and often change their minds.  A relationship with a big company will surely take time and cost you money whether in upfront dollars or expenditures on resources.  And while we would all love to build our business off the back’s of other brands and distribution, at the end of the day, in order to create a big winner, it is imperative for startups to control their own destiny.  This means that your business has to be able to grow organically and not have its fate fully dependent on its partners.  What this means is that first and foremost you have to have a killer product, one that people love, can’t live without, and share with others.  In this new world of mashups, open APIs, and widgets, startups can easily get distribution.  Getting customers and revenue is a different story altogether.  Remember, distribution doesn’t matter if people don’t use your product or service so start with the basics and figure out how to make your product a must have that someone will pay for.

The post Why startups need to control their own destiny first appeared on BeyondVC.

The consumer mobile breakout session was one of the more informative discussions that I attended.  Basically as the world moves to three dominant operating systems for wireless (Symbian, Windows Mobile, and Linux), Microsoft will look to increase its penetration by leveraging an extensive development platform to allow third party partners to develop new consumer services which can be easily deployed via its worldwide carrier partners.  Naturally, one of the questions asked was if these apps only worked on Windows Mobile or across the various operating systems.  As you might suspect, these apps would likely work better on the Windows Mobile platform, but the Microsoft folks did stress that it does and has to work with other competing operating systems as well. The gaps that Microsoft was looking to fill through partnerships or acquisition were, broadly speaking: games/entertainment, location aware services, TV/video (although the one Microsoft executive acknowledged it was overhyped), ad management, mobile content mgmt, and billing and payments.  One of the value propositions offered by the Microsoft mobile folks was key relationships with carriers across the world.

Another engaging talk was Peter Moore’s (Corporate VP, Interactive Entertainment Business) presentation on Microsoft’s move into the digital home with its Xbox360.  Of course, after a long day, seeing a commercial for the yet-to-be-released Halo 3 was quite energetic and refreshing.  Interestingly enough, it is quite amazing to see that as these gaming machines get more powerful, the games themselves end up being the commercial (think about The Gears of War commercial on television).  Despite the fact that Peter could have spent hours demoing games, his presentation centered around the full featured entertainment capabilities of the device which included the ability to synch with other PCs in the home and buy movies, television shows, and music in a simple way.  Once again, it is amazing how much progress is being made throughout the many divisions at Microsoft and how the Internet and on-demand services are getting weaved into the very fabric of the applications and infrastructure.  For a large company, one year has made a huge difference.  Finally, one of the other recurring themes I heard throughout the day was the importance of advertising in many of its product lines ranging from mobile to MSN to the digital home and video gaming.  If there are other acquisitions to be done, I am sure that some interesting advertising related technology and services will be on their radar screen.

Just to be clear, this is not in any way, shape or form a Microsoft love-fest.  I am just pointing out that while so many people are counting them out that they have lots of cash, renewed energy, and a long-term view towards winning in their markets.

The post Microsoft VC Summit 2007 first appeared on BeyondVC.

We’ve made great strides in speech technologies, but have only scratched the surface of what is possible,” said Jeff Raikes, president of the Microsoft Business Division. “The acquisition of Tellme will bolster Microsoft’s existing speech capabilities, bringing both immediate and longer-term value to our customers and partners.”

“Tellme was founded with the idea that anyone should be able to simply say what they want and get it from any device, starting with the phone,” said Mike McCue, co-founder and CEO of Tellme. “Now, with Microsoft, we’ll be able to extend that vision to millions of businesses and consumers around the world.”

I remember when I started in the VC world over 11 years ago, the question we always had to ask ourselves before we made an investment was "what is Microsoft doing or going to do?"  As I reflect on the last decade, I never really did think that as an investor in software and the Internet that the question would become almost irrelevant and would change to "what is Google doing or going to do?"  Given all of the discussion about Microsoft being dead, I must say that while they are still a distant third in the search space, they did make a brilliant move in acquiring TellMe.  While most of the revenue does come from TellMe’s hosted speech applications for customer service, the big value in the long run will be Microsoft’s ability to incorporate TellMe’s mobile search and voice-driven search through the mobile handset.  In other words, it seems that while Microsoft is not conceding to Google in search, that it does recognize that the mobile opportunity is potentially much larger and that this acquisition will clearly give it a big lead in the mobile space.  Think about it – when you leave home, you grab your keys, wallet, and cell phone.  The opportunity to reach and market to this third screen is huge and just in the first inning.

Even Tim Berner’s Lee in this week’s Economist (sorry, password required) highlights the next wave on the Internet being around mobile:

Although he is somewhat sceptical of the hype around Web 2.0, Sir Tim is excited by three other areas of the web’s development: its spread to millions of new users via mobile devices, the growing interest in the technology’s social and political impact and the “semantic” web, in which information is labelled so that it makes sense to machines as well as people. “If you look at the number of internet-capable mobile phones, PDAs and so on, they are rapidly outnumbering the things we think of as computers,” he says. “As the price of these devices falls, large parts of the developing world will get web access. When you have a large mass of new users, you will get many new applications, written by people with other needs.”

The number of internet users reached 1 billion in 2005. But although about 70% of the population now has access to the internet in North America, the figure is just 11% in Asia and less than 4% in Africa. To the jaundiced observer who remembers the disappointment of WAP, the first attempt to bring the internet to mobile phones, Sir Tim’s enthusiasm for mobile-internet access may sound like déjà vu. But he insists that there are crucial differences. “WAP was not based on standard internet protocols, there was no competition for browsers, and operators had a stranglehold on access,” he says.

Maybe with this acquisition and Microsoft’s commitment to mobile, I and other VCs will find ourselves once again asking the question, "what is MIcrosoft doing or going to do?"

As an FYI, there should be more to come on this topic as I will be at the Microsoft VC Summit tomorrow learning more about their plans for the next year.
 

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The post Algorithmic technology on the web first appeared on BeyondVC.

Over the next couple of years, it will be interesting to watch how the battle between top-down, conservative IT and bottom-up DIY employees gets resolved.  IT wants control, security, and compliance while users just want to get things done.  As the article advocates, the smart CIOs will figure out how to balance the needs of their users and the role of IT.

This will require CIOs to reexamine the way they relate to users and to come to terms with the fact that their IT department will no longer be the exclusive provider of technology within an organization.  This, says Smith (Gartner analyst) is the only way to stay relevant and responsive.  CIOs who ignore the benefits of consumer IT, who wage war against the shadow IT department, will be viewed as obstructionist, not to mention out of touch.  And once that happens, they will be ignored and any semblance of control will fly out the window.

Whether or not CIOs get it, does not really concern me as the nature of sales for many of these DIY apps and services should be focused around the end user vs. centralized IT.  Given this, the sale should be much different, less costly, and with much less friction.  If a user wants to track his sales force productivity, they can go online and sign up for Salesforce.com or create their own through a SugarCRM download.  There is no on-site installation as the web helps deliver the product efficiently.  From a sales perspective, as these companies grow over time, much of their sales can be done over the telephone or through a WebX or GoToMeeting session with only the large accounts reserved for an expensive direct sales rep.  Given this bottom-up, web-based model of selling and delivering software, it will be interesting to see how the incumbent vendors respond.  For example will users adopt a collaboarion platform from IBM that IT has pushed down on them or would it be better for CIOs to figure out what their workers are using and standardize on that?  Does this mean that the smarter incumbent software vendors look to buy startups that already have bottom-up traction versus building their technology from scratch?  As I was writing this post, I just noticed that IBM just signed a deal to pipe Google gadgets through its Websphere portal. 

"These sites are not just valuable to consumers. Businesses want the same content. Why would we keep these two universes separate?" said Larry Bowden, vice president of the IBM Lotus division for portals and Web services.

While Internet access, and thereby Google Gadgets, may be easily available to consumers, many businesses restrict access to the latest Web applications for security reasons, to make network management easier and to limit employee distractions.

By allowing Google Gadgets to work within its WebSphere Portal, IBM is making it easier for companies to give employees access to popular Web applications while keeping control over how they are used. Companies can decide which Google Gadgets they can see.

"The end user decides: We no longer need to go off and call a technician," Bowden said. "The power has been turned over to the people who know best. You know best."

It looks like IBM gets it and is trying to help its IT customers strike the delicate balance between control and giving users what they want.  All I can say is that the intersection of the enterprise and the web-based platform will be an interesting space to watch over the next few years and it is clearly heating up.

The post Do it yourself (DIY) in the enterprise (continued) first appeared on BeyondVC.

The post GOffice – what’s the big deal? first appeared on BeyondVC.

Loudeye operates 60 live services in over 20 countries and multiple languages across Europe and South Africa, Australia and New Zealand. Loudeye aggregates rights and content from all the major labels and hundreds of independents and currently offers licensed catalog and complete media for over 1.6 million tracks.

Why would Nokia need Loudeye if it wasn’t planning to offer its own music service direct to consumers.  Once again, for Nokia, recurring monthly revenue from every new cell phone buyer is a wonderful thing.  Everyone knows that margins on hardware are declining quickly, carriers are increasingly looking to Taiwan to private-label handsets to consumer to drive margins down even faster, and that ultimately cell phone manufacturers need to find alternative revenue streams.  The only question is when will this happen, not if.  So going after their wireless carrier partners’ data revenue may be controversial but in the end could be a must have for survival.

The post Nokia’s coopetition with carriers first appeared on BeyondVC.

1. a company that is performing quite well may be still be viewed as a failure in the eyes of the existing investors and team. 

2. your company must really hit significant milestones to raise a next round of funding at a higher price.

3. it may take too long to raise funding to find the right investor who will pay the valuation you are looking for

4. a potentially great exit for your company may never happen because it doesn’t meet the bar for your last round of financing.

So if the market is giving you a strong signal, listen and remember there is more to a financing than price and you need to carefully balance a number of factors such as other terms in the deal, an investor’s ability to add value, and your ability to work with the lead partner and his firm.

The post The fine line between dilution and delusion first appeared on BeyondVC.

"Frictionless sales means reducing the pain for customers to adopt and use a service/product and consequently reducing the cost of sales and marketing and service to get a customer and generate revenue.  As I mention in an earlier post, "The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow."

Well, if we thought we did that at Sipphone (full disclosure-it is a fund investment and i am on the board) with a fat client, I can tell you that we did much better with our newest release at Gizmocall.com.  At Gizmocall, users can now use their web browser, yes web browser, to make free calls to any mobile, landline, or SIP-based network.  With a simple Flash plugin, users get 5 minutes of free calling a day and 10 minutes if they register.  Congratulations to Michael, Jason, and the team for continuing to strive to lower the friction to using our service.  From a business model perspective, we clearly believe there is more to life than just minute stealing, so besides your usual upsell model for minutes and caller ID and other services, we plan on layering in some advertising.  Read Michael Robertson’s blog for more:

My plan with Gizmo Call is to offer phone calls that will feel free because they are paid for with advertising. The popularity of free email services, news services and community sites demonstrates that people will often choose ad sponsored services over paid ones. Because Gizmo Call is written in flash we can insert advertisements into the experience in a helpful manner. If you call 1-800-FLOWERS we can tell you about the great San Diego-based company ProFlowers which is running Valentine’s Day specials starting at $29.95 and offer to connect you to them at: 1-800-580-2913. If you need a plumber or a pizza just dial those words and we’ll pop up a list of vendors you can talk to for those services. Not everyone will want advertising in and around their calls, but Google has proved that targeted advertising is actually useful and that’s what we will strive for.                   

There’s no advertising yet on Gizmo Call which is why free calls are limited to just 10 minutes. Eventually we’ll have text, audio and video advertising – let your mind run with that one! Until then, use Gizmo Call to make some free calls and let me know how it works for you!

The post Free web-based calling! first appeared on BeyondVC.

1. large projected market-new emerging markets are welcome as long as we can see the opportunity ahead.
2. capital efficient business models – leverage frictionless sales and the web (try before you buy model, low barrier to usage, downloads, etc.) to create a more efficient and less costly sales and marketing machine.  Also leverage the commoditization trend to deliver products faster, cheaper and better.
3. disruptive technology – orders of magnitude improvement in price, performance, and delivery

A great example of a company meeting a number of those characteristics is portfolio company Greenplum (yes, full disclosure, I am on the board and may be biased in my opinion ).  Greenplum is leveraging the power of commoditization to turn the data warehousing market, traditionally led by proprietary vendors like Teradata, upside down.  Rather than rave about Greenplum, I thought I would share a recent article from Bill Inmon, a well known data warehousing analyst who some view as the father of data warehousing:

And with that explosion of data comes a corresponding increase in the costs of data warehousing. In particular, storage costs and the cost of the infrastructure required to support the storage needs are rising. The hardware vendors love to say that storage costs are going down all the time. This appeases the manager who has to pay large sums for the storage infrastructure. Storage costs may be decreasing at a factor of X, but the demand for storage is increasing at a rate of Y, and Y is a lot bigger than X.

It is reputed that one hardware vendor is selling storage for data warehouses at the rate of approximately $750,000 for a terabyte of storage.

So along comes Sun Microsystems and Greenplum with an offer you cannot ignore. How about $35,000 for a terabyte of data up to 24 terabytes?

If you are planning for a data warehouse in your future, you should take a close look at the Sun/Greenplum offering. No, let me say that a little bit more strongly – you cannot afford to not take a look at the Sun/Greenplum offer – not unless you enjoy throwing your corporate resources away.

It is about time that someone lowered the dreadful cost of data warehousing. Some of the leading vendors have been shameful in their gouging of customers. So the Sun/Greenplum offer comes as a godsend.

The offer is so good that in fact, you can afford to buy and install Sun/Greenplum, try it out, and if it doesn’t work, for whatever reason, use the gear for some other purpose. At the price ratio of $750,000 for one terabyte versus $35,000 for a terabyte of data up to 24 terabytes – you simply have to try this offer.

So you may ask yourself how we are able to offer that kind of pricing, 20x cheaper than some competitors, and still get profitable?  Well first, we are leveraging a hybrid sales model where partners like Sun help drive the high end opportunities and our open source street cred and our creation of Bizgres.org helps fuel the download model.  In addition, rather than build expensive proprietary hardware solutions, we are leveraging the power of commodity boxes and clusters to deliver better performance at a fraction of the cost of existing competitors.  In addition, rather than start from scratch we have built some proprietary extensions on top of PostgreSQL, a leading open source database, to make it BI ready.  So combine lower costs to build with a highly leveraged sales model and you can quickly see why we can offer the pricing that we do and build a great business from it.  There is nothing like leveraging a powerful trend, so if you are an entrepreneur building a company with many of the characteristics outlined above, I would love to hear from you.

The post The trend is your friend – leveraging the power of commoditization and the efficiency of the web first appeared on BeyondVC.

I went out to dinner a couple weeks ago with a few key executives at a portfolio company and as we started talking about future product direction, it seemed that we all had different ideas of where the company should go.  Seeing some confusion I tried to get us focused back on the basics when I asked the team what our vision was.  The first pitch was great and so were the others but unfortunately they were all different.  It is really hard to drive future product direction when your key executives can’t agree on what the company should be when it grows up.  In addition, it is quite difficult to get your employees on the same page without a simple, succinct vision.  Furthermore, it is hard to build word of mouth marketing without boiling down who you are and what you do in a memorable and short manner.  Yes, it can be challenging to distill everything you are doing into a short pitch but great companies are able to do this.  So let’s look at a few companies in the highly competitive video space that have managed to stand out from the crowd (other than YouTube) and break down their vision statements and taglines:

1. Metacafe: Metacafe is one of the world’s largest online video broadcasters with a global audience of 16 million unique visitors (comScore Media Metrix) watching over 400 million videos each month.  Using our VideoRank technology, Metacafe is the only site that mines the collective wisdom of its audience to filter and surface the most entertaining videos, making it the best place to both watch and distribute high quality video content.

Tagline: Serving the world’s best videos

(its saying I’m a pretty big player and it gives you the best videos,not just every video – secret sauce is its VideoRank technology)

2. Revver: Revver is a video-sharing platform built the way the internet really works. We support the free and unlimited sharing of media. Our unique technology tracks and monetizes videos as they spread virally across the web, so no matter where your creativity travels, you benefit.

Tagline: What if creativity could pay the rent?

(sounds a little techie-video sharing platform the way the internet works? the differentiation is in the fact you get paid-the vision sounds like it is more focused on the publisher than the consumer, secret sauce is its platform to pay creators)

So they are both video sharing sites but each has its unique spin to help its employees and users spread the word in a simple way.  In addition, I am sure that their respective vision statements helps guide their future product direction.  Revver probably asks itself, does my next release help me further strengthen my advantage as the best platform to get publishers paid.  Metacafe probably is constantly working to improve its community based voting and algorithms.

The trick is to make your vision broad enough to allow you to grow into it, yet be differentiated, and obviously simple to remember.  You want all of your employees when they are talking on the phone with customers or friends or even at cocktail parties to give a simple description of what your company does and how it does it.  You want the next degree of relationships to be able to explain just as easily as your employees – this is how great buzz builds.  You want your key product guys asking themselves how does this next release help our company continue to deliver against our vision.  So remember before launching into a variety of different directions, think long and hard about where you want the company to go and how to distill that vision into an understandable and simple pitch to help get the message out.  Take the simple litmus test at your next management meeting to see if you are all rowing in the same boat or different ones.  Doing this does not guarantee success but definitely helps get you and your team moving in the right and more importantly the SAME direction.

The post Why vision statements matter first appeared on BeyondVC.

The post One hurdle to a true wireless revolution – ease of use first appeared on BeyondVC.

If there are always going to be 1-3 winners in a space, then more competitors equals more failures. Combine this with the fact that this new resurgence of web startups is much more publicized and transparent than the first generation.  So more startups and more news outlets and blogs means that we are only going to hear more and more bad news in 2007.  That’s ok.  We have to remember that in the echo chamber of the blogosphere, this news of death and layoffs seems to reverberate quite loudly.  Just because we hear about it and hear about it from more sources does not mean that the sky is falling.  From my perspective, this is no different than the past.  Startups are risky and a number won’t make it but some will hit it big.  In addition, startups have to be flexible and more often than not their business models will adapt once they are out in the market which means a layoff or two may happen.

This reminds of the scene from the movie Monty Python and The Holy Grail where the dead collector comes through town to clean up the streets.  As he pushes his cart through the town, people start piling up dead bodies.  However, one seemingly dead body claims he isn’t dead.  The same goes for web startups – we will see more bad news but that does not mean the market is over.  It also doesn’t mean that we shouldn’t write about the failures as we can all learn from them. 

Here is an excerpt from the movie:

The Dead Collector: Bring out yer dead.
[a man puts a body on the cart]
Large Man with Dead Body: Here’s one.
The Dead Collector: That’ll be ninepence.
The Dead Body That Claims It Isn’t: I’m not dead.
The Dead Collector: What?
Large Man with Dead Body: Nothing. There’s your ninepence.
The Dead Body That Claims It Isn’t: I’m not dead.
The Dead Collector: ‘Ere, he says he’s not dead.
Large Man with Dead Body: Yes he is.
The Dead Body That Claims It Isn’t: I’m not.
The Dead Collector: He isn’t.
Large Man with Dead Body: Well, he will be soon, he’s very ill.
The Dead Body That Claims It Isn’t: I’m getting better.
Large Man with Dead Body: No you’re not, you’ll be stone dead in a moment.

Just to be clear, the fact that it seems like more and more startups are running into hard times does not mean that the market is in serious trouble.  And while I believe the failure rate may be even higher in this go round, I also expect that the dollars lost per failure will be orders of magnitude lower than in the first Internet wave.  When the 30th tagging site or 50th video site have hard times, that is not cause for alarm.  What will scare me is if we start seeing more unproven startups raise significant amounts of first round capital at frothy valuations and spend it on Super Bowl commercials or if Google starts to hit the skids.

The post Bring out yer dead…I’m not dead first appeared on BeyondVC.

With respect to your information flow, make it timely, transparent, and relevant:

1. Timely: we don’t like surprises.  Tell me in advance.  When you think we are going to miss the quarter by a significant amount, don’t tell me 2 days before the end of the quarter, tell me as soon as you can.  We are partners and this gives us all an opportunity to prepare contingency plans in advance or control our hiring before we run into a wall.  CEOs who communicate well make sure the bad news travels just as quickly as the good news. If you don’t tell us early, we can’t help you.

2. Transparent: let me know as clearly and concisely what the issue is and don’t spin me.  Transparency means sharing the raw data with me as well as the short summary of why something happened positively or negatively. If we don’t get a deal this quarter, and you really don’t think it will happen, don’t keep it on the sales pipeline and set the wrong expectations for us.

3. Relevant: I don’t need to know every little detail of your day-to-day operations but we also do need to be apprised of what is important. Relevancy of course changes with company stage as well.  Knowing as soon as possible about the first couple of engineering hires is relevant in a startup but knowing about the 10th engineer does not require a real-time update.  If you not sure if a specific update is relevant, err on the side of more is better.  Sending an email update out to the board is simple, and trust me, if the news is important, those board members who are more engaged or concerned will reach out to you.  If it really is a big issue (positive or negative), I suggest calling a few of the board members to discuss with them. 

At the end of the day, information flow comes down to trust – board members trusting the CEO and the CEO trusting the board.  The CEO-Board relationship is a two way street.  Board members have to be just as direct, open, and upfront with respect to our expectations for the CEO and the management team.  This means getting a plan in place for the year that is discussed, vetted, and ultimately finalized which the board and the management team sign up to. If you abide by these simple rules, I can assure you that these tips will go a long way towards helping you build a very strong and healthy relationship with your board.  At the end of the day, keeping any relationship strong and thriving is dependent on how well everyone communicates with each other.

The post Communicating with your board first appeared on BeyondVC.

The strategy of keeping employees happy and committed to spending endless hours on campus seems to be working. Richard Burdon, 37, an engineer who joined Google two years ago, has been staying past midnight to prepare for the introduction of a project. (Google’s Manhattan engineers have been responsible for developing Google Maps and are working on some 100 other projects.)

“Google is about as interesting as starting your own startup because you can really follow your own ideas,” said Mr. Burdon, who previously worked for Goldman Sachs, Sony and I.B.M. The only time he could remember leaving the office during the workday was to buy a friend a birthday present.

As a New York-based venture capitalist, this is great news.  While many employees continue to enjoy the meteoric growth of the company, I am quite excited at the prospect of having hundreds of well-trained engineers and product managers in New York who will one day want to start their own company.  New York has always had a talented and core group of technologists, many of whom are working on startup number 2 or 3, but what gets me excited is the idea that many newbies to the startup and web culture will have the opportunity to experience the fast-paced, engineering driven world of Google.  It is precisely the engineers like Richard Burdon mentioned above who worked at major corporations like Goldman Sachs, Sony, and IBM, who may have never left their jobs for a startup but did so for Google.  It is also many of these engineers, once they get their feet wet in an engineer driven culture, who will eventually want to leave and start their own companies contributing to the continued emergence of New York as a great place to launch a web startup.

The post Bringing the Valley to New York first appeared on BeyondVC.

1. Exchange server – USA.net – pay monthly based on number of mailboxes and mailbox size and eliminates the headache of ongoing maintenance and backup.  also can add mobile devices like Blackberry, Good-enabled, etc. and easily provision without cap x.
2. Voice-outsourced VOIP, we have a direct pipe to a local provider, we leased some Cisco phones, and once again no upfront cap x and lots of great functionality, we pay a base monthly fee for unlimited calling.
3. Security – we bought some Cisco gear but have a small IT firm as our managed service provider remotely monitoring and updating the software with the latest patches and release.
4. Connectivity = We are networked internally on Windows and have a shared drive where we can access files.  In addition, we have a VPN for remote access to this share drive.
5. Productivity – Microsoft Office

Going back to my friend’s question, if I could set up my office now, here is what I would do:

1. Exchange server – I hate exchange and I would bail on this as soon as I can.  Instead, I would get all of my email and calendaring functionality through Google Apps for your domain – it is free and provides 2 gb of email, integrated calendaring with your email, chat and simple voice chat, and an ability to create simple web pages.  Yes this is basic but it is easy.  In addition, I expect a lot more to be offered once Jotspot is integrated along with some of the other basic Google Office apps such as word processing and spreadsheet functionality.  My one big beef which is holding me back right now is the lack of simple syncing with wireless devices.  There are some apps you can plug in to sync Google calendar but they still need some work.
2. Voice – if I want something more robust I would get a Fonality PBXtra for $995.  If you choose to go the really simple route, the PC-only VOIP providers of today have come a long way since 2004. I am partial to Gizmo Project (wait for our new version which will be accessible through a browser – also, full disclosure, I am on the board) but Skype and other services can once again offer you pretty decent voice communications and functionality like the ability to buy your own phone number, call forwarding, and dual ringing on your computer or cell phone.
3. Security – not as important if your files are hosted offline and backed up remotely (try xdrive which is free for 5 gb or box.net (free for 1gb). 
4. Connectivity – a simple wifi network in the office can get you simple file sharing without an IT professional’s help.  If you want to collaborate with remote workers, you can use a wiki like Jotspot  or Socialtext or some of the shared storage services I mention above.  As far as remote acccess, no VPN is needed as a simple GoToMyPc account ($19.95 per pc per month) or LogMeIn (free for base functionality) can get you the access that you need without the headaches and upfront cost of a VPN.
5. Productivity-Microsoft Office but the online apps are getting better and in fact for collaboration or sharing would consider Google Office apps like spreadsheets and writely

What is amazing to me is how far and how fast we have come during the last 2 years.  The big difference is that the functionality is even better and so is the price – mostly free!  Given this, I wonder what we will be looking at 2 years from now?  Yes, one problem is that all of the solutions I list above are dependent on having an Internet connection.  What if I am not online and need access to my calendar or some office documents?  Since this is a pretty clear problem, my prediction for 2007 is that online apps get better offline client like functionality.  Maybe it will be the new Adobe Apollo platform that makes it happen for us?  What is clear is that one of the benefits of SAAS for developers is that they don’t have to code in multiple platforms.  Once you start diving into the murky world of multiple operating systems and developing clients for Windows, Mac, and Linux, it can quickly become quite messy and resource intensive.  That is why I also see 2007 as the year that offline apps become big as the Apollo platform is released and allows web developers to build an application on one platform that can be deployed cross operating system.  Also keep an eye out for Microsoft’s WPF/e (windows presentation framework everywhere see an earlier post for more info on wpf).  This is a big deal and will help SAAS-based apps continue its upward trajectory and spread from consumers to SMBs and even further into enterprises.  As an example, take a look at Jeff Nolan’s recent post about how frustrated he is with Exchange and how GMail provides a nice alternative.  With the ability to get my whole office set up with a few clicks, it is no wonder that Microsoft is running scared and embracing SAAS rather than fighting it.

The post Small business startup kit for 2007 – mostly free! first appeared on BeyondVC.

The Wendy’s commercials, to be broadcast nationally on Fox Sports this weekend, are one of the earliest national examples of an emerging TV technology that allows advertisers to vary their message at the last minute. The Wendy’s ads will reflect events in the football games, creating what ad executives call a reverse product placement of sorts. Instead of putting Frostys or Wendy’s fries into a TV program, the company will incorporate a show’s content in its commercials.

TV advertisers are also now able to vary their spots based on audience demographics, changes in weather, sales goals or the campaigns of competitors. Borrowing a trick or two from the Internet, where ads are finely aimed at Web surfers, technology companies are working with consumer brand companies to move away from the one-message-fits-all approach.

“This is where the future’s going,” said Chris Boothe, president of Starcom USA, a media-buying agency that is part of the  Publicis Groupe. “We think that everything’s going toward more customization. It’s making sure that the message to the consumer is happening at exactly the time it is relevant.”

Congratulations to portfolio company Visible World for helping Wendy’s and Fox, sticking with its vision over the years, and helping the television industry take advantage of new technology to bring Internet-like dynamicism to an aging platform.

The post The future of television advertising (continued) first appeared on BeyondVC.

UPDATE-there are lots of different types of social workers but in this context think counselor or sounding board.  My comparison with social workers was not meant to make all entrepreneurs sound like they have serious issues-the point is that sometimes the daily bump and grind of operating a business can get to you and having a VC who knows your business and who is part counselor/part sounding board can be an invaluable resource.

The post The similarities between venture capitalists and social workers first appeared on BeyondVC.

The post Set my music free – thank you EMI first appeared on BeyondVC.

Why is this a problem?  First, creating a plan that is too ambitious only sets you and the company up for failure.  People don’t like to fail and you and your employees can get demoralized after repeatedly missing targets by a significant amount and especially if your compensation is tied to a plan that will never be realized.  Secondly, in trying to hit an unattainable plan, management teams typically make another huge mistake – overhiring too early or frontloading all of their hires to spend their way to success.  What this does is speed up cash burn without delivering the desired results.  In an earlier post, I mentioned how hiring too far in advance of your market can lead to ruin:

"Do more with less and be careful of ramping up sales until you have a repeatable selling model.  In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins."

So just do yourself a favor when you build your strategic plan for next year – get input from all of the key stakeholders (sales, marketing, engineering), get them to buy off on the plan, and put together goals that force the company to perform at its best while at the same time being grounded in reality.  A good possible solution is for your company to lay out 2 plans – a baseline growth plan which the board approves and an upside plan that has a higher benchmark which the employees use as their goal.  What this does is allow companies to manage to a certain burn rate (baseline) but at the same time continue to push its teams to excel and deliver results.  If the company exceeds the baseline plan in a certain quarter, companies can always add a few more people to maintain the upside growth.

The post Setting unattainable goals can hurt your company first appeared on BeyondVC.

The point is that business is not a sporting event. Victory for one company doesn’t mean defeat for everyone else. Markets today are so big—the global video-game market is now close to thirty billion dollars—that companies can profit even when they’re not on top, as long as they aren’t desperately trying to get there. The key is to play to your strengths while recognizing your limitations. Nintendo knew that it could not compete with Microsoft and Sony in the quest to build the ultimate home-entertainment device. So it decided, with the Wii, to play a different game entirely.

I would argue that rather than title the article "In Praise of Third Place" that it should be titled "In Praise of First Place" because what Nintendo did was slice and dice the multi-billion dollar gaming market so that it could be first place in a submarket (which is quite huge) that Nintendo has defined, that plays to its strengths, and that it can win.  This is a big deal and quite smart.  Even though Nintendo is a large company fighting even larger ones, this is a strategy that any startup can use – change the stakes and be the best in your new category.  This does not mean to slice ad infinitum until you get a market so small that it is irrelevant, but the point is that going into "hand-to-hand" combat with those with much greater resources can be quite hazardous to your health.  Take a look at an excerpt from an earlier post I wrote about competing with the big boys. 

First, as a startup you have to get away from a feature/function battle because you will always lose against a big boy.  If a customer has already bought a product from an incumbent, they are more often than not willing to stay with that incumbent if they can deliver the extra feature/function soon enough in a good enough way. What I like startups to do is win with the product roadmap and vision.  Show the prospect how you solve their needs today better than the incumbent but more importantly why you are different and how your approach will solve their future needs.  If you can differentiate on this level, it gives you a much better chance to win. 

The post What startups can learn from Nintendo first appeared on BeyondVC.

Modifying TV spots
In an hour of omnipotence I’ve rebuilt and redistributed ads for some of the biggest companies in the country. Borrowing their existing creative I’ve modified a dozen commercials, turning each execution into hundreds of 30-second spots, each more targeted and relevant than the original. I’m confident that my work — if it were affecting the real world and not just Visible World’s demo system — would’ve multiplied the ROI on these ads by a geometric factor that would establish me as a genius within my organization, or at least ward off shareholder griping for another quarter….

Already six major marketers are using Visible World to manage and modify their ads in real-time. Another 12 are having dashboards built for them right now. This is a technology at a tipping point, and if you’re not prepared to take my word for it, maybe you can persuade the folks at Visible World to give you a turn as ruler of the ad world. It’s pretty heady stuff.

In short, I don’t believe that television advertising will go away but that it must be reinvented quickly and that advertisers must embrace rather than fear new technology.  And as we move into the future, rather than focus on broadband vs. television (digital vs. analog), I also see a world where both sides can work with each other to effectively deliver better results for advertisers.  As video becomes increasingly more fragmented and viewed on various systems and devices (television, VOD, broadband, gaming systems, cable, mobile, iPods), it will be imperative for advertisers to have an easy way to manage and optimize their video advertising campaigns wherever the audience is.  In addition, the more progressive advertisers will try to figure out how to marry online ad optimization with the offline world.  For example, let’s say you are an advertiser and your online ad for a specific mortgage product for ARMs is getting more clicks in a certain geography versus one for fixed rate mortgages.  Using that data from the Internet, wouldn’t it be great if you could change your television commercial so that the next airing has an updated offer for ARMs instead of for fixed rates?  That is just one example of how Visible World can bring the two worlds closer together, using data from your Internet campaigns to enhance and optimize your media spend on television.  And of course, without the Visible World technology, it would be hard to do this in a near real-time, automated, and cost-effective manner.  There are so many more ways that Visible World can make a television commercial more relevant and effective.  As Jonah goes on to say:

These are fairly obvious ways of using the technology, but as smart creatives start to get comfortable with this tool, we’re going to see way-more-ingenious applications. The ads could even become responsive to the programming. Think the Geico gecko opening his sales patter by commenting on the score in the game, perhaps — sort of entertainment being integrated into the ads, rather than the other way ’round.

Advertisers are starting to get it so keep an eye out for this idea of "advertising responsive to programming" during the next couple of weeks.

The post The future of television advertising (continued) first appeared on BeyondVC.

1. We lack clarity of ownership and accountability
2. We lack decisiveness

Rather than just outline the issues, Brad recommends some much needed solutions:

1. Focus the vision
2. Restore accountability and clarity of ownership
3. Execute a radical reorganization (blow up the matrix where there is no clear owner and kill redundancies and overlap)

This is all just basic Business 101, but sometimes if you grow too quickly and don’t take a step back and strategize about what’s important, you can get lost pretty quickly.  Whatever happened to the whole media group in LA with Lloyd Braun?  How about all of the turf wars between the tech team in Sunnyvale with the media guys in LA?  As an example, whenever one of my portfolio companies wanted to do something with Yahoo we were always never sure of who the real owner of the decision was and consequently it made it incredibly frustrating to work with them.  When there is no overarching vision and when there is overlap in terms of responsibility, you can imagine how much time executives can spend fighting amongst each other rather than focusing their aim on the competition.  And inevitably this leads to slow movement, bureaucracy, and an exodus of top talent.  While outlining a vision can sound hokey, it is important for every employee to not only know, but live, eat, and breathe the company mission.  It sounds like Yahoo’s mission to be the "most essential global Internet service for consumers and businesses" lacks clarity for the executives.  While I do use and love a number of Yahoo services, I always use Google for my searches.  I am sure all of these basic changes and suggestions, if taken up by Yahoo, will help them execute in a more streamlined and efficient manner, but at the end of the day it is going to be tough to outsearch Google in terms of technology and monetization (2x the monetization rate per search for Google vs. Yahoo).  Assuming Yahoo does narrow its focus, I can’t wait to see what ultimately will be the top 3 priorities for the company.

The post Yahoo’s manifesto for change first appeared on BeyondVC.

Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes….

In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a cost-effective, real-time basis…

We offer our solutions principally on an annual or multi-year subscription basis. Our direct sales group markets and sells our solutions primarily using the telephone and web-based demonstrations. From the introduction of our solutions in 2000 through September 30, 2006, our enterprise subscriber base has grown to approximately 1,500 companies who spend from $2,000 to more than $100,000 annually, including companies such as Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. We also sell to both individual consumers and smaller businesses through our Salary.com website.

From April 2001 through June 30, 2006, we achieved 21 consecutive quarters of revenue growth. During the years ended March 31, 2004, 2005 and 2006, we achieved positive operating cash flows of $0.3 million, $0.9 million and $1.8 million, respectively, and used $0.7 million of cash in the three months ended June 30, 2006. During these periods, we have consistently incurred operating losses, including $0.8 million for 2004, $1.9 million for 2005, $3.0 million for 2006 and $0.8 million for the three months ended June 30, 2006. As of June 30, 2006, we had an accumulated deficit of $21.8 million.

I would usually put IPO filings in the nonevent category but as I dug deeper into the company and financial performance, it did raise some interesting questions for me.  First and foremost, the traditional rule of thumb that most investment bankers have quoted me in the last couple of years was that in order to go public a company needs to have an annual run-rate of $40-50mm of revenue and a couple quarters of profitability.  While the Salary.com numbers are strong (read the S-1 here), they are not close to those metrics.  In fact, during the last 3 fiscal years for the company, it did $6.4mm, $10mm, and then $15mm in revenue.  The trailing twelve month number is closer to $20mm in revenue.  While slightly cash flow positive, the company is not GAAP profitable.  So the natural question for me is to ask whether or not the barrier for a private company to go public is much lower today and whether or not this will signal an ongoing trend in the future.  This is obviously relevant for a number of reasons.  Outside of a few outliers, most of the returns generated for VCs have been from M&A transactions.  If the IPO markets open up again, it would give investors and entrepreneurs another option to create value.  Using a back of the napkin analysis, most companies sell about 20% of their stock to the public, so one could assume that Salary.com is valued at around $200mm pre-money implying a 10x multiple on trailing twelve month revenue.  I must say that sounds quite appealing.  Anyway, we should all watch this company as it goes through its paces because if it does well, it could open the door for plenty of other companies like it.  There must clearly be an appetite from the institutional money managers who are looking for more upside from rapidly growing small cap companies.  By the way, one other interesting point about Salary.com is that is an on-demand application play with some web-based advertising thrown into the mix.  It is also mostly a subscription-based business which means it has a highly predictable revenue stream which is great for forecasting future performance.  Finally, the company only raised $5mm of VC dollars so it is highly capital efficient.  If you read from the S-1 above, most of the sales are generated through the telephone or through web-based demos, all of the traits for a nice frictionless sale and great business model.

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So of course, with an eye on simplifying my life, I decided to download and install Windows OneCare on one machine.  It was easy to download, offered diversified protection against threats, and also allowed me to add multiple machines.  However, one drawback, which did not really seem to be highlighted anywhere was that there was no real-time scanning and protection for incoming email.  That in my mind is a huge flaw.  How can Microsoft give everyone the perception that they are locked down with this new service when it does not scan your PC in real time for threats antivirus threats in your email?  I can see a whole army of consumers feeling secure but still having tons of issues without the real-time functionality. 

Anyway, this post is not about Windows or any one specific product, but the fact that I have to download and install security software on multiple machines and have to set them up and manage them.  As you know I am all about simplicity and reducing friction in usage, so why not have one simple box that does it all for the consumer – cable/dsl modem, router, wireless LAN, with best of breed security software loaded into the device?  Just like the enterprise security market went from packaged software installation to set and forget appliances, why can’t I have the same functionality in the consumer market?  As we all know, hardware is a commodity and prices have fallen dramatically.  And just like enterprises, I want defense-in-depth for my house which means building in security at the edge before it can even get to my machines.  With best-of-breed security functionality built into the router, I can set security policies once for my whole house and not have to install and manage client software for every machine.  I also get my CPU cycles back on my PCs as they can be a drain for the machines.  The good news is that forward thinking companies like Checkpoint ZoneAlarm are starting to go after this market and recently announced just such a device for the consumer market.  If you look at this graph you can see why having comprehensive security at the edge is needed.  Malware gets blocked at the edge before it can do damage to your PCs.  In my mind the state of consumer Internet security is that we are still in the dark ages but it is getting better.

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This makes total sense.  In the broadband world we live in today, the Internet is about instant gratification.  I could argue that one of the reasons YouTube exploded on to the scene (besides the fact that it had every copyrighted video out there on its site) is because of its use of Flash – no download and instant gratification right in the web browser.  It sounds simple but it is true.  There are many vectors that you can optimize with respect to consumer experience but take it from Marissa and Greg that in the end, users want instant gratification.  In my mind what instant gratification really means is speed and ease of use.  It has to load fast and it has to be easy.  This is about reducing friction for users to experience your service and reducing the friction for you to generate revenue.  Remember no matter how many extra bells and whistles you add, don’t forget that speed and ease of use really matters.

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While CBS has certainly put some dollars and focus behind this "going early" effort, it is not lost on a number of media companies that I have met with in New York recently.  All of them are looking to invest and buy startups before they get too big.  As you all know, commoditization means it is extremely cheap to get a web business started and build an audience.  Since the inflection points for startups occur much sooner and on much less capital, missing that first round means you have to pay up to get involved.  Paying up means it significantly increases the bar for success and the risk of your investment or acquisition failing.  According to the PaidContent post today, "On the making deals side, it sounds like he’s in sync with Moonves, who has said the company won’t be making major digital acquisitions."  All of this is to say that Rupert Murdoch made a ballsy bet when he bought MySpace and paid the price that he did – no one else moved as quickly or as emphatically. 

In theory it sounds great – spread around a number of smaller bets instead of making a bet-the-farm acquisition like a Facebook. And  I am sure that CBS will see a ton of great entrepreneurs, but the question is whether or not CBS, a traditional media company, can identify the right companies and add significant value to drive them to success.  Early stage investing is not easy and neither is acquiring a couple of entrepreneurs working out of someone’s apartment.  Success for CBS will come down to execution as it will really be competing with technology companies like Google and Yahoo (take a look at a discussion we had at Kinnernet in April about this topic) who have a better pedigree and track record of buying pre-venture-backed companies and making them successful.  If you throw in the inevitable friction that will be created between the new and old media side of CBS, it will be interesting to see how this strategy evolves.  Regardless, more capital and more exit opportunities is great for entrepreneurs.

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Socialtext, the first wiki company, announced today a free hosted wiki program for JotSpot customers following that company’s acquisition by Google. Socialtext will migrate JotSpot wiki content and provide one year of Socialtext Professional hosted wiki service to any JotSpot customer who signs up by the end of November 2006. While most JotSpot customers are small-to-midsized businesses, this offer is extended to deployments of any size.

Who knows whether or not Ross’ program will be ultimately successful but I certainly applaud his efforts for being aggressive and moving quickly on the deal.  For what it is worth, I have used both services in the past and while Socialtext was certainly more powerful and flexible, I found Jotspot incredibly easy to use.  As i have mentioned repeatedly, reducing the barrier or friction to usage is incredibly important on the web and can be a make or break issue for your business.  As Ross says, while Socialtext (higher end) and Jotspot (lower end) are clearly going after different segments of the market, it seems that Jotspot’s vision to go after the lower end and help the power user with an incredibly easy to use service won the day for Google, as it continues to expand its efforts to take on portions of Microsoft’s business.

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For example, in one portfolio company, as we dug deeper into the sales funnel, we clearly saw that there were two distinct types of customers – one with a very short sales cycle with more do it yourself implementation and another set with a longer sales cycle.  The natural question you have to ask yourself is how do I put programs in place to reach the first group of sales prospects to increase my efficiency.  One other huge boulder we found was that sales pilots were taking too long to get started.  As we dissected the problem, we discovered that a large portion of this time sink was because it took too long for a customer to get the required hardware to run a pilot.  In order to reduce the friction, we brought in our own appliances to minimize the time to pilot and also mapped out a plan to run sales pilots in an on-demand fashion with no installation onsite at all.

In another company, the boulders that we discussed were less a sales targeting issue but more of an implementation issue.  While we had a great distribution deal with a partner, the conversion rates were not as high as we liked.  To move this boulder, we spent plenty of time discussing how we could get our customers to use our service with as little friction as possible – in other words, how to get a customer using our service with 1-2 clicks instead of 5 – 6.  This may sound trivial but trust me it is not.  Reducing the barrier to usage can make the diifference between a huge win or a mediocre effort.  This applies in both the enterprise and consumer world.  Once again, it is quite important to deconstruct your sales cycle and look for those huge boulders and put programs in place to move them to create a more streamlined process.

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1. What is our unique value proposition to customers?  Is it truly unique and differentiated (come on-we need to be brutally honest with ourselves here)?  If not, how do we leverage our strengths to create a compelling value prop to customers?
2. Who do we want to be when we grow up?  In this world, I strongly believe that one must put a stake in the ground and either go big, go niche, or go home.  Which one are we and why?
3. Where is the market headed?  What are the opportunities – are we a leader or follower?  If we are a follower, how do we become a leader? 
4. Given all of the above, what are we uniquely positioned to deliver given our strengths and weaknesses?  What are the biggest threats that keep our company from delivering?
5. How are we going to reach that customer at the highest point of pain and in the most capital efficient manner?

As one of the entrepreneurs in the portfolio pointed out, some of these questions can be theoretical and murky and until you get a product out into the hands of customers or consumers, it may be hard to answer them.  My perspective is that yes this is true, but you need to have few of these basic questions covered before going into the market and then with the data take a step back and refresh, rethink, and reload.  In other words, you need to take market feedback to validate or invalidate some of your initial thinking and adapt.  I know these are all basic questions but you would be surprised at how many people come in and have not put their mind to some of these questions.

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1. What are the hardest problems in our current business approach – the market issues that we keep struggling with over and over?
2. What’s (surprisingly) easy about our business – the things that are working better than expected?
3. Where’s the parade?  What major trends are we trying to get in front of with our business?

What would our business look like If we:

• Stopped trying to do what’s hard,
• Did more of the things that are easy, and
• Made sure we were in front of the biggest parade we can find?

I think all too often management can get bogged down into day to day details and it is extremely important to take a step back every once in awhile and think a little more strategically about what you are trying to accomplish, where you are going, and how you are going to do it.  It is hard to build a great company without answering these questions.  The beauty of Andy’s questions are that they are simple yet powerful.  This reminds me of the good old SWOT analysis where management looks critically at their company and themselves to assess their strengths, weaknesses, opportunities, and threats.  This is also a great discussion to have at the board level since having input from others who know your business quite well but are not involved in the daily hand-to-hand combat can be quite valuable.

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Xbox will be the first group within Microsoft to use Windows Live Service Agents. Colloquis technology will be a strong contributor in enabling Xbox^® customers to rapidly find helpful information related to their support needs. The conversational tone and ease of use of the product will offer customers another approach with which to address commonly asked questions, providing quick resolution to customer issues. The product’s technical flexibility makes it an excellent fit with other self-service options that Xbox plans to release in the fall.

In addition, Microsoft plans to take advantage of Colloquis Internet bot technology in an application called Windows Live Agents, a conversational application that users can interact with via Windows Live Messenger. These “agents” are used to entertain, encourage engagement with products or services, provide a new advertising opportunity for brand advertisers, and drive search and information retrieval.

On the Windows Live Agents side, take a look at what can be done using Colloquis technology delivered over the Messenger platform.  According to the Microsoft site, think of a bot as an automated contact that can be added to your contact list and that you can converse with using text to deliver information, complete tasks, or be entertained.  I look forward to seeing how developers using this bot technology will tie together various web services and applications all through a simple buddy contact on your IM list.  On the current Windows Live Gallery page, you can see an Encarta bot, a map searcher bot which interacts with the Virtual Earth Map through an IM chat, and an InsideMessenger bot that "interacts with Amazon, finds flights in realtime, integrates with RSS feeds and soon will integrate with YouTube/MySpace video feeds."  I look forward to seeing Microsoft bring bots and automated agents into the mainstream.  I can’t think of a simpler way to interact with web services or initiate commands than through a simple text chat. 

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While these new technologies are giving Cisco’s current customers reason to upgrade, Cisco also is seeing growth of nearly 50% a year in its sale of networking systems in emerging markets like Saudi Arabia. That growth results from sales investments Cisco made in the past couple of years, just as it had done previously in India and China. A large sales force of Cisco representatives is now making the case for oil-rich nations to invest in networks as a way to improve health care in those countries and create high-value jobs. Today such countries represent 10% of Cisco’s sales, but Chambers thinks they will contribute 30% to 50% of future growth.

Given the amount of money the Middle East is printing from oil, the fact that the oil reserves will not last forever, and that the Middle East is investing heavily in infrastructure (I believe most of the world’s cranes are in China and the Middle East), I would not be surprised to see this area become a strong player in technology.  Give it time, and Cisco is spot on for making the investment and bringing these countries state of the art infrastructure.  It is not a coincidence that a couple of the fund’s portfolio companies have found fertile ground and great sales opportunities in the EMEA region.

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The idea of a deal had been broached a few days earlier. The setting was classic Silicon Valley start-up: a booth at Denny’s near YouTube’s headquarters in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion and autonomy to continue running the business.

As I have written before, alot can happen when your competitors get acquired.  In most cases, your competition ends up spending too much time inwardly focused on integration and synergies and not enough time building their business.  While this problem is more prevalent in the enteprise software world given the nature of what it takes to make an acquisition succesful, (think Oracle-enterprise product integration is much harder and personnel and sales force training can take lots of time) it should not be the case in a lower friction web world.  As we can see, one of the smart things that Rupert Murdoch did was give MySpace autonomy to grow their business instead of stifling them with corporate culture.  I am not exactly sure how EBay has approached the Skype acquisition but I did hear that there is some imposition of EBay culture on Skype.  We all know that history repeats itself and one of the classes I remember from college was one on Literature and the British Empire.  One of the central theses of that class was that one of the reasons the British Empire failed is because they tried to impose their will or culture on others rather than have them slowly buy into it over time.  You can think of the cookie cutter approach – Britain conquers country, Britain installs own government system, Britain installs its own President, and eventually the conquered country revolts. This is what happens many times in acquisitions. What is briliant about Google’s play besides the attractive price is that it is not messing with YouTube’s success, it is giving the YouTube team the autonomy to keep building its business.

UPDATE: What I also forgot to mention is that one of the most important aspects of maintaining autonomy means maintaining product autonomy.  The last thing you want to do is piss off customers and destroy value.  Even small changes in the UI can make a huge difference when it comes to customer satisfaction. 

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The next step in this evolution of commerce will be social shopping or companies leveraging Citizen’s Media (blogs, podcasts, videocasts, tagging) to drive commerce.  According to Answers.com, "Social Shopping is based on the principles outlined in the wisdom of crowds where a large group of users can recommend products to each other and between them work out what to buy and which ones have the most buzz."  I believe this is an interesting area that has not been fully tapped yet.  At the root of it, people want to connect.  Most people I know tend to check the Internet first to research a purchase and also ask friends for recommendations or reviews about products.  The more inefficient a market is, the more opportunity there is to educate consumers and peers leveraging the web. 

A great example is the wine market.  I am certainly no wine connoisseur, but I have been trying to learn more about it over the last two years.  Over time, I moved from an Excel spreadsheet to using the web to track some of my purchases and to learn more about each bottle.  One of my favorite sites is Cellartracker.  It leverages almost a wiki like concept so when I add a bottle of wine, it first searches its database to see if anyone else in the community has already input the data.  If it does, I can easily add a bottle to my virtual cellar and if not, I can add the data myself.  It already has over 3 million bottles of wines in its database so I did not have to do alot of work to get started.  It also has community reviews built into each input of wine so you can get recommendations for other bottles and figure out what others that have the same bottle as you have in their wine cellar. The downside is that the UI is not the prettiest and the site may be too flexible for the average user.  Cork’d is another example of social shopping – it allows you to catalog your wine, review and rate it, maintain a wish list, and subcribe to your friend’s wine lists.

One of my favorite examples of leveraging citizen’s media is Wine Library, which has one of the largest selection of wines and some of the best prices on the web. Gary Vaynerchuk, Director of Operations, really gets the web and has leveraged podcasts and videocasts to launch Wine Library TV, a wine video blog with daily updates.  If you haven’t checked it out, I suggest subscribing to his videocast and buying wine from his store.  I just had dinner with Gary tonight and it really blows my mind to hear how he helped take a small, family owned wine retailer based in New Jersey and leveraged the Internet to create a powerful wine retailer.  It is great to see Gary bring next generation web concepts to the under the radar world of wine retailing.  He especially understands how content can and does drive commerce for his company.  Every videocast drives sales and as you can see from his site, he has built a pretty loyal following in a short period of time.  He has a pretty sizable subrscriber base and uses RSS, tagging, and comments effectively to  build a community around his videocasts.  Since Gary understands how powerful the web can be, I would not be surprised to see him becoming the Robert Parker for the web generation as he delivers his reviews and thoughts in a way that we get and can consume on the go on any device. The big difference will be that Gary can and will leverage the web and his community to rate the best wines versus relying solely on the fine taste of one person.  When speaking with Gary, it is also quite interesting to hear him talk about Wine Library as a content and social networking site as much as an ecommerce player.  In the future, Gary plans on delivering alot more functionality on his site allowing his users to instantly add any purchase to their own virtual wine cellar, take notes on the wine, and share recommendations with their friends or the public.  In my mind, this is a great example of how powerful social networking and blogging concepts can be for ecommerce plays. It has allowed Gary to build a stronger brand, acquire new customers virally, improve his conversion rates from web marketing, sell more wine, and ultimately boost his profitability per new customer (lower acquisition costs + increased sales).  Given some of these benefits, I truly believe that social shopping will become a big thing in the next few years.

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Given that I am quite interested in globalization, I wanted to share with you a few graphs that I saw this week that were pretty impactful for me.  First, I recently discovered this piece that Mike Milken wrote for the Wall Street Journal a couple of days ago.  I found it on Greg Mankiw’s blog, an economics professor at Harvard and also the Chairman of the Council of Economic Advisors (he is also a former Professor of mine). 

Like Greg, I want to highlight Michael ‘s thoughts on the graph.

"China and India combined to produce nearly half the world’s economic output in 1820 compared to just 1.8% for the U.S.  Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets."

In addition, here are two other graphs from this week’s Economist that summarize what the world may look like in the future.  I encourage you to read the in-depth survey as it provides some great historical context as well as trends we should watch in the future.

Tying into Michael Milken’s graph of the world economy in the past is this Goldman Sachs one showing who the economic leaders will be in the future – notice China as #1 and India as #3 by 2040. You can already see from Michael’s graph above that from 1973 to 2001 the US share was diminishing as India and China were growing rapidly.

The last graph is quite interesting as it relates to us technology folks.  We have always thought of India and China as places to offshore low-level development work.  Yes, alot of that has already been done but what is alarming is what may happen in the future as the comparative advantage that India and China have over us in terms  of college graduates in science and math is overwhelming.  Not every one of those graduates according to the McKinsey Global Institute is up to par with the standards that we have in the U.S. (10% in China and 25% in India) but that is clearly changing.

So what does this mean for us.  I am still processing this and would love to hear your thoughts.  In my humble opinion, I believe it means that first and foremost, we should continue to fight and compete by stressing education.  We cannot fall behind here as it is one of our most important assets.  Secondly, I always like to say that the trend is your friend so be on the outlook for how to leverage this labor and talent pool in your current company.  It could mean offshoring work (only if you and your team can handle it) or creating new companies that enable global labor arbitrage and collaboration leveraging the Internet (wiki opportunities, open source plays, communications like Gizmo Project, one of our investments). Finally, personally and professionally, pay attention to investment opportunities.  There are no secrets why alot of VCs are starting funds in India and China because as these emerging economies grow, income levels rise and with that comes more disposable cash to buy products and services.  Like I mention above, it could also mean finding opportunities that leverage the Internet and take advantage of the global talent pool (Logoworks – not one of mine but a great company).  From a personal perspective, I have  been building a nice allocation in an emerging markets index fund for the last 3 years.  Trust me, it is not for the faint of heart and it will be quite a bumpy and volatile ride but looking ahead it is hard to argue with the economic growth in the emerging markets.

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You may know that over the past five years, we have focused on working with libraries across the nation to help kids connect with a real live tutor for one-to-one help.  We’ll serve over 1 million students this year through our Live Homework Help programs in over 1,500 libraries in 40+ states, and we will continue working closely with libraries as we expand our offerings.  94% of students say they got the help they needed and would recommend the service to a friend, and lots of great news coverage about those programs at Tutor’s Press Page.

Today we launched Tutor.com Direct (the right side of Tutor.com).  Students and parents everywhere can now get live one-to-one help from expert tutors at the moment a child needs help.

No more waiting for your tutoring session next week or driving your child to a tutoring center.  Tutor.com Direct allows a child to get the help they need every day, before small difficulties turn into significant learning problems.

I hope you’ll try it, have your kids try it, and share it with friends and colleagues.  You can use the code "GCLAUNCH1" to get your first two hours for $5.  Plus a third hour free if you call us at 800-411-1970 and give us your feedback after trying the service.

Hidden in this promotion for you to try this service are some nuggets of wisdom, the most important of which is that as a startup you must be flexible, flexible enough to know when your go-to-market strategy is not working and that sometimes you have to change, change your business model, your product, or your pricing strategy in order to be successful.

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Startup Review will be a blog that profiles successful Internet start-ups in a case study format. The case studies will analyze the key factors that made the companies successful, with an emphasis on strategy and product decisions. Each case study will also have sections discussing launch strategy, exit analysis, and links to other good analysis on the company.

I don’t think that there is a good forum where people can discuss what made certain companies successful, particularly the less publicized success stories. Sure there are whole books written on companies like Google and eBay, but what about the more modest success stories in the $10M – $2B range? My goal is to highlight lessons learned from companies like Rent.com, HotorNot.com, or Greenfield Online.

I took a look at his site and he has some great posts on companies like MySpace.  If you are interested in going more in-depth to understand how certain companies got off the ground and made it, I suggest subscribing to his site.  As for my two cents, it would also be interesting for Nisan to dive deeper into some more high profile failures in the market so others can understand the many things that can go wrong in a business.  I have found that digging into your failures and doing a post mortem on why your company lost a sale or a customer, partner, or employee can be more illuminating than just understanding why you succeed.

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1. Example #1: Your company is about to be sold and as the acquirer is doing due diligence it wants to make sure that there are no outstanding claims to the intellectual property of your company.  In other words, the acquirer does not want to have an ex-employee or founder come after them once the transaction is completed.  Well, this is easy to take care of, right?  Typically most companies have their employees and particularly technical personnel sign an assignment of inventions and confidentiality contract where any product or patent developed while working for your company is owned by the company.  So in order to satisfy the acquirer’s needs, all your company has to do is find the signed documents for the key technical founders.  Well, guess what – if you didn’t keep proper records and don’t have the signature, there are two options – the acquirer may walk or you have to go back and get another signature from an ex-employee.  Good luck with that.
2. You are about to sell your company.  5 years ago, you and a technical co-founder conceived of the idea and launched the service.  However, your technical co-founder decided to work full-time at another company and ended up just consulting with your startup post-funding.  While this person may have signed an assignment of inventions agreement with you, he also signed one with his current employer.  When you closed your first round of funding years ago, the lead investor did his diligence and found out that the technical co-founder’s existing employer may have a right or may even own the startup’s technology.  After much debate, you secure a release from the technical co-founder’s company stating that they have no claims to the technology.  Fast forward 5 years – you are about to sell your company, you have switched lawyers twice, and the acquirer needs this release.  You can’t find the signature page.  Guess what, you are going to have to go back to the technical co-founder’s employer and get another release.  I can pretty much guarantee you that it will cost you to make this happen.

The net net is to not forget about the little boring things like record keeping when you start your business because it may come back to bite you in the ass and cost you real dollars when you need a document or signature most.

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Ms. Deitch said Facebook’s feedback from users comes in the form of emails to its customer-service email address, which the company’s product-development team reviews weekly. But the company typically doesn’t solicit feedback by showing features to users before launching them.

Facebook held an emergency meeting yesterday to plan its response to the backlash. Ms. Deitch said that the new features are "here to stay" but that staffers are discussing possible tweaks to appease users. She wouldn’t say what those changes might be.

While you cannot solely develop based on what existing customers want because you may miss the next big opportunity, I thought the benefit of web-based software was that you could test and tweak very easily.  If what Facebook’s spokesperson says is true ("But the company typically doesn’t solicit feedback by showing features to users before launching them"), I would suggest that they build some new release practices to maybe roll out a new feature to a subset of the population and gather feedback before having to deal with this maelstrom of negative publicity.  Isn’t that what a lot of the best web-based businesses already do?  To be fair, Mark Zuckerberg has responded admirably and promptly to his community.  However, he could have avoided this all in the first place if he tested the implementation of the new features with a small subset of his community and I am sure that he would have learned that balancing privacy may have been more important for his users than raw functionality.  My advice to many startups (particularly web-based ones) – after internal QA, try testing new features with a small sample set to further refine and tweak before GA. 

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1. "The great software developers, indeed, the best people in every field, are quite simply never on the market."
2. "Numerically, great people are pretty rare, and they’re never on the job market, while incompetent people, even though they are just as rare, apply to thousands of jobs throughout their career."

Like any important process, hiring great people means that you and your company need to make it a priority and stay incredibly focused.  In fact, hiring great people reminds me alot of finding great deals as a VC.  At the end of the day, being proactive is key and leveraging your network to generate targeted and filtered deals or resumes will always create a higher yield than sitting back and waiting for the masses to come to you.

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Acquired as Expertcity in February 2004, the Citrix Online division is an on-demand giant in its own right, with trailing twelve month (TTM) revenues of $121.6 million to June 30th this year. That makes it even bigger than the number 2 on-demand CRM vendor RightNow Technologies, which reported a TTM of $99.3 million for the same period, and more than a third the size of web conferencing leader WebEx, with a TTM of $343.7 million (for comparison, on-demand poster child salesforce.com posted $396.6 million TTM with its latest results).

Even more impressive is the fact that the company grew from $35mm in revenue from the end of 2003 to around $121mm in revenue 3 years later – not too shabby for an on-demand play going after the SMB market.  In addition, at the time of the sale, the company had raised around $30mm in financing but still had $16mm on the balance sheet when the transaction was completed.  So it is hard to argue that the SAAS model if done right can be capital efficient and offer tremendous growth opportunities.  In my mind, there are two ways to look at SAAS offerings – vertical market applications or horizontal plays.  Of course the challenge is that many vertical market app plays may not be big enough and the horizontal plays have probably been done already and are quite competitive.  All that being said, I am still quite interested in looking at companies offering a SAAS platform for Prosumers and SMBs.  If you have any of these types of companies that you want to show me, I am all ears.  I love the model and numbers like this show that the SMB market is really ready for these types of offerings.  As Brett Caine, head of Citrix Online says:

"Companies such as Citrix Online and salesforce.com and lots of others are starting to demonstrate in a very real way that companies of all sizes are able to use services to meet their needs in a cost-effective manner," Caine told me. "I think SMB has fully embraced the services model. There’s no doubt about that. Companies of all sizes have started to seriously embrace the software-as-a-service model."

I know I am preaching to the choir as none of this is new, but I must admit that the growth is pretty impressive.  As you know, SAAS will only get stronger as broadband penetration increases, as our wireless devices gain more processing power and better connectivity, and as the tools to access, share, and deliver timely data get even more powerful and easier to implement (think AJAX, enterprise mashups, lightweight integration with other apps, RSS for simple data delivery).

Going back to the earlier point on deciding to hold and go public or to sell at that time, with perfect information it is easy to conclude that we should have held on to the company and continued building it up.  However the decision is not that easy as there was lots of uncertainy at the time – we were only a two trick pony at the time and had not launched GoToMeeting and did not know how successful it would be, we did not have a sales channel to leverage like a Citrix, the IPO window was virtually shut for 2 years and we did not know when and how big you had to be for it to open (Google was one of the few Internet companies to go out in 2004), our growth rate was slowing while our subscriber churn was slowly increasing from just the remote access product, and the price was quite attractive.  Once again you can always question your decisions looking back with perfect knowledge but I can honestly say that everyone still feels that we chose the right path given what we knew in 2003.

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Why I decided to pull our IPO filing.
You might ask, why, if Go Daddy’s situation has never been better, did I decide to pull our IPO filing? There are three reasons for doing so:

1. Market conditions
2. The Quiet Period
3. We don’t have to go public

Market Conditions.
The state of the stock market for an IPO is as uncertain as it could be. In fact, the USA Today published an article that IPO stands for “Investor Pain Overload.”   This is due, in large part, to the overall "bearishness" in the market.

Consider the situation from a global perspective and follow it all the way to Wall Street.
We have war and escalating hostilities throughout the Middle East, with no end in sight. Oil prices are skyrocketing. Tech stocks, in particular, are once again taking a beating on Wall Street, due in part to some investment banks cutting their ratings on the U.S. technology sector. Rising interest rates have played a key factor. Their steady rise over recent months has put adverse pressure on stocks overall.

In a bit of irony, last week when the SEC informed us our filing was accepted as being ready-to-go, market conditions were a terrible mess. In fact, inflation worries, say analysts, are bleeding into the tech sector. For all these reasons, I liken the timing of us getting the ‘green light’ to a person being told his car is in perfect condition just before it’s about to be driven into a wall.

I don’t expect market conditions to correct themselves for sometime.
I feel we owe it to ourselves to withdraw our filing until better and more stable times arrive

What if you were a cash cow and nobody noticed?
This seems like an excellent time to address an issue that has bugged me since the moment we filed our S-1.

After we did our filing, I was surprised that not one journalist took the time to look at our cash flow statement to report our actual results. Instead, each and every one of them hastily reported that Go Daddy filed to do an IPO and that we had never turned a profit. Not one of them took the time to look at our cash flow statements to see that we generated significant operating cash flow during each reporting period.

The accounting method we are required to use.
Because GoDaddy.com sells domain name registrations, we are required to use an accounting method that is ultra conservative.

So one of the principal reasons that Bob lists for pulling is that he doesn’t have to go public because his company is a cash cow.  When you print cash like GoDaddy, you can control your own destiny.  While the company doesn’t look profitable on an income statement perspective because GAAP requires GoDaddy to recognize a domain name registration over the effective period of registration, GoDaddy is in a wonderful cash position because it collects the cash upfront when someone buys the domain.  This is quite similar to a lot of SAAS oriented businesses that may sign up customers for one year contracts and collect the cash today but recognize the revenue over the life of the contract.  When these types of companies grow quickly GAAP numbers may not tell the full story.  And as I am sure many entrepreneurs know, you can’t spend GAAP Net Income but you can spend cash.  As Bob Parson summarizes:

To date, Go Daddy has been completely self-funded –we have been cash flow positive since October 2001, and – whether anyone has noticed or not — continue to generate healthy cash flow from operations. We’ll manage just fine without the IPO money — thank you.

When in doubt, remember cash is king.

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As for the Long Tail, the only question one can ask is when will it happen vs. if it makes sense or not.  In today’s Wall Street Journal, Lee Gomes (see his article here – sorry, requires login) challenges the timing of the Long Tail and comes up with some interesting data.

"By Mr. Anderson’s calculation, 25% of Amazon’s sales are from it’s tail, as they involve books you can’t find at a traditional retailer.  But using another analysis of those numbers – an analysis that Mr. Anderson argues isn’t meaningful – you can show that 2.7% of Amazon’s titles produce a whopping 75% of its revenues.  Not quite as impressive.

Another theme of the book is that "hits are starting to rule less."  But when I looked online, I was surprised to see what seemed like the opposite.  Ecast says 10% of its songs account for roughly 90% of its streams; monthly data from Rhapsody showed the top 10% songs getting 86% of streams."

Lee has a few other examples and one of the most interesting ones is when he states that when Chris looked at the data 2 years ago for eCast that 2% of songs did not play every quarter and now with a much larger inventory that number has risen to 12%.  Maybe eCast just had the hits up in the first place?  In short, Lee Gomes concludes that the Long Tail may be true but it will also take a long time before it happens.

From my perspective, I do believe we still live in a hits driven world but that it is definitely changing.  In addition, if you apply the concept of the Long Tail more broadly to concepts ike YouTube, etc. then it is happening today. Regardless of what you think, Lee’s article is one of the few that I have seen challenging the Long Tail meme that we all want to believe.

UPDATE: Since I posted from the train this morning and have been in meetings for most of the day, I did not get to see Chris Anderson’s thoughtful response to Lee Gomes. Here is an excerpt from Chris’ post:

What it does say is that the current data at Rhapsody, Netflix and Amazon show that the tail amounts to between 21% and 40% of the market, with the head accounting for the rest. Although I don’t discuss this in detail in the book, in the case of Rhapsody, the trend data suggests that the tail (as defined above) actually will equal the head within five years. Which is why the language Gomes cites from the book jacket is actually all phrased in the future conditional tense ("What happens when the combined value of all the millions of items that may sell only a few copies equals or exceeds the value of a few items that sell millions each?"). I asked him to quote the jacket copy in full context, but it apparently wasn’t convenient to his thesis to do so, so he didn’t.

From this post, it seems that Lee misquoted Chris and that Chris agrees that it will take some time for the Long Tail to outsell the hits.

UPDATE 2 – Please read Lee Gomes’ comment to my blog post below where he clarifies his thinking on the article and stands firm on his position especially in relation to Chris Anderson’s rebuttal and my commentary where I suggest that he may have misquoted Chris about the impact of the Long Tail. 

Ed, I usually don’t respond to blogs, not because I don’t value them enormously — I do — but simply because I write for a pretty big outlet myself, and think that once I have my say about something, I should shut up and let others have theirs. I need to comment, though, on your suggestion that I might have misquoted Chris. As I hope you appreciate, that is one of the worst things a journalist can do, even (or especially) when writing about a person whose views are being subject to scrutiny.

Here is how I described the book’s premise about this matter: "In the book’s main sections, Mr. Anderson writes that as things move online, sales of misses will increase — so much so that they can equal or exceed the sales of hits." Note that it is written in the future conditional tense, exactly like Chris says own his sentence is. I never said that Chris said that misses were currently outselling hits; my point was simply that considering all the to-do he makes about this in the book, I was a little surprised that he didn’t have any current examples. Had I had more space than I do for my column, which recall runs in the print paper and thus is limited to around 850 words, I would have happily quoted Chris’ entire sentence, as well as this other one from the jacket. "Using the worlds of movies, books, and music, he showed how the Internet has made possible a new world in which the combined value of modest sellers and quirky titles equals the sales of top hits."

As for the suggestion, not yours, that I misunderstood Chris’ methodology: I know perfectly well how he made the calculations he did, and explained them (I hope) very clearly in my piece. I added, though, that there was another way of looking at those same number, making it clear to my readers that Chris did not think that second method was meaningful. At least I gave readers a choice between two methods; the book didn’t even acknowledge that some other method existed.

Thanks for letting me have my say, Ed.
Lee Gomes
Wall Street Journal

Ok-this is done and I thank Lee for questioning the Long Tail meme and stirring the pot as I believe this healthy debate will only improve our thinking and analysis around this concept.  Of course, I am curious to see the how the data around the Long Tail evolves as time passes as this transparency will help all of us get a better understanding of the timing and true impact of the tail in certain markets.

The post How long is the Long Tail? first appeared on BeyondVC.

For the life of me, I don’t understand how a great product went to shit with just one release.  Maybe it was the fact that they raised $100mm or so of venture capital and feel the heat to grow and expand quickly.  As you might notice, every security player that locks down the home PC has evolved into a suite-based approach.  In addition, I see that Webroot also expanded to the enterprise as well.  All I can say, is that any company looking to expand and grow should not forget what got them there – in Webroot’s case it is great antispyware software for the individual consumer. Webroot may also want to do a better job of QA before releasing its product to the market.  Given all of these issues, I am done with Webroot and moving on to another anti-spyware program.

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The companies that survived this downturn were excellent at cutting costs, repositioning their products for new markets, and being resourceful and creative to survive. While these are some of the business principles I want my companies to continue to adhere to, I also want to caution that there is a danger in being too cheap. Some of these companies were so shellshocked from what happened during the past couple of years that they have become too cautious. For anyone that has been through the tough years, the only thing I can say is congratulations for surviving but now it is time to take some calculated risks. It is time to get out of the bunker and go into attack mode. Go after your competition, take some calculated risks, and focus on creating some revenue growth. What is different now than before is that most companies that survived the nuclear winter know who their customer is, how much they will pay, and what features and functionalities they may want in future versions. While it may sound like idle VC talk, I encourage you to spend that extra $$$ now as long as you can see the real ROI behind a targeted marketing program, the hiring of a new engineer to finish a product faster, or a new sales person to manage more qualified leads. Once again, take it with a grain of salt, as some entrepreneurs may think this is another VC swinging for the fences, but the point is don’t be too cautious because the opportunity may just pass you by.

Trust me, having lived through the bubble has changed my mentality a ton but I always have to remember that there is that lingering fear in my mind (fear can be good), and that I also have to temper my psychological mindframe with the data we have at hand and the opportunity in front of us. In other words, have a strategy and stick to it and if anything remember that old wounds can haunt you and use the data at hand to help make your decision.  If the ROI and return is there, test it out and try it as you never know until you take that step. There is a huge difference in building your company because your competitors are doing it versus building because it is the right thing for your company and the data suggests it.  Underinvesting in your company is just as much a sin as overinvesting in it.  So find the balance and continue building.

The post Reliving the bubble first appeared on BeyondVC.

The genius in this program is the attempt to drive market awareness virally by getting all your (PC- and headset-equipped) friends and family to sign up for GizmoProject and experiment with it. You then have the option of calling them at no charge; they can receive the call on either the GizmoProject softphone or their legacy PSTN phones.

There is lots of buzz in the blogosphere about this plan – some calling it great and others calling it a marketing gimmick.  Yes the free calls require both users to be registered to Gizmo Project but whether you call it a gimmick or not, I can already see some dramatic user signups in the last few days.  Michael Arrington from TechCrunch gets it when he says:

If calls continue moving towards free, then it’s going to be all about the value-added features. Video, better conferencing support, SMS – I can only imagine what sorts of features VOIP providers will be able to find substantial profit in. Perhaps these consumer VOIP services will have to make consumer VOIP a loss leader in exchange for building the strength of enterprise VOIP offerings. Ad supported free calls could be acceptable if the ads appear on the web interface. It’s hard to say what could take the place of burning through VOIP-out minutes, but interesting things will likely emerge.

As I have always thought, the price of phone calls has nowhere to do but down (and it has been dropping substantially over the last 5 years) and Gizmo Project is making a big move with its "free" offering.  As you might assume, the key to making our business model successful is the upsell of value added services and to continue to make sure we acquire new subscribers at the lowest cost possible.  From my perspective it all goes in the marketing bucket – would you rather spend money on silly television ads or pass on the low cost of telephony to your customers?   As Jason Droege, President of Sipphone told Om Malik,

“Wholesale PSTN rates are sooo cheap these days that it’s not much different than the cost of bandwidth back when I started Scour.net,” says Jason Droege, chief executive of SIPphone, the company behind Gizmo Project. “In the last 12 months I’ve seen wholesale PSTN costs drop dramatically and I expect this to continue. ”

While Mark Evans has a point that the problem with our service is that at least one user has to remain tethered to the computer to make calls, all I can say is to watch for an upcoming product announcement in the next month or so which will change all of that.  In the meantime, enjoy your free phone calls!

For other perspectives see Silicon Beat, Andy Abramson’s VOIP Watch, and Engadget.

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We encourage you to invite your software industry portfolio companies to participate in the SIIA Software Industry Financial Survey, conducted with assistance from Deloitte & Touche LLP and its affiliates.

The report from this survey will provide in-depth analyses on nearly 100 financial statement and productivity ratios — detail far beyond that available in annual reports or SEC filings. These include R&D, sales and marketing, legal, revenue per employee and inventory turnover, among others. Results will be shown by sales volume, market segment, ownership, profitability and other measures, allowing you to make appropriate peer comparisons.

I am sure this will be a worthwhile endeavor for you.  When I meet an entrepreneur I always like to ask who they want to be when they grow up and why?  In other words, I like to know what company out there today has a business model that you would like to emulate.  While I do not pin my valuation for an early stage company on the financial model, it is important to have one to understand your costs or cash needs and to understand whether or not you have a viable business model with high gross margins or low gross margins.  For example, if you are another social networking company that walks in my door wanting to be the next MySpace then you better understand that the only way to make that model work financially is to have a huge audience generating tons of page views since the monetization rates on each page view are so low relative to paid search as an example.  If you are  selling infrastructure software and you model out in 3 years that you will be more profitable than every other company out there, I am sure you are missing something as well.

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"We believe service providers would likely see significant revenue volatility over the next one to two quarters," JP Morgan analyst Dick Wei wrote in a research note.

"We expect roughly a 10 percent to 20 percent revenue impact across the second quarter of 2006 to the third quarter of 2006."

Piper Jaffray analyst Safa Rashtchy also expected "major impact" on wireless service providers.

"We believe the total impact of these services will be severe and could reduce revenues by 20 percent-30 percent in 2007, with potentially much more near-term impact," Piper Jaffray wrote.

While there is always a tradeoff of how to get your wireless app in front of millions of users with the  revenue share and loss of control to the carrier, I just hope that the wireless walled gardens will crumble to give many of us the freedom and opportunity to use new applications like Google Maps on our devices. Whle this carrier policy shift was meant for the good of the customer, it still shows us how vulnerable a wireless service provider can be to its carrier partner.  As I have seen in other situations, the wireless carriers could have just as easily changed the percentage on the revenue share leaving its partners with less of the pie. The allure of creating a hit wireless app is compelling but reliance on the carriers can make life extremely difficult.  If you go it alone you will have more control but there will still be significant barriers to market your app to potential users, get them to download it on their phone, and finally to actually have it work on their device.  We are still far away from making open access a reality, but when it happens, there will truly be tremendous growth in the use of new wireless services.

The post Why wireless apps are tough first appeared on BeyondVC.

1. VPs of Sales need to make their comp.  Typical salaries range from $150-200k plus performance equaling a total package of $300 to $350k.  Most VPs of Sales will try to get you to guarantee the first year or at least the first couple quarters of compensation to offset the risk of working at such an early company.
2. All VPs need people to manage which means your VP of Sales will want to hire a bunch of reps to grow the business.  The experieced enterprise direct sales reps will cost you $80-100k base plus performance of up to $150-175k total comp.  Once again many of the best reps will want to get some guaranteed draw for at least a quarter or two to get started.

What ends up being a situation where you expect to bring on a performance-oriented sales team becomes one which many of your new hires get guaranteed comp for a couple quarters.  The burn rate added to your company almost doubles overnight with these heavyweight sales guys with no leads to go after and no mature product to sell.  In addition, over time the sales team will get frustrated if the product is not ready for primetime and they will be out looking for a new job in a couple of quarters making all of this effort a very expensive experiment.  Hiring a VP of Sales is not a commitment to hire one guy, it is a commitment to bring on a team, one that will not be cheap.  Before you make this commitment, make sure you are ready.  As you can read from an earlier post, when you ramp your sales efforts is critical.

Do more with less and be careful of ramping up sales until you have a repeatable selling model.  In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins.

Many of the best companies I have seen have taken the bootstrapped approach where the founders of the company act as the initial sales team to close a few deals, to learn about the customer, and further refine the product.  Yes, this can only last so long as everyday out of the office or with customers means another day not developing the product.  That being said, rather than hire a VP of Sales first, I would encourage you to focus on generating leads and hiring a sales rep or two to follow up on them.  This way you can take a smaller step to refine your sales model and product before going big.  Remember don’t hire a VP of Sales to only have them hunting for dodo birds.

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While I am no means an expert in product pricing, it is important to first analyze the competitive landscape, how your product fits in versus the competition, and then to figure out where you want to play in this market given your strengths and weaknesses. If there are no direct competitors, then look at some potential substitute products that customers are buying and figure out how your pricing looks relative to those companies. Once you get an understanding of the market dynamics, you should figure out how you want to enter the market vis a vis your pricing – do you have the most-feature rich set of services and want to charge the most or charge a similar price for more functionality or do you want to be the high volume-low cost provider. Finally, I would think about your product roadmap and determine if you can get to market aggressively, be different from your competition, and build a model around upselling new features and functionality. More often than not, I see companies not doing enough thinking on product pricing with the idea that they can always change it later on. In addition, many companies seem to err on the side of charging too little, rather than charging a little more with the opportunity to discount and drop or refine pricing down the line if sales do not ramp up as anticipated.

So when you release your product, remember that the laws of gravity take over in product pricing. If you are going to give a product away for free, have a plan to upsell or make money down the line with premium services or other functionality. Also remember that once a customer starts using a product or service that the last thing you ever want to do is take value away from your customer by increasing the price or beginning to charge for a service without adding new features and functionality. How you price your product at market release is not easy to undo in the future.

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Frontier CIO Robert Rapp says the airline’s yield management process runs on Bizgres MPP. The system predicts the yield or profit that Frontier will receive on various flight combinations and ticket prices. The system helps Frontier determine where to offer seats at bargain prices and where to avoid what might turn out to be a competitive bloodletting, with no one profiting, says Rapp, the former CIO of Southwest Airlines, a pioneer of low-priced flights.

"Greenplum allowed us a very economical solution for a mid-sized airline. There are large amounts of parallelism in the system," says Rapp. A comparable but higher end commercial system used by retailers such as Wal-Mart comes from Teradata, a unit of NCR Corp. "Greenplum was available at 20-30 times less" than such a system."It was available at a very nice price point for us," adds Rapp.

Congrats to the Greenplum team on reaching this significant milestone and I am sure that this Frontier Airlines story is one that the company and I will be hearing about for a long time, in every sales presentation and pitch.  As I have said before, it is important to make sure your first 5 customers are highly referenceable (extremely happy with your solution and influential in the community to get the market’s attention) so you can significantly leverage those first relationships to establish market credibility and even help close some of your sales prospects.

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As one of our marketing consultants, Richard Currier, has always told our portfolio companies, "you market the vision, and sell the product." If you get too locked into talking about a product, then your partner or customer gets stuck into thinking about who else does this and why are you different.  Getting into a feature/fucntion battle in the first meeting is not a great way to start.  Sure enough, our prospective partner started naming several companies asking us how we differed from them.  If you start with a vision first and clearly talk about your view of the market in the future and how your product evolves from where it is today to a roadmap of the future, then it is easier to differentiate your company and bring the discussion to a higher level. 

Trust me, the word vision became almost a dirty word during the market crash as no investor wanted to have another entrepreneur or CEO long on vision and short on execution.  The problem is that the very skills that got us to the market hype (lots of vision, big thinking) were not the skills that enabled many of us to survive the downturn (tactical focus on generating revenue, conservative business plan, and execution).  If I look at the world on a spectrum from focus on all revenue and profits on the one hand and all technology and vision on the other hand, I would like a mix tilted much towards the technology spectrum in the early stages of a company’s growth.  Pre-2000, I would argue that the mix was all tech and vision with no focus on building a business.  Post-2000, many companies were much more on the business spectrum and less on the tech side.  Today, I am asking that entrepreneurs bring back that vision thing and show us the big picture because showing me a point product doesn’t cut it.  In addition, in today’s world it is much harder to get public and many of the acquisitions today are not based on how many customers you have or revenue but based on your technology today and product vision in the future.  I have a number of companies being looked at right now and having a 2 year advantage on a product can mean alot for a strategic partner or acquirer. I am by no means advocating that you build a company to flip, but I am just stressing that vision is not a dirty word, that you need one, and that as long as you carefully balance that with building a real business you will be in great shape.

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I look forward to hearing more about this topic from Jeff Nolan (we are grabbing dinner Monday night) as he is blogging from Sapphire now.

Update: this discussion is enterprise focused, not a consumer one

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One of the interesting questions posed by a VC was how Microsoft valued technology and engineering assets versus companies with lots of customers and revenues.  In short, Steve had a simple answer in that Microsoft knows how much a technology asset or new product is worth to Microsoft and then they can compare that to what the value would be using more traditional financial metrics.  In the end, Steve rightly said that it comes down to a negotiation since revenue ratios, etc. really do not apply to a bunch of engineers and it comes down to what the VC needs in terms of multiples and what the founders need to get the deal done.  I suggest keeping an eye out for Microsoft as it feels like they may even do more than the 22 acquisitions they did this past year.  As far as opportunities and trends are concerned, Steve pointed out the usual suspects:

• Consumer market drives enterprise expectations
• Open source – more pragmatism coming to the market, not just a religion but needs to deliver real value
• SaaS – it works, it will grow, but there are still some opportunities like no higher level platform in the cloud – for example, how do you make presence work from site to site
• Office 2007 – biggest area of innovation for Microsoft, think of Office as a client to all data, front end to SAP as an example.  Also will include Office Communicator in Office 2007 with Word, Excel, etc. highlighting how important communications and collaboration will be.  Btw, Office Communicator is SIP-based.
• Mobility – Steve believes the hype was higher a couple years ago and that the reality is bigger today as we have smarter more intelligent devices at cheaper prices running over faster networks.  There will be a need for software to help intelligent devices in the cloud to talk to each other.

I have to admit I was pretty impressed by the openness of the Microsoft executives and the sheer amount of new technology they will be bringing to market in 2007.  My favorite technology which I saw in action was Windows Presentation Foundation (WPF, formerly called Avalon) and WPF/E (cross platform subset of WPF).  The demos that I saw really showed me what the next generation of rich, web-based interfaces could look like beyond today’s AJAX and Flash.  While WPF is great for applications, the fact that WPF/e is cross platform really opened my eyes to this being a potential Flash killer.  That being said, since WPF/e is programmed using XAML and Javascript, a couple of the demos I saw were web pages with some flash elements included as well.  For more detail on WPF/e, I suggest reading Ben Galbraith’s blog post on Ajaxian (excerpt below):

1. WPF/E allows a subset of XAML to be rendered in a browser on IE and Firefox on Windows and Safari (Firefox?) on OS X (Linux and Solaris support uncertain).
2. This subset consists of a pretty impressive set of functionality, including: 2D vector graphics, advanced text rendering, audio/video playback, imaging, animation, and advanced composition of graphical elements. In short, all of the pretty eye-candy coming in the new WinFX APIs with the exception of 3D graphics and the Metro document rendering (i.e., MSFT’s PDF killer; my my, they are really going after Adobe, aren’t they?).

Given the rich, interactive functionality that WPF and WPF/e offers end users and the productivity improvements it provides for developers and designers, I do believe that this will be one technology that will gain traction in the years ahead.

The post Microsoft VC Summit first appeared on BeyondVC.

Looking at the long term, I am quite excited about the prospects of all of this money coming into help grow the Internet sector and SaaS.  First, having another big player push the concept of software as a service will only help further educate and soften the market, particularly business customers  Secondly, this will mean that Microsoft will be aggressive with hiring and with acquisitions.  I remember being at the Microsoft VC Summit a couple of years ago and hearing Steve Ballmer talk about his acquisition strategy.  He would either do huge, billion dollar ones or look at acquisitions less than $20mm.  That has been changing and will change rapidly with this renewed empahsis and focus.  That only means good news for VCs and entrepreneurs.  And as a VC, I wholeheartedly agree with Microsoft’s CFO, Chris Lidell when he says, "Today, we believe we face the largest array of opportunities for growth and innovation the company has ever seen." I certainly feel the same way from a VC investment perspective.

Whether Microsoft succeeds or not is another story, but $2b invested in new technologies will go a long way towards solidifying their position.  I would say that they did alright in 1995 when they decided to point their guns at Netscape to make sure the browser and Internet would not circumvent their monopoly on the desktop.  The problem is that once they won the browser wars, Microsoft became satisfied, fat and happy. And as we all know, fat cats don’t hunt.  Others came around and outinnovated them – Firefox, Google, etc. 

This is Round 2, which really started with Microsoft’s purchase of Groove Networks and Ray Ozzie last year.  To refresh your memory, I suggest reading Bill’s email from October 2005 (also see the Ray Ozzie memo) where he leads the battle charge for the next generation web, the SaaS era. 

Today, the opportunity is to utilize the Internet to make software far more powerful by incorporating a services model which will simplify the work that IT departments and developers have to do while providing new capabilities…..

However, to lead we need to do far more. The broad and rich foundation of the internet will unleash a "services wave" of applications and experiences available instantly over the internet to millions of users. Advertising has emerged as a powerful new means by which to directly and indirectly fund the creation and delivery of software and services along with subscriptions and license fees. Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses.

And yes, it sounds alot like the memo Bill Gates wrote 10 years ago called the Internet Tidal Wave where he helped the big battleship called Microsoft reposition itself and point its guns at Netscape and others.  Round 2 is no different from Round 1 but the stakes are higher and it will cost Microsoft oodles more cash this time to create a dent in this market.  While we all know that memos often do not mean a whole lot, it is clear that Microsoft is quite serious as they are not afraid to piss off Wall Street and really put dollars to work for the long term position of the business.  This will certainly be an interesting battle to watch over the next few years.

The post Can Microsoft reinvent itself? first appeared on BeyondVC.

Jeff Nolan points to an interesting post from John Hagel which highlights this changing enterprise world. What has been deemed as the agile enterprise driven by SOA has actually turned into anything but.  The enterprise version of "lightweight" called SOA stands in stark contrast to the next generation web perspective of lightweight.  As John correctly points out, enterprise lightweight in the form of SOA means plumbing, it means expensive, it means complex, it means lots of consultants, and it means lots of dollars.  In contrast, next generation web technologies are easy, incremental, and driven by the edge and focused on people, not plumbing.  While some of these next generation apps may not scale, there is clearly something that centralized IT can learn from the edge, their frustrated internal customer, that things can get done more quickly and more cheaply.  As these two philosophies become more tightly coupled we will have some interesting opportunities to invest and make money.  While not directly related to this SOA/web mashup discussion, one of the companies I have always found interesting is Splunk which is bringing a Google-like approach to network management.  It is downloaded, driven by the edge user, and then pulled into the corporation from the bottom-up rather than the top-down.  It stands in stark contrast to EMC’s (Smarts) and IBM’s (Micromuse) way of selling and using their respective products.  There will be many more opportunities like this in the enterprise as enterpreneurs leverage user interfaces and technology from the consumer world in the enterprise. Of course, this means a whole new way of reaching customers (frictionless sales), selling to them, and supporting them but this is saved for another future post.  The good news is that this new age of DIY in the Enterprise is not going away and is only getting stronger everyday.  This also means the creation of many more disruptive enterprise software opportunities in the next 5 years.  I agree with Jeff that this is an interesting area to watch and is beyond web mashups-rather, it is a philosophy enabled by all of this new technology, the philosophy of DIY in the Enterprise.

The post DIY in the Enterprise first appeared on BeyondVC.

This battleground is about software and not devices which is why I believe companies entering this market from a telephone-centric view of the world will miss out on a big opportunity.

When I say, VOIP is "moving beyond Vonage" what I mean is that the opportunity is not about making and receiving calls but about how VOIP becomes seamlessly embedded in all applications, into the very fabric of the web.  Imagine seeing any phone number on a web page and clicking it to dial seamlessly.  Or how about being in your CRM application and knowing which of your sales reps are online as you are reviewing the pipeline and clicking to IM or call them through the CRM app.  When you call them, you have no idea if they receive the call on their home phone, computer, wifi device, or cell phone.  All you know is that they are available and that you can call them with one click.  This is the direction we are heading in – it will take time, but it will be interesting and it is certainly more than just a phone call.  If you want to learn more about this I suggest reading Alec Saunders from Iotum’s post on Voice 2.0.   As Alec says, :

In the voice 2.0 world any application, within the bounds of permissions set by the subscriber, can access presence; initiate, accept, and redirect calls; and query directories.

Alec gets it and this is certainly some of the stuff we have up our sleeve at Sipphone, developers of Gizmo Project.

The post VCs and VOIP first appeared on BeyondVC.

It seems that many of the bigger open source players are building out their own stacks ala Microsoft and others in the pursuit of growth and profits like traditional closed-sourced software companies.  Isn’t this the antithesis of what open source stands for?  Rick Sherlund, Goldman’s software analyst, says that it makes sense from a financial perspective since it allows vendors to cross-sell and lock-in the customer – customer retention is a good thing after all, isn’t it? While all of the open source players did their best to dodge this question and claim that they are really open, MySQl was the only company that really seemed credible here as its goal was to be part of everyone’s stack, including the Microsoft .NET one.  JBoss and RHAT clearly seemed to be building their own middleware and open source stacks while at the same time claiming an open architecture.

Fast forward 18 months later and you have the first move in that model – Red Boss.  Sounds like Microsoft?  I thought part of the reason technologists bought open source was to not be locked in to any one vendor.  This will be interesting to see as the need for revenue, growth, and profits drives some of the larger open source players and to see if they continue to remain 100% truly open.  Should I tweak the JBoss app server just a tad to make it work better on Red Hate vs. Suse or .NET?  Let’s watch how Red Boss balances the need to meet Wall Street expectations for quarterly numbers with the need to make its customers happy by helping them avoid proprietary vendor lock-in.

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One of the discussion groups that I led with Simon Levene (heads up Corp Dev in Europe for Yahoo and Yair Goldfinger (founder and CTO of ICQ and Dotomi) was titled "Are Internet VCs Dead."  You know the backdrop – it costs less to get a company started and to generate users and Google and Yahoo are agressively snapping up companies before VC rounds.  Google’s expertise seems to be buying engineers, many times before a product is even launched.  Yahoo, on the other hand, prefers to buy companies that have some nice user base, maybe no revenue model yet, but also before a VC round.  The last point is that companies are now more capital efficient (see an earlier blog post) where $10-15mm can get a company to cash flow breakeven vs. $30mm.  So what do VCs that invest in Internet companies do? Before I go there, I would flip the question and ask what do entrepreneurs do?  From my perspective, I wouldn’t take in more than $1-2mm to get my company started with a developed product and an idea of what usage will look like.  At that point, as Yair suggests, it is decision time.  Some of the questions to ask include:

1. Do I have a product or feature or can I build a real company (i.e., a growing cash flow sustaining business)? 
2. What is the risk I face in building a company for the long term vs. selling today. 
3. And finally, do the math – if I take in VC money I will clearly have to sell for alot more tomorrow than what I sell for today in order to generate the same or greater value.
4. Do I want to do it?

As a VC, I truly would not want to invest in a company that has not thought about all of the above with a founding team that is fully behind building out the company for a longer term play. All that being said, the numbers are still against the entrepreneur.  While there have been a number of acquisitions in the past year, it is still a fraction of the number of companies started.  Since it is so cheap to start a business, you can have anywhere from 5-10 companies out there in each category.  In addition, it is not clear that many of the acqusitions during the past year could have built real businesses rather than being a feature of a much larger entity.  While the math worked for a number of enterpreneurs that sold, one of the decisions you need to make is the likelihood and timing of being crushed by a larger player if you decide to go alone and raise VC funding.  Whatever you start, I would suggest thinking about what your potential revenue model is from day 1 and thinking through the economics.  Hell, it may change a couple of times, but building a company with the sole purpose of flipping is the wrong idea as your odds of success are very low.

Despite this, the opportunity for entrepeneurs and VCs could not be greater.  There are clearly more users globally, broadband is everywhere, users are more educated, companies can target more, capital efficiency has increased, and there are real business models out there generating tons of profits.  I do not think that Internet VCs are dead, but rather, need to reinvent themselves.   It is also clear that the VC model is broken and needs to change.  As you can see this is slowly starting to happen as smaller funds ($200mm vs $750mm) are being raised, VCs are doing less new deals per year and sitting on less boards, and many are trying to get in earlier.  Having a smaller, more focused fund allows a VC to make some investments during the Angel round ($500k-$1mm), watch the company closely, and give VCs the opportunity to lead the first real institutional round.  If the company has the chance to flip, then great, everyone wins.  If the company want to take the next step, then we can be there to lead or co-lead the next funding round.  It is imperative for VCs to get in early and structure their funds around this because in the Internet space companies can build momentum quite quickly which also means that valuations tend to move quickly as well.  That is also why the Googles and Yahoos of the world are trying to identify the emerging opportunities before the VCs get involved. 

All in all, it was a wonderful time, and I feel honored to have been one of Yossi’s guests and for having had the opportunity to network and participate with Israel’s tech elite.  Unfortunately, I had to head home on a redye Saturday night, but many of the attendees ventured to the Marker Tech Conference where 3500 people were expected to attend and hear panel discussions led by many of the participants at Yossi’s Kinnernet.  Kinnernet was great and I had a blast, made many new friends, and came away clearly impressed with Israel’s thriving and talented startup community.

The post Kinnernet 2006 – geek camp first appeared on BeyondVC.

So what does this have to do with my blog?  I was having lunch with a friend recently who was telling me about some of his dealings with Google over the last year.  As an ex-Wall Street guy, it struck him that some of the meetings he had with Google were like the ones he had at Long Term Capital years ago.  Even when LTC was about to crater, he remembers going to their offices, being sequestered into an off-campus conference room, and not being able to get any information out of them to even help bail them out.  In addition, people would show up and leave during the meeting, take notes, and not even introduce themselves.  Well, it turns out that his meetings with Google over the last year were pretty similar.  While the Google employees were clearly bright and technical, my friend was not sure who the decision maker was and what they actually wanted to do with the company.  In addition, he felt pretty uncomfortable showing up to Google and having to sign an NDA on the spot, and then going into a meeting where people would walk in and out, sit on their laptop and take notes, and not even introduce themselves.  Hmmm-it really does sound like Long Term Capital.  There are other parallels-Google has an appetite for hiring PhDs. is driven by an incredible proprietary algorithm, and is by far the best web company on the street and performing like a rock star.  Like LTC, the bigger and bigger Google gets, the harder it will be for them to drive significant percentage based growth.  In addition, the culture, since it is one driven by engineers, can also be driven by a NIH or not invented here syndrome.  Ultimately, since history always does repeat itself, I hope that Google understands that self-confidence is imperative but hubris and arrogance can kill.  Look at Long Term Capital and the chronicles of its short lived performance in a book so aptly titled, When Genius Failed.  Hell, Microsoft was the same way in the mid-to-late 90s and as time goes by I hear that they are becoming a bit friendlier to startups and partners.  I guess that is what happens when you get your ass whooped by a newcomer.  Hopefully, Microsoft hasn’t learned its lesson too late.  And I hope that Google remembers its mantra of Do No Evil as they are going to need partners to continue to grow their business and build great product.

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Being an early stage investor, I have played on both sides of the fence.  I have been on boards where we have been approached preemptively by other investors.  In those cases, it is helpful to think about two points:

1. Valuation isn’t everything – sure, you want to take cash at a good price but if you take too much cash at too high a price too early, it builds unrealistic expectations for you, your company, your existing investor, and your new investors.  You may end up chasing too many different opportunities, losing focus, and having a fractured board because of these lofty expectations.
2. Having too much cash can be a curse and not a blessing – speaks for itself (see my last post)

On the other side of the fence, it is important for us proactive VCs to maintain our discipline, value the opportunity fairly, and really understand and work with the company to determine how the money will be used.  In addition, we need to be careful about helping our companies use their bullets on the right opportunities and not every opportunity.  Let’s not forget the lessons learned during the bubble where companies with too much cash just crashed, burned, and died faster and more spectacularly than ones with less cash.  In general, pre-emptive financings can be a great thing for both VCs and entrepreneurs, but we must be careful about managing expectations and staying focused.

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Dana Blankenhorn from ZDNet gets it:

This is a problem a lot of Web 2.0 start-ups like Technorati, Bloglines and Flickr are facing, and projects like Drupal will face soon. They were built with open source tools, but then find they need to "graduate" to something like a data warehouse.  And there’s old Oracle, telling them there’s nothing from an open source supplier that can deliver what they need. Share with us, they say, you don’t have any choice.

Well, now there is a choice. Greenplum CTO Luke Lonergan said that O’Reilly Media, one of Greenplum’s early customers, graduated from mySQL to PostgreSQL with Greenplum and got a 100% 100 times improvement in database access speed across a 500 Gigabyte database. Other Web 2.0 start-ups, and projects, can do the same thing.

"The price of conversion is where the pain is," said Yara, "but look at how fast some of these projects grow."  While mySQL was smart in building on a lightweight Web base, more and more users and projects will find the need to graduate, and face proprietary FUD from major vendors saying they have to pay the "monopoly tax" in order to grow.

I truly believe the next battleground will be based on scaling the back end and more importantly mining all of that clickstream data to offer a better service to users.  Those that can do it cheaply and effectively will win.  The tools are getting more sophisticated, the data sizes are growing exponentially, and companies don’t want to break the bank nor wait for Godot to deliver results.  Given these trends, I suggest downloading Greenplum’s Bizgres MPP and let me know what you think.

The post The next generation web, scaling and data mining will matter first appeared on BeyondVC.

On the flip side, I have seen many an entrepreneur create successful businesses who some could argue were slightly cash-starved.  I am not arguing for entrepreneurs to starve their companies of the resources they need, but what I am suggesting is that having too much money can make one lose their creativity in terms of allocating scarce resources to grow a business.  This is especially quite important during the early stages of company development.  An entrepreneur needs to experiment with various ways to reach his target market, generate revenue, and develop product.  An entrepreneur also needs to stay focused, disciplined, and make hard decisions in terms of where to focus company resources.  Too much capital can kill this need.  Throwing too much money at the wrong strategy or too many different areas only adds fuel to the fire.  While money can really help an entrepreneur scale a business, having too much can be a curse.

The post Having too much money can be a curse, not a blessing first appeared on BeyondVC.

Gizmo Project voice calling and IM is booming on Macintosh, Microsoft Windows, and Linux computers because Gizmo Project works well and connects with every type of device like WiFi phones, other VOIP and IM directories like GoogleTalk and even the popular open source Asterisk PBX software. I think people are beginning to understand the difference between Skype who walls their customers in and won’t play nicely with anyone and SIPphone who connects to everyone making it possible to have just one address. Next week SIPphone will announce closing of a major venture capital deal which will help the company grow even faster.

As you can read in an earlier post, I, like Michael, am a believer in the growth of open standards. We want to provide consumers with the ability to have one address and connect to anyone on any network.  We want to expose our APIs to allow anyone or any company to easily integrate our VOIP/IM service into any application or device.  In addition, we want to make it extremely easy for consumers to bridge the Internet and traditional PSTN by extending the SIP functionality to non-PC devices such as routers, wifi devices, adapters, and dual mode cell phones.

While there are a number of factors that go into an investment decision, these are the key highlights for us.  Sipphone has a strong team led by Michael Robertson (founder of MP3.com) and Jason Droege (founder of Scour.net, first video search engine).  They know how to develop and market great consumer products and services on the web.  The market is huge as only a tiny fraction of overall global voice traffic is VOIP-based on the end-consumer side.  This is not a zero sum game between other VOIP/IM players but between the incumbents driving analog telephony and the new players driving digital subscriber growth.  Sipphone has demonstrated it has a winning product that can grow its user base and upgrade free users into paying customers for value added services and features.  The cost of sales and marketing is zero as Sipphone is a frictionless sale, especially when compared to a Vonage.  Finally, I believe that consumers are smart and demand interoperability and that open standards will win.

The post Why we invested in Sipphone, developers of Gizmo Project first appeared on BeyondVC.

For example, when I was reviewing a financial model with a portfolio company which generated revenue through advertising it was clear that while traffic was a huge ingredient in revenue generation, RPM was an even stronger metric as each change in RPM significantly drove sales.  Over the next month, we experimented with a number of changes (of course we measured and monitored each change against the benchmark) to determine how to finetune RPM.  Why spend more dollars on getting more traffic to our site when we were not effectively monetizing in the first place?  Finetuning our RPM is an ongoing process but now for each dollar we spend on generating traffic, I am confident that it will return much more than a dollar in revenue to the company.  Metrics matter and understanding what inputs have significant leverage on your operating model is the key.

Yes, I know it is hard for early stage companies to accurately predict their revenue.  But from my perspective, the financial model is not as important for accurate revenue prediction as it is for understanding how the economics of your business works.  Does each new customer make money or lose money for you?  In any financial model there are usually a handful of inputs that drive the overall sales and cost equation.  Make sure you know what they are, how sensitive your revenue and costs are to that input (in the earlier example, traffic was a key input but RPM had a more direct impact on sales), and measure, monitor, and finetune your company based on these important pieces of data.

I was at a board meeting the other day and while we were pleased with the results for the quarter, we were struggling to understand why we were not getting more customers if we were winning a majority of our proof of concepts (POCs).  As we dug through the data we discovered that while we did convert a majority of our POCs, 50% of POCs ended up in no decision.  In other words, we wasted half of our sales engineering resources on sales that would never happen.  The key was to go after the low hanging fruit first – only do POCs that can convert into a sale.  So what have we done to correct this?  We now require a more detailed checklist before a sales rep can request a POC for a customer.  Even if we are able to reduce the no decision rate from 50% to 35% this means more sales.  Clearly this does not mean we need to hire more sales engineering bodies as we can better utilize who we already have.

It doesn’t matter if you are an enterprise, web 2.0, or old economy company because everyone must understand the key drivers of their business, measure them, and finetune their operations to run as efficiently as possible!

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Sometimes we all focus on the short-term at the expense of looking at the long term.  Sure Google is overvalued now but the company is delivering some impressive results.  Remember the First Law of Technology:

"A consistent pattern in our response is to new technologies is we simultaneously overestimate the short-term impact and underestimate the long-term impact."

Well, we did that starting in 1995 when Netscape went public and are doing it again today. And remember Scott McNealy touting "the network is the computer" years ago. Somewhere lost in the translation was this comment from Eric Schmidt when asked about Google’s entry into consumer electronics (thanks to David Jackson who runs the Internet Stock Blog and has been posting transcripts of investor calls):

There’s an awful lot of speculation about Google playing in those markets. The Google PC, those kinds of things. To me, most of those are people projecting the last one, not the next opportunity on us. And from my perspective, those are not very interesting business opportunities; they’re well covered in the market, we partner with many of the players and we would much prefer to deepen our partnership with them than to go into competition with them.

We are relentlessly focused on this new end-user experience, which is multi-platform and based on the internet and that’s where our future is. That’s where the growth is, that’s where the revenue and monetization is. And, as I mentioned earlier, it’s so large, it makes no sense to divert our resources to these other and somewhat smaller opportunities.

Sound familiar?  The network is the computer, the web is a platform, the browser is the OS, services will live in the cloud, and we will access information from anywhere, anytime, and any place.  Once again, sometimes we overestimate the short-term impact of new technologies and underestimate the long-term impact.  This is why I am so excited to be investing now because if you believe services will live in the cloud and anything that can be digitized will be digitized (media, voice, etc.)then I am sure you will agree with me that we are just in the second inning.  And this is not just a consumer-driven change, this will affect enterprises as well.  So Google missing its incredibly high expectations is not all that bad because when looking at the bigger picture, Google is still delivering some spectacular results and causing the old guard to get with it and respond to the changing times.

BTW, it doesn’t mean I would buy the stock at these valuation numbers and nor do I own it now but the point is that there is still plenty of significant opportunities for startups to create value in the years ahead, especially since Google will not and cannot do everything.

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"Let them work on your crown jewels."

In other words, most software development opportunities are with consulting firms where employees work on a project basis.  So these jobs are usually fleeting and never last very long.  Other software jobs are body-for-hire which, once again, is not that interesting and does not provide real upside for the developer.  Many of the better opportunities have developers maintaining existing code, fixing bugs, and doing low-level programming.  By making a strategic decision early to let the developers in India work on the core technology this company has been able to thrive and prosper and turn its offshore team into a real strength.  All of the main architecture and design is still done in the US, but all of the development is done offshore.  The other reason why this has worked so well is because the company also made a conscious decision to send over our existing VP Engineering and a few other key developers to seed and build the team in India.  It is a wholly owned subsidiary and the employees all work for the company.  The startup costs are obviously higher to do this but if you are looking to do offshore development and do it successfully I seriously urge you to consider building your own team if you can find the right lead project/eng. development manager.  I have seen way too many companies fail in offshore development trying to just work with consulting firms as inevitably the churn and training costs end up being quite high.  In addition, to make it really work, let your team build real product, work on new technology, and not just maintain old code.

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"You miss 100% of the shots you don’t take."

"A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."

If you have read my blog in the past, I am sure you can understand why I love them so much.  They are apropos for not only sports but business and life in general.  Read them one more time, think about them, and figure out how it might apply to what you have not done or what you want to do!

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The other interesting part of this announcement is that later this year Google will also support SIP  allowing for true interoperability between different VOIP networks that use the open standards SIP protocol.  Cisco uses SIP (proprietary version called SKINNY), MSFT uses a form of SIP in Live Communication Server, and open source telephony software like Asterisk and Pingtel (Sipfoundry) either leverage this protocol for VOIP communications or can connect to SIP-based networks (Asterisk).  In other words, many in the business world who have VOIP services have knowingly or unknowingly jumped behind the SIP bandwagon.  While true interoperability with these services does not completely exist since some hardware vendors have created their own versions of SIP-based technology, this does provide an opportunity for the SIP-based players to potentially end-around Skype by combining networks.  While Skype has been doing incredibly well and has a tremendous network advantage, will the fact that Google is getting behind SIP and open standards neutralize the proprietary Skype advantage over time?  Does open standards win out over time versus closed proprietary systems?  Skype has no reason today to be SIP compliant since it wants to protect its most valuable asset, the network, but will it over time look to offer a SIP gateway?  Whatever happens it will be interesting to see if true open standards will triumph over closed and proprietary and how long that will take.  At the end of the day consumers don’t care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications.  What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity?  Keep an eye out over the next year for innovative services that will move closer to this reality-dual ringing computer and cell phones, seamless transferring of a conversation between networks, and more control over who connects with us and when.

The post Google Talk Federation – open vs. closed first appeared on BeyondVC.

So then the next question you may have, is how do I compete for this talent?  It goes back to selling the vision of your company, the ability to make a huge impact in a small and thriving organization, and outlining the equity opportunity.  Those seeking the comfort of a nice paycheck at an established company need not apply.  All that being said, despite the next generation web about being cheap, the costs are rising quickly as the big dogs with hordes of cash are not afraid to spend it to stockpile their talent.  As you look at the bulk of your costs over the next couple of years, it is clear that your budget will reflect a huge percentage of cost in bringing the right people on board.  No matter how you slice it, despite this mantra of cheap, it is not as cheap as we all want because personnel costs are rising, not decreasing.  This next phase of ramping up companies is not about how much you spend on marketing as most services today are spread word-of-mouth.  It is not about technology spend as it is way cheaper than years past.  It is about finding and hiring the key people who know how to scale a back end infrastructure, who can create and deliver innovative product, and who know how to leverage word-of-mouth to create a huge opportunity.  And you must do this when Google and Yahoo are not afraid to be the George Steinbrenners of the web.  The good news is that just because you spend the most on your payroll, you don’t always win.  Just remember Billy Beane and his Oakland A’s.

The post The Arms Race for Talent first appeared on BeyondVC.

From a philosophical point of view, I view compensation as the combination of salary, bonus (if any), and equity.  For cash starved startups, having management and employees believing in the opportunity and team and being motivated by equity is key to success.  From a cash perspective, you have to pay market to slightly above market rates to attract good people, but I prefer to see the employees with above market equity compensation packages to align interests.  You never want anyone worrying about paying their mortgage but at the same time, given similar backgrounds, I prefer the employee who will take less cash and a higher equity package. 

The next question you may have is what is the definition of market.  On a public company board, for example, I look at other companies that we compete with and other businesses that are in a similar stage of revenue growth and financial numbers.  On a private company board, there are surveys out there that you can get a hold of that outline compensation for different positions based on venture capital raised, geography, stage of company, and revenue.  None of these numbers are scientific but they certainly help you ballpark market compensation.  Of course, any active venture capitalist can look into their existing portfolio of companies to determine what market really is.  Taken together, you must decide if you want to pay market, below market, or above market compensation.  As I mention above, I like to pay above market on equity and at market or slightly above market on cash compensation.  Of course, there are certain cases where you have to be flexible and pay up for the right person.

In terms of bonuses, I am not a huge fan of cash bonuses for companies losing money, especially in the early stages of development.  As a company matures and hires additional executive talent cash bonuses become more important to retain top level executives.  With respect to bonuses, there are no guaranteed bonuses, only performance-based ones.  In addition, I prefer a performance-based bonus over just paying an executive more salary.  As far as bonuses are concerned, it is really important to have clearly defined goals and metrics to measure performance and subsequently pay out cash.  For most of the key management, I like to tie much of the bonus number 70-100% (depending on which function) to overall company numbers like revenue goals, number of new customers signed, and cash balance related numbers.  These metrics should be simple Yes/No metrics – it should be quite clear if someone realized their goal or not.  Of course, these metrics depend on the stage of company and predictability of the future, but overall it is good to see all of management working together as a team, succeeding or failing together on overall company goals versus measuring performance against individual MBOs.  Of course, this means having a clearly defined budget that is put together and agreed to by all stakeholders including management and the board.  This must be put in place by the end of the prior year so you are ready to measure and manage performance for the new year. 

As I look to the new year, it is important to have an option forecast just like any financial forecast.  In order to do so, you should have a general range of options that you will give to each employee based on their level such as staff, manager, director, VP, etc. so that each employee at each level is relatively the same.  The range is to obviously give a little more or less to a certain level employee based on performance and other factors.  From a company perspective, you then look at your hiring needs for the year, put in the number of estimated options for each employee, and you have just created your option forecast for the year.  These compensation bands are important as your employees talk to each other, and whether you like it or not, employees end up knowing how much each person makes and what their equity package is.  In fact, I have seen several instances of VPs asking for salaries and bonuses similar to their peers out of respect.  This is obviously how I do not want to compensate employees as each function adds a different level of value and each VP starts out at a different time in a company’s life.  That being said, it usually becomes an issue at some point in time so it is imperative to have a total compensation range for each level of employee and to avoid paying someone total compensation that is completely out of range and non-market.

This is just a general framework, and there will always be one-off adjustments to be made.  For example, throughout the year I like management to let us know of any "at-risk" employees that may need some adjustment to their overall compensation numbers.  In addition, we also need to know about which employees we should be proactive about and move their compensation to the higher end of a salary range to further incent them.  Finally, I like to know about any key performers or herculean efforts that should be rewarded with some additional performance-based options.  If you can take care of all of these issues in one fell swoop at the end of the year that is best from a governance perspective.  However, depending on the situation, you may have to act swiftly as circumstances can force you to do otherwise.

Finally, and most importantly, there is more to making your people happy beyond the monetary compensation.  As I wrote in an earlier post, A Players like to work with other A Players.  To the extent that you have a strong team and every hire is better than the next, I can guarantee that you will attract some great talent.  A Players like to learn from other A Players and like to know that when their backs are against the wall, they have other team members with the experience and know-how to persevere.  In an employee’s mind, the more A Players means the more likely that the company will succeed and create some real equity value.  In addition, people like to work on exciting projects in a dynamic, lively atmosphere.  There is a big difference working in an environment with team members who are passionate about the product and success of the company versus employees who are happy to go through the motions.

The bottom line is that you have to take care of your number one asset, your team, and start preparing early in the year to make sure that you have the right plan in place to keep your team motivated and excited to work at your company.  This includes managing compensation proactively but also making sure you hire the right people and create a winning, passionate atmosphere in which your team can thrive.

The post Where’s your plan to manage your most important asset, your team? first appeared on BeyondVC.

A friend of mine heads up IT architecture at a large health care organization.  One of the big initiatives is to reorient the company to focus on the consumer (sounds like they hired too many consultants).  What that means for IT is how to do they integrate thousands of different databases to figure out all of the information about a particular doctor?  Sure, some of this is an exercise in enterprise data integration but you have to remember that probably 75% of the real information is in the form of unstructured notes about the particular doctor.  Think about how much data gets put into CRM systems which is not structured.  So naturally he asked me about what was happening in the consumer blogosphere, about tagging technologies, about RSS and turning every application into a publishing system, and how he could potentially integrate this into his enterprise.  The pain was large enough that he was looking for new and better ways, think loosely coupled ways to solve his problem.

This is just one example but you could easily think about that customer pain and extract it to a number of enterprises.  Data and application integration continues to rank either #1 or #2 in every CIO spending survey but going for the expensive $1mm plus point to point integration methodologies is not the way to go.  We just have to be creative and think about new ways to unleash the massive amounts of data in the enterprise to make the workers more productive.  Think of the easy-to-use technology used in search, RSS as the new publish subscribe, and loosely coupled applications as a new wave to hit the enterprise in the next few years.  Obviously all of the buzzword du jour technologies are just enabling technologies and it is incumbent upon the startup to find the problem, figure out the market potential, and understand how to sell it.  It is quite early in the process but this next-generation web will have a huge impact in the enterprise as well as in the consumer space.  It will just take some time  because while many of the startup companies I speak with understand the opportunity in the enterprise, they are rightly focusing on the market opportunity with consumers first.  Many of these entrepreneurs do not want to be seduced by the big dollar figure type deals that are out there knowing that it costs a lot of money to sell to the big boys and a whole different kind of support infrastructure.  In addition, most enterprises are not ready for it yet, but trust me, the early adopters are already out there trying to figure out how to use wikis, RSS, and other successful consumer technologies in their shops.  This means it is a good time to be looking so if you are an entrepreneur bringing some of these new technologies into the enterprise, let me know as I would like to speak with you to learn more.

The post Web as platform-don’t forget the enterprise first appeared on BeyondVC.

During dinner, one of the CIOs reminded me of the difficulty of startups selling into his organization.  First, when you think of IT budgets, you have to remember that about 60% is spent on people, 20% on hardware, and 20% on software.  In the software bucket, much of this money is spent on software maintenance and relationships with existing vendors.  While the remaining small % of spend leaves room for new license spending, only a fraction of that will be even available for early stage companies.  Lesson #2 is that it is important to understand the culture of each financial institution with respect to their reputation of being an early adopter, fast follower, or mainstream player.  For example, someone from Citi told me that if he were a startup he wouldn’t even bother selling into Citi as it takes an incredibly long time and you could die trying.  Ditto on Bank of New York as their business is about settling the trillions of dollars of cash transactions daily.  Nothing innovative they really need to do here except scale and reliability.  BONY gets no points for taking on sexy technology or more risk.  On the other hand, investment banking and trading heavy financial services companies will take a look at new technology to get a leg up on the competition.

Lesson #3, if you sell into a large financial services player, either be well networked, come in through a partner, enter from the bottom up, or go to revenue generating groups with money and buying power.  On the top down approach it is all about having credibility.  No one wants to be the first, especially if your technology doesn’t work.  On the well networked side, get a reputable CIO to believe in you and your service, get them your board or advisory board, and have them make a few calls their technology friends to open up some doors. With respect to working with partners this can be many times more difficult than landing a large customer.  I would not waste your time with a partner unless you have a number of solid customers and can show the partner how they are going to make money and lots of it.  Finally, entering from the bottom up means staying away from the CIO’s office, offering free downloads, for example, where the actual workers can bring software into the enterprise from the worker-bee level.  This takes time but can be doable.  Finally, if you have the right product and reach the right person in the revenue generating departments, not IT, and show them how they are going to differentiate themselves from the competition and make more money with your product and service, you can avoid being put in the IT bucket all together.  What does this mean for me?  I wouldn’t bet the farm on selling to these guys unless you have a team that knows the space cold, is well networked with peers who have budget authority to get the early customers and traction, and unless you are well prepared for long sales cycles.  It is damn hard to break into the clique, but if you do it can be quite rewarding.

The post Thoughts from a recent CIO dinner first appeared on BeyondVC.

During my demo, one of the founders of a wireless application company showed me a financial trading application streaming with live after-market data.  It really looked like any Bloomberg or Reuters 2000 terminal scrunched into a smaller form factor.  I also used a variety of other applications which ran seamlessly on the Windows Mobile platform.  This led us to a conversation on the "walled gardens" of wireless.  Traditionally, consumers have had limited choice with respect to the software and services they are allowed to use on their device based on their wireless carrier.  Sure, many carriers offered open web access on their phones but there really has been no point in browsing for information on the web with slow networks.  In addition, browsing regular web pages through a small phone sucks.  As wireless data networks like EVDO continue to increase their throughput (400-600kb), as devices like the Q get better and become more like mini-computers, the future will be leveraging the open web for downloadable mini-apps.  One of the best examples of this is the Google Local for mobile application.  Rather than go cut a deal with a carrier or launch its own MVNO (mobile virtual network operator), Google is playing the carrier-neutral angle allowing anyone with open web access from the phone to download the app.  It is elegant, functional, and small but its usability is not limited to what a user can access through a browser.  While this only runs on J2ME enabled devices, downloadable mini-apps will clearly be a trend that will continue in the future. Why do we need MVNO’s specialized and targeted to every slice of America when we should just be able to download and access what we want, when we want, and from any device. Let’s just hope that as we move into the future device manufacturers, carriers, and software vendors will get smart and find ways to create a truly open platform to break down the walled gardens of wireless, to allow end users to install any software from any vendor on any device, and thereby enable a wireless data explosion bringing lots of revenue to the carriers and lots of happy customers.

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The post Frictionless sales (continued) first appeared on BeyondVC.

Opening up the Solaris Enterprise System, and giving it away for free, lowers the barrier to finding those opportunities. Free software creates volumes that lead the demand for deployments – which generate license and support revenues just as they did before the products were free. Free software grows revenue opportunities.

Opening up Solaris and giving it away for free has led to the single largest wave of adoption Solaris has ever seen – some 3.4 million licenses since February this year (most on HP, curiously). It’s been combined with the single largest expansion in its revenue base. I believe the same will apply to the Java Enterprise System, its identity management and business integration suites specifically. Why?

Because no Fortune 2000 customer on earth is going to run the heart of their enterprise with products that don’t have someone’s home number on the other end. And no developer or developing nation, presented with an equivalent or better free and open source product, is going to opt for a proprietary alternative.

Those two points are the market’s reality. And having reviewed them today at length at a customer conference, with some of the largest telecommunications customers on earth, I only heard the strongest agreement. They all, after all, are prolific distributors of free handsets.

Betting against FOSS is like betting against gravity. And free software doesn’t mean no revenue, it means no barriers to revenue. Just ask your carrier.

To further add to his point, just because it is free does not mean it is frictionless.  It has to be easy to install and easy to use.  In addition, free can be time based or feature-based.  What free means is lowering the barrier for a customer to use and love your product.  It means more qualified leads and a shorter sales cycle.  It means a lower cost of doing business-lower sales and marketing and lower implementation cost.  It means a more capital-efficient business.  The great news is that when the more established vendors like Sun jump on this bandwagon and educate their customers, it only further legitimizes this way of doing business for many a startup.

The post Frictionless Sales (continued) first appeared on BeyondVC.

1. Be flexible: Have an agenda but listen to and know your audience.  If the VC wants to run a meeting a certain way, be flexible, and go with the flow.  I have seen many a pitch where an entrepreneur comes in with an agenda and wants to go through each powerpoint slide in excruciating detail.  These meetings typically do not last very long as I wonder what it would be like working with that person or for that person.  Deal with questions as they come up, not later.  VCs can be impatient at times, and it really bothers me when an entrepreneur says, "Let’s wait until slide 15" especially when you are just on slide 3.  Meetings have a rhythm so be in sych with your audience.  Startups require entrepreneurs to be agile and adept to respond to quickly changing market needs.  If you are too engrossed with following every powerpoint slide, it makes me wonder how flexible you will be in responding to market conditions.

2. Have a well-honed elevator pitch: If you can’t explain to me succinctly what your product does, what problem it solves, and how you will make money then I wonder how you will explain it to your customers.  Don’t worry, I want to see your baby in action, but save the demo for later as I want to hear you articulate these points first.

3. The Slide Deck: make it short and sweet, 15-20 slides will do.  However, the best meetings happen when we never even touch the slide deck and end up in a free form conversation about the team, product, business, and market.  Many times, I have even found myself brainstorming with the entrepreneur about other revenue opportunities and go-to-market strategies – I just love those types of meetings.

4. Listen and ask questions: try to get feedback about your business and the opportunity.  The meeting is not a one-way street.  Make sure you figure out if you like me, my firm, and my style as much as I am looking for a similar fit.  Remember, it is a competitive market out there, and I need to sell my value add to you as well.  Asks lots of questions – be open to feedback but do not be afraid to respectfully disagree.  Not all of the feedback you receive will be right and many times it will be wrong, but take all the data you can so you can be better prepared for the next VC pitch.

4. The Demo: First, if you have any web-based business, I would hope that you have the wherewithal to have an alpha version running.  As we all know it is cheap to start a company, and if you have not taken the first steps to get a product/service up and running, I am going to wonder whether you have the technical know-how to make it happen or the passion and risk-seeking behavior to be an entrepreneur.  I love it when entrepreneurs have sunk some of their own money into their business or substantial amounts of time to turn their dream into reality.  This shows me a real level of commitment.  With respect to the demo, I like them live, but as Bob Rosenschein once told me, there are 20 things that can happen in a demo, 19 of which can go wrong.  So be prepared and have a cached version of your service to walk through.

5. Next steps: In any meeting, never forget to ask about the next steps.  What is the VC firm’s process, when will they expect to get back to you, is there any more information that you can provide, etc…

A couple of other points to add:

Pre-meeting: Research the VC, the firm and get to know the types of investments that he/she likes to make, that the firm likes to make, and what is currently in their portfolio.  Google is a great resource, look for VC blogs, and talk to others that may have pitched the VC and the firm recently.  We need to sell to you as much as you need to sell to us.

A couple of don’ts: don’t be late, don’t be arrogant, and don’t ask for an NDA before you start the pitch

Happy pitching!

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However, I cannot overemphasize the importance of getting back channel references (references that were not given by the individual on the official list) to get a real view of the candidate.  You need to look deep into your network and your VC’s network to reach out to investors, executives, peers, and direct reports who worked with the candidate in prior companies to get a complete picture and balanced profile of the recruit.  A wrong hiring decision for an early stage company can be a killer!  All too often startup companies want to run fast and furious and hire that killer executive candidate ASAP without doing the extra work required to determine the right fit. In this particular case, through the back channel references we were able to find a number of inconsistencies about a candidate’s effectiveness at a prior startup, his reasons for leaving, and his overall management skills.  While the references were balanced and fair, they were far from glowing.  In fact, most of the back channel references were consistently mediocre which for me was a vote of no confidence.  Sure, you should always expect to get a couple bad references if you do enough of them on someone, but if you see a consistent pattern of concerns or "areas that need to be managed" emerge from those references, it is time to move to the next candidate.  In fact, let me extend this message and state that doing back channel references should be standard business practice.  Why learn in 3 months that a particular executive, VC firm, or business partner was not a right fit, if you can piece together that information beforehand?  Just a little more work in the diligence process can save you lots of frustration in the long run.

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The CIO of one of the largest retail banks in the US recently told me that he has about 60 new projects under evaluation. About half of them will pass technical, functional and investment hurdles. He will then fund 4 to 6 over the next two years.

That means that 25 or so projects that meet all objective criteria will not go forward.

Software vendors and investors need to understand and deal with this reality. 

This is the new reality in selling to enterprises – doing nothing may be a bigger inhibitor to sales growth than your competition!

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1. Who is calling you, what is their role, and what have they acquired in the past?  You need to determine whether it is just a junior person screening or if it is someone with real clout and decision making power.
2. Why do they want to enter this market and what is the decision making process by which they will make a build/buy decision?  If they are early in the process, you have to be concerned about wasting your time, educating a potential buyer about your market, and going nowhere with your conversations.
3. Have they talked to anyone else?  In many cases, an acquirer may already know who they want to buy, but will still talk to other players to fully understand the market and the competitive landscape and to use you as negotiating leverage.
4. What are they looking for in terms of an acquisition?  Revenue, product, management, both?
5. Who is responsible for making the acquisition work, and how does the acquirer intend to integrate your company into the existing infrastructure?  Will the acquisition be run as a separate, stand-alone unit or will it report to a certain group.  Knowing this will further help you understand the decision-making process of the acquirer, and who you may need to influence to get a deal done.

Before your first meeting, here are some questions you should have answered yourself:

1. What other acquisitions have they done, what multiples did they pay, and how recent were the deals?  If the buyer hasn’t done many acquisitions or if they paid low multiples do not start thinking about pie in the sky valuations for your company.
2. What is the company’s market cap and how much cash is on their balance sheet?  If your selling price is too high for the buyer based on the buyer’s market cap or cash on hand, don’t waste your time educating them about your product and the market.
3. Use your network to talk to some of the management or venture investors of companies that were recently acquired by the buyer to determine what their process was and to figure out if the opportunity is real or just a fishing expedition.
4. What is the corporate culture?  Does the acquirer have an NIH (not invented here) syndrome or is there a history of openly collaborating with partners and looking outside for new technology?

Once again, it is always nice to have a large company call you and express acquisition interest.  That being said, go into the conversations with a skeptical eye and make sure you do not waste your time as these strategic discussions can quickly lead to a dead end if not managed appropriately.  The tricky part of the dance is trying to establish early in the process a range that the acquirer will potentially pay for your company assuming everything you tell them is true.  The sooner you can get to this answer the sooner you will know if you should continue talking or just walk away.  If you manage this process appropriately you may find yourself in a great place as many of the best acquisitions happen when companies are bought and not sold.  The downside is that these discussions can suck up lots of your precious resources and be a tremendous distraction to your management team.

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Another VC friend, Scott Maxwell of Insight Venture Partners, has launched a new blog with encouragement from myself and Brad Feld.  Many of the VC bloggers on the web are early stage focused so Scott will bring a unique twist to the VC blogging world by focusing on expansion stage companies that have a product and some decent quarterly revenue.  As Scott mentions in his post:

The issues faced by technology companies at this stage of development are very different that early stage companies. The major issues are around distribution strategy and execution, but as companies scale they tend to need more formal development approaches and have many other process, organization, skill, and staffing gaps as well. Every CEO is also looking for more leads, customer introductions, and ongoing advice in every category, personal and professional.

I tend to agree with Scott so if you want a different perspective, a perspective of what your later round VC is looking for, I suggest putting Scott’s blog on your must read list.

The post VC Blogs – the old and new first appeared on BeyondVC.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

While getting in early and being nimble is a great way to make money, no matter how early you go, it is hard to build a sustainable VC portfolio investing in features.  As an entrepreneur, if you can get up and running for $20-30k, so can 10 other talented people.  Fred Wilson and a new VC blogger, Peter Rip, have written some thoughtful posts about a bubble mentality developing.  I have written about it before as well in an earlier post comparing and contrasting 1999 vs today.

In other words, these business models are quite capital efficient.  It is no wonder why VCs are quite excited about next generation web companies.  All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble.  As you see from Tim’s map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.

So if you are an entrepreneur, stop talking about Web 2.0 and start talking about how you are going to scale your business and make money.  Start talking about how you are going to create a defensible barrier to entry.  Better yet, since it is so cheap and easy to get started show me whay you are not just a feature, show me your user growth, and show me how you will maintain your competitive advantage.  Sure, as a startup, you will not have all of the answers and your business model may change, but show me that you care about these business concepts and that you have thought through these issues.  While I am a big believer in the promise of the web, I see this less as a revolution but more an evolution from where we started in the mid-90s.  We are talking about the same principles as the mid-90s, and we would not be here today were it not for the incredibly painful bursting of the last bubble.  But with every bubble bursting comes a rebirth and from the last bubble what we have is lots of cheap bandwidth, resilient entrepreneurs who scraped for crumbs to survive, and a mentality to do it cheaply (rise of open source and leveraging commodity inputs).  What we also have today versus yesterday are business models that can scale cheaply, be profitable, and throw off lots of cash.  Let’s focus more on these concepts versus being Web 2.0, as I do not want to think about what kind of rebirth will come from another bubble.

The post Web 2.0 Bubble first appeared on BeyondVC.

It’s written in HTML, CSS and JavaScript to run on any modern browser without needing any ServerSide logic. It allows anyone to create personal SelfContained hypertext documents that can be posted to any WebServer, sent by email or kept on a USB thumb drive to make a WikiOnAStick.

As I’ve said before increasingly the web is becoming my platform and the browser is my gateway to rich services.  I have a public blog which you are reading here, a private blog where I bookmark some items and make notes to myself, a couple of wikis which we use internally at Dawntreader or with portfolio companies to work on specific projects, and now a TiddlyWiki which I use to organize my personal thoughts, put ToDoLists together, record call notes, etc.  Instead of having all of my notes in a notebook or in Outlook or Word, I now have a searchable, taggable personal notebook accessible through any web browser.  I can link to files in my hard drive, websites, etc.  It is open source and there is an increasingly strong community building new plugins and macros to add to your TiddlyWiki.  The great thing is that it is a selfcontained file with no server side installation meaning I can carry it with me, email it, put it on a USB drive, or even upload it to a fileshare internally or on the web.  I am still grokking this but needless to say I suggest that you save a copy of it and start using it.  I am currently using Johnny LeRoys TigglyTagWiki version which you can find here.  As for how big or active the community is, Jeremy says it is hard to tell but his site is getting 25k unique visitors a month and growing.  On Technorati there are 1271 posts with Tiddlywiki mentioned.  For an even clearer explanation of TiddlyWiki, I suggest going to Euicho.com.  Euicho does a good job of breaking it down to its elements, comparing and contrasting it to Wikis, and outlining the limitless possibilities:

• It works great as a documentation manager for products, software, etc.
• Do you have a desktop full of tiny .txt file reminders and notes? It can store little bits of information, reminders, and notes like that with ease.
• It makes a great FAQ page.
• Turn it into a todo list, with items as tiddlers.
• Some use it as a blog.
• Some use it as a website.
• Make it your own personal dictionary/encyclopedia.

What I love most about Tiddlywiki is that it is quite easy to use but incredibly flexible.

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I have been banging on about the importance of ping servers for a while, perhaps Versign with Moreover and Weblogs.com can do something or perhaps another startup will.

Whatever happens, the architecture of online publishing is changing and with it, the entire architecture of search – pinged instead of crawled. That is a very big deal for Google.

It has been quite a journey during the last five years, but I am glad that I had the chance to work closely with so many talented professionals like Nick Denton, Jeff Jarvis, David Galbraith, Jim Pitkow, and Angus Bankes, many of whom are helping shape the next generation web.

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This is a nice graphical representation of what is happening in this next wave of the Internet.  As an add-on to this, I thought I would compare and contrast some differences, all quite obvious, with the first euphoric Internet wave.  I have shared many of these thoughts in earlier posts like "The web-based platform" last October and "Web-based businesses circa 2004."

So as you can see, there are more sophisticated users, it costs significantly less to launch a new service/product, and many of the business models are proven to reach profitability.  In other words, these business models are quite capital efficient.  It is no wonder why VCs are quite excited about next generation web companies.  All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble.  As you see from Tim’s map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.  What this really means is that building a sustainable competitive advantage in this new open world means leveraging network effects to foster loyalty, community, and collaboration. In most cases this will be enough to create lots of value.  In other cases like Friendster vs.MySpace it shows that this network effect can also be fleeting.

One other point to consider with all of this is the significant changes ahead in the enterprise.  Many of the points in the map above fit consumer-facing services.  With the proliferation of broadband and the thought that the consumer is also an enterprise user, we must be cognizant of the many opportunities for web-based services to be brought into the corporation from the ground-up. Everything we did in Windows and Office and other enterprise apps 5 years ago can be done through a browser/web with Salesforce.com, Skype, and web-based email and calendaring.  We are clearly not there yet, but this will happen.  In addition, as enterprises move to a world where they must support multiple users and devices on-demand, they will need to buy new software and infrastructure to manage this new complexity.  So as you can tell, I am quite excited about the opportunities as the web becomes a more robust platform and a gateway to deliver rich applications, but at the same time I express caution because I do not want to want to make the same mistakes we did in years past.

The post Web as platform first appeared on BeyondVC.

Investors had better take notice. As hedge funds search for new strategies to produce the holy grail of "alpha," or outsized returns relative to risk, private-equity investments of all stripes are suddenly turning up in the industry’s portfolios.

The holdings — ranging from modest positions in startup companies to multibillion dollar corporate buyouts to a variety of more esoteric instruments, like subordinated debt — already amount to $65 billion, or 7% of hedge-fund investments, according to estimates by Freeman & Co., a New York-based financial boutique. That tally, the firm believes, could swell to $100 billion by next year.

Today’s Wall Street Journal has an article (can’t find online source but in Marketplace B3C) on hedge funds entering the venture capital market.  It is no secret that hedge funds took flyers on early stage tech companies during the bubble.  However, what’s different this time is that hedge funds are looking to create separate vehicles to make venture capital investments with a longer time frame to withdraw capital.  As the article states, the big concern is if hedge funds can be patient enough to generate the needed returns.  Instead of worrying about the tick, hedge funds need to understand that VC is a 5 year game plan.  The other area of concern for me is the idea of even more money plowing into early stage deals.  I can vividly remember during the boom being priced out of a few deals from some hedge funds who were willing to give money at a higher valuation with less oversight to eager entrepreneurs.  All this being said, this trend is just starting but one to which we should pay close attention.  I just do not want all of this capital to end up badly in the next bubble.

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Let me set the stage for you as it is a microcosm of what is happening in other IT markets.  Currently you have the incumbents like Cisco, Avaya, and Nortel which are dominating industry roll-outs across enterprises.  Some of these companies are next-generation players as they have replaced the old-school PBX systems of other competitors or even their own legacy systems.  While the market is still early in development, the new IP PBX guys are playing the same sales and marketing game as the old school PBX players.  Enter the next area of the market, the open source players like Digium with Asterisk and Pingtel with SIPFoundry.  Both of these companies are employing the open source model of letting customers download the product and upselling support and maintenance.  The core value proposition is similar to many open source companies – commoditize the old closed system with off-the-shelf hardware and let customers avoid vendor lock-in with a pure, open system saving on their TCO.  There are definitely some technical differentiations between Asterisk and SIPFoundry, but nonetheless, the approaches to market are pretty similar.  Finally, you have the disruptive players like Nimcat Networks and Popular Telephony (Peerio) who are promoting a serverless, peer-to-peer architecture.  With intelligence embedded in the edge, these companies promise even more ease of use (just plug a phone into your LAN and you are ready to go) and lower TCO than the other vendors.  Of course there are many issues with privacy and security when you start talking about P2P but this is still quite an interesting technology which will find its market. 

Fast forward back to Avaya buying Nimcat.  For an early stage company, promoting a new standard and new architecture is huge, uphill battle.  On the other hand, incumbents like Avaya must continue to analyze their competitive threats and move quickly to protect market share, even if they have to cannabalize their own sales.  This move by Avaya is brilliant and I look forward to seeing how it will embed Nimcat intelligence in its products and to see if a giant like this can make a disruptive technology a standard.

All this being said, I believe the real battle is not about VOIP or telephones but the real-time enterprise.  Who will control the central nervous system and lifeline of the enterprise?  If you believe we will move to a world where real-time communication (voice, video, IM with presence) will be embedded in every device, not just telephones, and every application, then you can’t ignore SIP.  Microsoft is one big player using SIP or its own version of SIP to promote its vision of the world.  Microsoft’s launch of the Live Communication Server 2005 with integration into Windows and Office is the first step.  The other vendor to consider as we move in this direction is the open source company, Pingtel, which is managing the SIPFoundry project and will provide an alternative to Microsoft lock-in.  This battleground is about software and not devices which is why I believe companies entering this market from a telephone-centric view of the world will miss out on a big opportunity.

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My first thought was that if we continued on this path we would never have a product that met market needs.  There would be no way that the engineering team could execute against its development schedule with a number of one-off requests.  So we asked management to analyze the problem and report back to the board.  The first place to look was product management to determine whether these customer requirements were one-off adjustments or features that were significant market needs that product management did not identify.  The other place to look was sales to determine if sales reps were selling what we didn’t have and promising the world to close deals.  As you may know, a healthy tension between sales and product management will always exist.  Sales will always want any and every feature to close that big deal and product management should only want features that will address broader market needs.

After a week, management reported back to the board and determined that the problem eminated from sales.  More specifically, it was pretty clear that the sales reps were not properly trained or equipped to sell the product.  When not armed with the knowledge and sales tools to properly sell, it was quite easy for the reps to get derailed during sales presentations, flail when addressing customer objections to the product, and agree to add one-off features to close a deal.  To address this problem, management presented a plan to get the sales reps properly trained, equipped, and managed.  In addition, management would have to play an ongoing role stressing the importance of closing the right deals and walking away from the wrong deals.  So the next time engineering misses a release date, make sure you understand why because most likely it is a symptom of a much larger problem.

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To that end, let me talk about .Net.  I have spent time over the last few years with .Net evangelists and they have been helpful in certain situations.  That being said, most of the fund’s portfolio companies (90%+) are not using a .Net platform.  When I dig deeper into technology and platform decisions, I like to think in 2 separate buckets, the consumer market and the enterprise market.  On the consumer side, one big value for Microsoft has been its hold on the desktop as Tim Oren strongly points out, but as we move more and more into a web-based world its strength is diminishing.  Look at Google, Firefox and new scripting services like Greasemonkey and Yubnub which are increasingly offering users more and more functionality through a web-based interface.  I am sure Microsoft will get it right with Longhorn but it has taken way too long and many a more nimble, startup has out-innovated Microsoft and decreased its competitive advantage.  While the OS is important, Microsoft has lost its complete and utter dominance as we move to a service-oriented world where broadband is everywhere, apps are in the cloud, and the browser becomes king.  All that being said, I will not make my decision to fund a startup based on whether or not it uses .Net.  For example, if you want to see a great app built on .Net go to a friend’s web service, Phanfare, and try using the application.

On the enterprise side, the only reason I would support having a company move off an existing platform to .Net is if there was significant customer demand for it and if Microsoft would really provide the company with access to its channel.  Microsoft has been putting a huge effort in promoting their go-to-market support for startups but the irony is that Microsoft really wants companies to develop vertical, industry-specific applications on the .Net architecture.  In other words, many of these companies are nice businesses but not venture-backable opportunities where VCs can make big returns.  If Microsoft can change this attitude and show me where and how to make money leveraging its Ecosystem and partners, I am all ears.  In the end VCs have be loyal to its Limited Partners, not a technology platform, so the eWeek article itself is overblown.

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Anyway, as I had time to think about it, it might be helpful for entrepreneurs to understand how VC funds operate to better understand our motivations and to better align interests.  At the end of the day, VCs are in the capital gains business.  We make money when our LPs make money which means that the companies we fund and entrepreneurs that we back need to be successful.  Clearly when VCs and their LPs negotiate their agreement, economics are the most important topic at stake.  While VCs get management fees to pay the bills, it is the carried interest portion or % of profits that VCs receive that really drives our thinking and aligns our economics with performance.  In any typical fund, we except 1 to 2 deals to be homeruns with 10x or greater returns, 3-4 to be pretty good returns, and the rest to either get our money back or lose money.  What that means is that every one of our deals needs to have significant return potential and market size for us to think about investing in a deal.  In addition, companies should be capital efficient (see an earlier post on capital efficient business models) meaning that no more than $25-30mm should go in, especially if a home run deal acquisition is $200-300mm (not $1b).  If only 1 to 2 deals have home run potential, the chances of us getting any one of them to really work is slim to none.  If the majority have this potential, we get more at bats at the plate and more opportunity to create real value for the fund.  As a fund matures, VCs need to demonstrate real cash-on-cash returns to go out and raise the next fund.

This is the point at which conflict could exist.  First, there could be situations where the VC says no to a great opportunity to sell the company but for whatever reason wants to hold out for a greater return.  On the other hand, there could be situations where a VC wants to exit too early with a decent return but not optimizing the overall value of the company in order to return capital to investors.  At the end of the day, what this means is that entrepreneurs and VCs need to get on the same page pre-investment in terms of everyone’s expectations for performance and goals.  In addition, there needs to be constant communication as the markets and company evolves to ensure this alignment.  The good news is that given a VCs economics, we only do well when the entrepreneur and company does well so what better alignment could there be.  A point of diligence for entrepreneurs could be understanding where in the fund lifecycle a VC is and what some of their returns to date have been.

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Tying together a demand-driven approach to investing means that you have to have access to the IT decision makers with the budgets.  This is typically not easy as every tech vendor in the world is pounding on their door to give them a pitch.  That being said, if there are more IT buyers like James McGovern that understands the value that VCs can bring to IT buyers then we will all be in great shape funding companies that solve real problems. James, an enterprise architect at a major Fortune 100 company, recently wrote a post  on ITtoolbox explaining how his brethren can continue to innovate and stay ahead of the curve.  He goes on to say:

The methodology used today within corporate America is fundamentally busted. Sitting around waiting for a vendor to show up on your doorstep with the right solution at the right time is simply gambling (I really wanted to say irresponsible). Enterprise architects need to not sit on their butts waiting for the "right" solution to magically appear. Instead they need to make sure the venture capital community understands what problems we face so that they fund the right portfolio companies.

Competitive advantage within corporate America via the use of technology isn’t gained by implementing service-oriented architectures or any of the other hype in published in industry magazines. SOA is a reality of today’s marketplace and everyone will be doing it (hopefully doing it the right way by purchasing my upcoming book).

Competitive advantage can be gained though by being first to implement new waves of technologies before your competitors even learn about it or it appears in a matrix by your friendly neighborhood industry analyst. It is in the best interest of enterprise architects to start setting aside time to learn about technologies that are not yet released within the marketplace and are seeds within the minds of CTOs of Internet startups.

With this thought in mind, I have decided to take deliberate action in making this situation better for both parties. I am reserving Friday’s at 5pm on my calendar to talk with venture capital firms who want to bounce ideas off me related to funding or to listen to the pitches of early stage Internet startups that simply need a sounding board for someone who sits in the walls of corporate America on a daily basis…

The same principles go with VCs as well – sitting around waiting for deal flow in this competitive VC market will not get you very far.  Be proactive, develop an investment thesis, and reach out to the end users like James – I wish more IT buyers thought like him.  Of course, as VCs we must remember not to solely rely on the buyer’s advice and use as many data points as we can to further validate or kill our investment thesis.  The danger of solely relying on IT buyers is that the solution may only be necessary for a handful of buyers and that the problem is so near term that by the time your product is ready another vendor has already stepped in to fill the void.

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My only words of wisdom for you is that In any negotiation, make sure you mark down your most important points and put them in a bucket.  Place the less important deal points in another bucket. Try to put yourself in the company’s shoes to understand their major points as well.  I encourage you to ask for everything but at the end of the day be smart about what you really want-try to win on the big points but don’t be afraid to give in on the small issues.  At the end of the day, nickels and dimes do not add up.

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This brings me to another point.  I had the opportunity to speak on a panel the other day hosted by Venture Scene New York.  The panel focused on exits or liquidity events and how VCs thought about them.  The clear trend that I am seeing is that companies really have second thoughts about going public these days due to the costs and requirements of Sarbox.  That obviously is not the sole reason many companies that can go public choose to be acquired but it is one of the top few.  In addition, it is no surprise that you see many public companies, particularly smaller ones, looking to go private as well.  Something has to be done to make Sarbox more relevant and less onerous, particularly for smaller companies.

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First, from his perspective, he would rather pick one or two ventures at a time then spread out investments VC style.  If you think about it, there have only been around 7 or 8 internet-type companies that have gone public in China since the last bubble in the US (Linktone is one of those) when the Sina.coms were out in the market.  Given that, he would rather pick a couple sure bets and really work with them cradle to grave.  It is also tough to have any real governance and control of an investment by just sitting on a board in China, especially if you are monitoring a deal from thousands of miles away.  Secondly, he said it is tough to find good, experienced talent.  That is one of his gaiting factors in ramping up his ventures.  Finally, from an investment perspective, he would rather go consumer than enterprise.  His first business was a systems integration play which spawned Linktone and Smartpay.  He said it was difficult because the private companies you are selling to are really quasi-government agencies.  It is tough to get paid and very tough to protect your intellectual property.  At least on the consumer side, if you price your product or service appropriately, you can build a real PAYING user base and protect yourself from competitive threats with your base of subscribers.  Look at the history of China going from Boeing to the automakers like GM which did joint ventures with companies in China only to have their IP recreated and used against them.  I am sure GM could have protected themselves by charging less for their Buicks!

So there you have it from an experienced entrepreneur in China.  His thoughts make a ton of sense.

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Quite simply, Greenplum is using an open source database optimized with supercomputing architecture to bring terabyte scale datawarehousing to enterprises.  Leveraging this architecture, Greenplum will be able to offer significant price performance benefits over existing BIG IRON solutions.  In addition, Greenplum is working with Josh Berkus and the PostgreSQL community to launch a new project, Bizgres, whose goal is to build a complete database system for BI exclusively from free software.  From a business perspective, what I like about our strategy is that we are building off an already existing and strong community of PostgreSQL developers.  Secondly, rather than pursue a broad platform play for all databases, we are focusing on a large but focused market in BI.  We believe this is a great way for open source to enter the enterprise as the market is riddled with expensive solutions, BI is a top 3 initiative in most enterprises, data is growing like a weed in most places, and because we are not asking CIOs to bet their transaction systems on open source.  Finally, our revenue model is not based fully on a support/service play.  The open source DeepGreen product will target small-medium sized businesses or anyone with data marts and reporting apps in the 10-300 gigabyte range.  GreenPlum will sell licenses for any company that wants to to deploy the DeepGreen MPP product to scale to multi-terabyte environments.  While it is yet another spin on open source, I am quite excited about what GreenPlum is doing and truly hope that by leveraging the success of PostgreSQL, staying focused on a targeted market, and employing a dual license model that the company will be able to rise above the noise.  As I have mentioned in a previous post, one of the clear benefits of open source, especially if you leverage an existing community, is to reduce the friction in the sales and marketing process.

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So how do you make a real partnership work?  In theory, it is very simple but requires a ton of hard work.  Here are a few rules I like to use when working with partners. 

Rule #1 – Don’t rely on corporate; engage at the field level. 
Many early stage companies try to create partnerships from the top down without recognizing that the real action is in the field.  If you can bring your potential partner customers and lots of customers, you will get attention and be in a much better position to negotiate a real partnership.

Rule #2 – Focus, narrowly focus your opportunities.
Many of your potential partners are huge enterprises, and it is easy for a small company to get lost in the shuffle.  Try choosing a group in the large organization (it depends on how the company is organized) where you can effect a real P&L and create a strong value proposition.  In some companies that might mean focusing on a vertical like energy or financial services while in other companies it may mean picking a specific function like business intelligence or compliance.  Either way focus on groups where you can make a real impact. 

Rule #3 – Your partner’s sales force needs to get comped
Once you are able to demonstrate a handful of customer wins, it is time to get a deal done.  No matter what kind of deal it is, make sure that your partner’s sales force is comped for selling your product.  If there is no comp for the sales force, your product will not move in a highly leveraged way.

Rule #4 – Dedicate the proper amount of resources to make the partnership successful.
Once again, lots of companies think that once you sign a deal the hard work is done.  On the contrary, this is just the beginning.  You need to treat your partner like your largest customer and provide the same amount of focus on your partner as you do your customers.  You will have to develop a joint business plan together, figure out the proper sales strategy, put together compelling joint collateral and presentations, offer sales and SE training to your partners and their resellers, and finally get your customer support ready.  In addition, make one person responsible for making the partnership work.

Rule #5 – Don’t get sucked into your partner’s black hole.
Be careful of developing custom software for your partner or making too many proprietary tweaks beyond the necessary integration.  I have seen early stage companies too often bend over backwards without thinking about the real benefits of all of your partner’s requests.  As an early stage company you have to walk a fine line between leveraging partners for sales but also not becoming so glued to the partner that you alienate other potential channels.  As I have said in previous posts, it is ok to say no to some requests especially if you can demonstrate why it will not help generate more sales for both comapnies.  Either way, your partner will respect you and know that you are not a pushover.

As you can see, it is quite hard to support more than one partner for an early stage company. 

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On the early side, I continue to believe there is much innovation to be done.  As the VC funds get larger and larger, they are under increasing pressure to put more dollars to work in every deal.  Therefore, it remains quite difficult for the larger funds to dole out money in $2-4 million chunks, and the valuations are quite attractive at this stage.  As a fund, we typically like to lead or co-lead the first institutional round (post-angel) where the company has a strong entrepreneur, innovative technology, and a handful of customers to prove the market need.  Where I do not want to be is in a Series B or Series C round in a "hot, momentum" company.  I have had a number of these companies come through my door, and I keep asking myself how a company which is only a feature of a much larger offering will create a significant return for the fund after having raised too much cash at too high a price.  When I see "hot" companies with revenue less than $5mm raise capital at $50mm pre-money valuations, I start getting worried, and it further reinforces my thinking on where to make good investments.

In the end, making good investments is predicated on taking advantage of inefficiencies in the market.  As we look at every new deal, we always revert back to the lesson that Warren Buffet’s mom gave him, "Buy low and sell high."  This includes investing on both sides of the barbell, very early with innovative technology in new markets and very late with established, out-of-favor software companies throwing off good cash flow.  Considering that I am an early stage VC, I will have to play the later part of the barbell with personal investments in the public markets.

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That being said, incumbents tend to add confusion in the marketplace and lengthen any startup’s sales cycle.  Their typical tactics including saying they have the product when they don’t, promising they will have the product in one to two quarters (maybe three or four or never is the real answer), or giving it away for free in a bundle of other things that the customer buys.  The last one is a tough one to counteract – I mean if the customer gets it for free, then it doesn’t have to be as good as an innovative startup’s product, does it?  So how do you compete against these tactics? 

First, as a startup you have to get away from a feature/function battle because you will always lose against a big boy.  If a customer has already bought a product from an incumbent, they are more often than not willing to stay with that incumbent if they can deliver the extra feature/function soon enough in a good enough way. What I like startups to do is win with the product roadmap and vision.  Show the prospect how you solve their needs today better than the incumbent but more importantly why you are different and how your approach will solve their future needs.  If you can differentiate on this level, it gives you a much better chance to win. 

One other piece of advice is that you must qualify the opportunity early in the sales process.  If the incumbent is esconced in the account, you may be better off walking away quickly in pursuit of greener pastures.  As I got off the phone with the portfolio company CEO today, what made me happiest was not hearing about all of the wins against the incumbents, but how we walked away quickly from those types of deals. Just today the CEO had a conversation with a particular prospect who said that our software was the best but the incumbent was willing to offer it for $30k instead of $150k.  We ended up walking away from this deal and told the prospect to return to us when the product didn’t work.  Having been through this before, I can tell you that many of these prospects will come back to you.  Over the long run, if the market is big enough and you build enough market share and critical mass early it will always be easier for an incumbent to buy you rather than start from the scratch.  If not, you may want to figure out how you can partner with the incumbent or their competitors.  Either way, remember one of your key advantages is to keep innovating and staying a product generation ahead of your competition.

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Having been through this a number of times, this is the point at which you need to take a deep breath, stay the course, and look at the situation in a positive light.  First of all, the majority of acquisitions fail.  Secondly, your competitor will be inwardly focused and quite distracted for the first 6 months trying to integrate with the parent company.  Finally, depending on how the acquisition was completed, employees will begin to leave as soon as they get the bulk of their money off of the table.  When a competitor is acquired, rather than sulk and worry about why it wasn’t you, try to aggressively exploit the situation and use it as an opportunity to grab market share and poach some experienced and talented personnel from your nemesis.  Last year, for example, one of my companies was able to build an incredible sales team overnight, saving us six months of hiring and giving us an opportunity to hit the market harder and faster.  So the next time this happens remember that you will more likely than not be in a better situation after your competitor is taken out of the market leaving you with plenty of opportunity to grow.

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Of course, there was much deliberation on our side and as we ran the numbers over and over again there was no way we could understand how this competitor could ever make money on the strategic partnership.  From our calculations, it would take a couple of years to breakeven off the deal under the very best circumstances.  Trying to make the deal work for both sides, we went back to the potential partner and asked them to give us an NRE (non-recoverable engineering expense) and to handle level I customer support.  At the very least, if the partner handled the first tier of customer support, we could be marginally profitable.  The potential partner said no, and we walked away from the deal.  Trust me, it was a tough decision, and we tried to rationalize why it made sense.  However, when the deal is not a win-win situation it is very hard to make it work successfully. 

From my perspective, one of the huge problems is that there is tons of VC money out there and lots of me-too deals as Brad Feld elaborated in a post recently.  A space gets hot, lots of venture money pours in, and only a few companies survive while the rest vaporize.  We do live in a competitive world and taking market share and killing your competition is part and parcel with being in a startup in a large market.  That being said, what killed many companies during the bubble was pursuing market share at all costs.  I feel like that mentality is coming back in the market.  In my mind, losing money on every new customer signed up is not a long-term winning strategy unless you think you can get financed to infinity (yes, many did during the bubble).  At some point in time, to be a real business you have to generate cash flow from internal operations.  Having done enough deals, I am of the opinion that if it is extremely one-sided and never makes economic sense, it is a recipe for disaster.  To that end, I wish my competitor the best of luck because I can see the train wreck around the corner.  We will stay close to the strategic partner and when the time comes reopen the dialogue.

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Given this backdrop, I am excited that Morever Technologies (a portfolio company) and Kanoodle recently launched a partnership called FeedDirect RSS Ads.  Quite simply, FeedDirect will allow content owners to not only monetize their assets with content-targeted sponsored links via Kanoodle but also get maximum distribution through the Moreover network.  All it takes is a few clicks to sign up and begin generating revenue.  As a VC, one of the cliches we often talk about is eating your own dog food.  In other words, entrepreneurs and VCs, where applicable, should be users of products or services they create or in which they invest.  To that end, I am changing my RSS feed to incorporate the FeedDirect service.  From a transparency perspective, I plan on sharing some of my data with you as my RSS feeds get converted.  To subscribe and test out the FeedDirect service, please change my feed to this link.  If these ads annoy you or if you have thoughts on improving this, please let me know.

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Although the demand for speed pushed engineers to use ASIC hardware in third-generation designs, the results were disappointing. First, building an ASIC costs approximately US$1 million. Second, it takes 18 to 22 months to generate a working ASIC chip. Third, although engineers can use software simulators to test ASIC designs before chips are manufactured, networking tasks are so complex that simulators cannot handle the thousands of packet sequences needed to verify the functionality. Fourth, and most important, ASICs are inflexible.

The inflexibility of ASICs impacts network systems design in two ways. First, changes during construction can cause substantial delay because a small change in requirements can require massive changes in the chip layout. Second, adapting an ASIC for use in another product or the next version of the current project can introduce high cost and long delays. Typically, a silicon respin takes an additional 18 to 20 months.

Given the need for flexibility and speed to market (particularly in the security space), a number of companies I have seen over the last few years have taken advantage of NPUs to deliver product with good enough performance with more up-to-date functionality than their ASIC brethren.  As we move on, I expect to see further improvements in NPUs in terms of speed and programmability as we all continue to recognize that the value is in the software.

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One area I did like was the market for software compliance.  As we move to a componentized world where developers increasingly build in pieces of software from a variety of sources, how does a company know what they are using and from whom and more importantly what the licensing rights are for those components.  2 early stage companies going after this space are Palamida and Black Duck software.  I had a chance to speak with one of the founders of Palamida, Theresa Bui Friday, and came away quite impressed.  The Palamida software works like an antivirus scanner looking into code and checking against its compliance database to catalog your code base, identify whose components you are using, and then providing the user with the associated license and contact information.  Increasingly IP compliance is becoming a big deal, especially when you talk to CIOs, and incorporating this type of automated scanner early in the development process can save customers a ton of headaches and potential dollars from law suits.  I view this market as part and parcel with the source code scanning market.  Increasingly, secure coding is being built into the QA process and companies are coming out with automated scanners to check for vulnerabilities before products go to GA.  According to Reflective and NIST (full disclosure I am an advisory board member) it costs less than $0.10 to scan code early in the development process and up to $1,000 per line of code once a product is in GA. 

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1. Who owns the relationship?  In the example above, everybody was excited about a potential partnership, yet no one stood up to champion the deal and own it.
2. Who will get fired for not doing a deal?  Every person has annual and quarterly objectives they need to hit.  If doing a deal with your company creates more work, then why should they do it.  However, if doing a deal with your company fits in the parameters of their overall goals, then you are probably in the right spot.
3. Who will implement the deal?  In many cases, VCs and entrepreneurs can do a great job calling on a high level with executives at a company.  However, the executives at a company do not usually implement the deal.  Once a deal is signed, you need to understand who the day-to-day interface will be and how you and your company can make that person look like a hero.

In conclusion, I told my friend to stop wasting his time with that company and to focus on other deals.  As a startup your resources are limited and some of the major decisions you make at a company are what you are not going to do rather than what you are going to do.  In other words, you need to know when to say no.  If you can do that earlier in a business development or sales process, the better off you will be.

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1. Release early and often – It is better to release an imperfect product, get feedback, and continue evolving than trying to release the perfect product because you may never get there and run out of cash before doing so.

2. Filling the product management/marketing role early is key.  Having a person who can shape the product and prioritize features by gathering the data in terms of what customers need near-term and what the market may need longer term is imperative.  More often than not I find early stage companies that are engineer-driven that spend too much time on features that the market may not need.  Avoid this problem early on and focus your limited resources on the right priorities.

3. Sales ramp – Do more with less and be careful of ramping up sales until you have a repeatable selling model.  In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins.

While our panel was focused on helping entrepreneurs build a winning technology company, we also did have the opportunity to digress briefly and dive into business models that we liked.  When Scott made all of us pick what type of company we preferred in terms of its target market from a list of enterprise, SMB, or consumer, it was interesting to hear the responses.  I selected enterprise with the caveat that the company have a scalable business model (capital efficient, channel friendly, OEMable, possibly hosted, etc.) while a number of others voted consumer, SMB, and hosted software.  If you asked the same question a few years ago, I am sure that enterprise would have been the overwhelming choice.  While there was no consensus on SMB vs. consumer, it was quite clear that all of us had a limited appetite for investments in traditional enterprise companies predicated on large direct license sales.   

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Another portfolio company, Moreover Technologies, has a real time information management platform that delivers breaking news from the web and blogs.  As an early pioneer in RSS, Morever did a great job repositioning its business during the downturn and selling its information feeds into the enterprise and powering other search engines with news feeds.  Recently, Microsoft announced that it was going to allow users to add RSS feeds to its MyMSN service powered by Moreover.  You can read more about it here.  You can also get Moreover’s feeds through a number of RSS readers like Pluck, Feeddemon, and Newsgator.  As it relates to 3 RSS readers just mentioned, Moreover plans to monetize this distribution by delivering ads through RSS.  As a blogger, I have definitely looked at a variety of business models in the space and am a believer that RSS ads is one way to go.  There has been lots of conversation about how much more valuable a subscriber is vs. a visitor in terms of relationship building, and I hope that the ads will not turn away end users from valuable content.  Either way, it is great to see Moreover helping bring news and RSS to the masses via these deals. 

To both companies, I want to say congratulations for sticking though the tough times.  Your hard work is beginning to pay off now. 

Full disclosure – I am an investor and on the boards of both companies.

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The other major initiative was security.  We spent a fair amount of time talking about best-of-breed versus the single vendor approach.  While the company had a bias towards single vendor for most infrastructure buys, it certainly was an advocate of best-of-breed for security.  We talked about how a monoculture was not as immune to disease and attacks as a heterogenous environment.  What this means is not only layering security but also deploying 2 different security products at each layer to avoid company or product-specific attacks.  This is a big deal at lots of companies which is why, despite the intense roll-up activity in the security space, that new vendors will constantly have the opportunity to sell.

As always, I had the opportunity to find out where a few of my companies were in the sales process.  The big takeaway for me was that "you only have one chance to make a first impression."  What does that mean?  Well, in today’s environment, enterprises have the upper hand.  This means that most enterprise sales end up in a proof of concept (POC) or bake-off against other competitors.  So the first impression you make in the POC is the installation.  If it is hard to install, forget about it.  The logical conclusion your sales prospect will draw is that it is a hard to use product.  So while you spend time building some great features and making your product more scalable, do not forget to spend time, lots of it, in the areas that customers touch and see.  This means making the install process as easy as possible (this is where appliances can help in many cases) and making your GUI intuitive and easy to use.  If you can’t get this right, you will lose most deals or at least be fighting an uphill battle in a competitive bakeoff no matter how scalable or feature-rich your product is. I tried to get my company a second chance, but the impression was already made.

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One of the smartest software execs I’ve worked with had a saying, Developers don’t buy things, they join things."  That’s been a pretty focusing statement for us over the years, and as we enter the new year, you should expect 2005 to be one in which we place an ever heightening focus on our dialog with the community, and the developer community in particular.  And not simply maintaining the dialog we have today, but finding new constituencies, and expanding our reach.  Establishing a relationship with a developer is all about starting a conversation – one that always flowers.  And often into opportunity.

I totally agree with Jonathan on this.  The key, however, for any small company is to do this economically and efficiently.  Let me give you an example.  Let’s face it-many companies selling into enterprises end up going through some "pilot" or "beta" period where a sales prospect’s developers and technologists get to use the software and deploy it on a trial basis.  When I look at a sales pipeline, I always want to know who in the organization the company is selling into and why.  You see, I have more often than not seen a number of early stage companies selling into enterprises but not selling high enough to the people with budget.  In other words, the vendor ends up getting excited about the number of pilots in the market, many of which are with technologists who by nature like to try things and rarely end up buying.  The vendor spends an inordinate amount of time reaching out to the developer or technologist to set up a pilot and then leaves with no defined criteria on when the pilot ends and how it automatically converts into a sale.  The developer uses the product, sucks up lots of our resources, and moves on to the next new technology.  While it is imporant to court developers and technologists in the sales process since they typically have to give the technical buy-off and can just as easily squash an opportunity, it is not a great and economical use of time to have your most expensive direct sales resources and sales engineers doing this. 

Enter the web and the open source movement.  Sure, "try before you buy" works if your users can download the software for free either on a trial basis, say 90 days, or if you open source a version of your product and build a real community.  One of my portfolio companies is laying the foundation and groundwork to open source some of its software to help build a community and buzz around its product.  We know that developers and technologists are key to the sales process. We want developers and techies to download and use the product and bang on it.  However, we just want to reach them in an easier, more efficient way.  Why have our most expensive sales resources do this when we can leverage the web?  We want to build community around the product, gather great feedback, and land and expand our relationship with the developer.  We hope this open source strategy will work as we build a relationship with the developers who ultimately will drive decision making from the bottom-up while our expensive sales reps can reach the execs with budget from the top-down.  Hopefully, the two ends will meet in a selling process with less friction.  We shall see.  I will keep you posted as this experiment evolves.

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While in Israel, I also had the opportunity to discuss home networking and automation with a few bright individuals.  In order to get a fully automated home (like a Crestron) where you can control your audio visual, home network, computers, lighting, heating, air conditioning, etc., from any other room or even remotely, one can expect to shell out ridiculous amounts of money to make it happen.  These vendors typically sell proprietary and closed-end systems that require custom coding to make them work right.  Besides the cost and complexity, the other thing that bothers me about the digital home is that there are too many competing standards and not everyone’s product works together.  For example, Sony pretty much only works with Sony and so on and so forth.  DirecTV provides Tivos that do not network with other boxes while existing Tivo boxes can be networked.  This drives me nuts. As the value is clearly in the software that drives many of these boxes, electronics, and HVAC equipment, the battleground and control will be driven by who can help the consumer cheaply and simply integrate and manage all of their systems.  If there is an industry begging to be open sourced, standardized and commoditized, this is it. While it is in all the vendors’ interest to bring the economics down to reach a wider market, I just don’t expect to see enough cooperation from them to drop their proprietary standards to make this happen soon enough.

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Another way of looking at company maturity is to look at M&A data.  This week’s Plugged In column from Barrons has some great data on M&A in 2004 and how many of the companies that went public or were acquired were the very ones left for dead over the past few years.  Of the 247 venture-backed companies which were acquired this year, 222 or 89.9% received its first venture funding prior to 2000 and 159 or 64.4% received its first round of funding between 1999 and 2000.  Anyway, as I look at the data from Thomson Venture Economics and the NVCA, it is further proof that we are returning to normalcy in terms of the time it takes to build value.

As you can see from the chart at the left, average valuations of M&A deals while trending upwards in 2004 to $91mm, is still way below the $231mm and $338mm numbers in 1999 and 2000.  As we return to a state of normalcy, the point is that it takes time to build value and nothing happens overnight.  In addition, I also see the definition of what makes a great exit changing.  If we are returning to a pre-boom normalized valuation level where you need to make good money at exits of $50-100mm and a home run deal is around $250mm, it behooves us to make sure that we invest in capital-efficient business models to generate the same 8-10x that we once could with an average deal size of $300-400mm (see an earlier post for more on this topic).

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1. Build a target profile: Put together a specification of the role, responsibilities, required experience, and intangible qualities you are looking for in a senior hire.  Share the specs with your board for additional feedback to make sure everyone is on the same page with respect to the person needed and the major goals and objectives.  Many times, the specification itself can highlight bigger issues about company direction if everyone is not communicating and on the same page.  Does a board member want to change the goals for next year?  Is everyone aligned with that change?  Understanding who to hire and what their goals are incredibly important – hiring a person without having a spec will result in failure nine out of ten times.

2. With the specification in hand, put together a target list of potential companies where you can find this executive.  The ideal companies are in the bullseye and others will be in concentric circles one or two removed from the center.  For example, if you have a network security startup, the obvious players will be other security companies that sell similar products at similar price points with a similar distribution channel.  One concentric circle out from the bullseye could include networking companies that have a similar business model and distribution channel.  From an experience perspective, the perfect candidate will be someone who has had a VP role (if you are looking for a VP) and worked at other large brand name companies as well as been successful at earlier stage entities.  Like in darts, it is not easy to get a bullseye (unless you spend too much time in the local pub), so you need to think of all of the tradeoffs that must be made in terms of the characteristics of a new hire which will include qualities like leadership, requisite experience, and domain knowledge.  In general and depending on the role, I tend to prefer leadership and experience over domain knowledge and hungry, up and comers over rich and happy.

3. Begin the search – look in your own network – trusted people you or your board have worked with before always come first as long as they meet the spec.  Putting a spec together eliminates the need to do favors and hire friends.  If you can’t find someone in your network, bringing in a knowledgeable executive recruiter can help.  The right firm will always help you find the person not necessarily looking for an opportunity – many times that is the person you want for your company.  When picking a search firm, I prefer boutiques or small, highly focused shops which tend to have the partners doing the work and making the initial calls to prospects.  Your executive recruiter is an extension of your company and must be able to give a great pitch to high level prospects.  A recruiter who gets it and can properly sell the story to prospective hires will truly help the company.

5. Make hiring a priority – You have to stay on top of the search.  If you are using a recruiter, I suggest having weekly status calls in the calendar with members of the search team, typically one or two from the company and one or two board members.  Regardless, if you want to bring high caliber talent in quickly, you have to make hiring a priority.  The more time you put into it, the more you will get out of it.  Whatever you do, do not slowroll the process and leave people hanging.  Change a few meetings, etc. if need be, to get in front of the right person sooner rather than later.

6. Reviewing resumes – Resumes are not everything but what I look for is a person’s story.  Do they have a history of demonstrated success?  Have they worked at other blue-chip startups or well known companies and been a top player?  Were they responsible for delivering meaningful results and contributing to the success of the company?  These are just some of the things that cross my mind when reviewing resumes.  A history of working at companies that repeatedly failed will certainly worry me.

6. Interviews – It is always good to have a proper blend of selling and interviewing in your first meeting.  Many times you will know by a person’s resume whether they have some of the experience needed to do the job.  Obviously you will want to dig into specific examples of how the prospect overcame challenges, drove new initiatives, led and hired a team, etc., but always leave some time to do some selling on the opportunity.  Assuming you like the prospect, you should get another set of eyes like some of your VCs to meet with the candidate and interview him.  As you meet a number of prospects, chemistry becomes an important determining factor in hiring.  The superstar on paper may not always be the best fit for the team if the chemistry is not there.  I always like to use the Detroit Piston/LA Laker analogy.  Both teams had consummate professionals playing at the highest level of basketball but the team with all of the superstars did not come out on top – there was no chemistry.  As you move a candidate further in the process, doing backchannel references are the most important ones you can do.  That means you need to call some of the other VCs and execs at prior companies who are not on the candidate’s reference list.  You can learn alot about a person from these checks.  I have passed on a number of candidates based on some negative backchannel references.

7. Close them – now you have the right person, get the deal closed as quickly as possible because as I have said before the longer it takes to close a deal, the more chances it has to fail.

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When I first met Andrew in late 1998, he had just finished his Stanford Ph.d program in EE from Stanford with other well-known classmates.  My fund seed invested in his idea which was to allow anyone to build database-enabled, web-based applications through a simple GUI.  Some of the applications that users built ranged from simple forms for their website to richer ones like help desk, call center, project management, and sweepstakes apps.  This was 1998 and Flashbase was a true predecessor to Intuit’s Quickbase. We were obviously way too early but after a year of blazing this trail, we ended up selling the company to Doubleclick for a nice return.  After spending a few years with his golden handcuffs on at Doubleclick, Andrew is back in action with his next project, Phanfare.

Like any great consumer service, the company started because Andrew wanted to solve his own problem with sharing his digital photos.  For many, the first instinct with a digital camera is to make prints.  However, it is clear that this will evolve and people will share more and more of their pictures online.  The problem is that the print sites only want you to share with friends as a vehicle to sell more prints.  They do not keep your photos up indefinitely, their branding is all over your private albums, and your friends and family get bombarded with email to buy more prints. So Andrew did what most entrepreneurs do, created his own software and service.  Simply put, Phanfare allows users to share and back up their digital photos in a simple, permanent, polished, and unbranded way.  You can even use your own URL to share photos.

From a technology perspective, we are seeing an evolution in the way network client software is written. Initially, the client sw was web-based, with simple html as the implementation technology. Then interactive sites moved to using client side scripting like javascript. Now, for media intensive applications, we are starting to see full fat client network applications like iTunes. While I am a fan of software as a service, it truly makes sense for apps manipulating or using large files to be client-side but network-enabled. With Phanfare’s client software, you can manipulate your pictures locally from within the app while your website stays in synch in the background. While the idea of sharing photos does not sound like a heavy-duty technology initiative, Phanfare’s founders were trained to build cache coherent multiprocessors at Stanford. This means that like any web-based service you can use Phanfare from any computer with a simple download and keep your albums synched.

So as the holiday season approaches and you snap tons of photos of your friends and family, I suggest giving Phanfare a try.  I have my own family website and may just transition it all to Phanfare.  While the service is great, my only question is how big this market will be for Andrew.  That being said, it is great to see Andrew back with a new venture.

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On the panel you had representatives of RedHat, MySQl, and JBoss combined with the perspective of a large IT buyer, the CTO of Goldman Sachs.  While I will not fill you in on all of the gory details, one thread did stand out in my mind.  It goes like this:

It seems that many of the bigger open source players are building out their own stacks ala Microsoft and others in the pursuit of growth and profits like traditional closed-sourced software companies.  Isn’t this the antithesis of what open source stands for?  Rick Sherlund, Goldman’s software analyst, says that it makes sense from a financial perspective since it allows vendors to cross-sell and lock-in the customer – customer retention is a good thing after all, isn’t it?  While all of the open source players did their best to dodge this question and claim that they are really open, MySQl was the only company that really seemed credible here as its goal was to be part of everyone’s stack, including the Microsoft .NET one.  JBoss and RHAT clearly seemed to be building their own middleware and open source stacks while at the same time claiming an open architecture. 

The interesting point was served up by Michael Dubno, CTO of Goldman Sachs.  He specifically told the vendors that the danger of the open source stacks is that it does create lock-in and that open-interoperability is what is most important to him.  He will go somewhere else if the open source guys end up limiting his options-he needs great service not extra features.  Moving on, he points out that the biggest gaiting factor for him in terms of adopting open source is making sure the legal issues will not come back to haunt him.  Goldman reviews every license agreement and makes a determination of which licenses make sense and which do not.  What Michael wants is integration from a legal perspective, not a feature perspective.  He claims the biggest cost to Goldman is not 2 products, but the cost in service and supporting 2 different contracts-he wants more standardization of contracts.

I found this to be an interesting point. I have seen a number of open source related software plays and it seems that many are trying to create their own unique twists on licensing.  While Goldman’s CTO is one data point, I would encourage companies looking to open source some of their software to try not to be too cute and design their own unique open source license but rather look to leverage existing ones like GPL.  One of the biggest barriers to a large enterprise using your software will be the software license itself.  The other point is to not forget why lots of companies are using your product in the first place – be open!

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There are a couple of different ways to manage engineering releases.  One engineering release is date driven, the other is content driven. In a date driven release, the team knows when the next release is out but does not know exactly what will be in it.  The release runs like a train schedule, whoever makes it to the station on time is part of the release.  The other release is content driven; the team knows what is in the next release, but does not know the exact ship date. The release runs more like an airplane shuttle, it takes off only when full.

While I may be oversimplifying the issue, the one that I like my companies to subscribe to is the date driven one.  Of course, just because it is date driven does not mean that there isn’t a highly focused theme.  It just forces the team to clarify the absolute minimum requirements necessary to deliver the right product for the market.  It also discourages feature creep and encourages highly disciplined prioritization.  Most importantly, having a date driven release can get everyone at the company aligned.  Everyone knows the ship date and sets their schedule accordingly to ensure that all pistons are running as GA hits.  This means marketing has to have its collateral ready, upgrade program in place, and product launch schedule set.  Sales knows when it can start telling prospects about the new product and time it appropriately so it can get customers lined up for the next quarter without delaying sales in the existing one. Engineering, of course, needs to deliver product and not get distracted.  While all of this discussion on product releases sounds great, none of it really matters if you do not have the experienced team that can manage them and instill the discipline.  So as you think about your next product release, think long and hard about whether you want the trains to run on schedule or the airplane shuttle to be full.  You know where I stand on the issue.

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More often than not, you will hear a sales person complain about their product and tell corporate that if they had these 5 features, they could sell more.  Since sales people look for the path of least resistance, they typically go back to marketing and development to ask for the fixes and changes to close a new customer.  Many times, management, in pursuit of meeting their numbers, will oblige and make the requisite changes to land a new customer.  If you fast forward into the future and continue this behavior, you will end up with a company that has a number of customers but also a support nightmare-too many different versions of a product which makes it difficult to maintain and support from a development and customer service perspective.  In addition, you end up constantly delaying the next release of your product as precious resources get sucked away.   You also have lots of features that the market does not want.  Finally, the profitability for each customer goes down significantly as you add new features just to close deals.

In the long run, having too many of the wrong customers can kill your business.  The more experienced and disciplined team will not build a new feature for every customer but rather have a seasoned and proactive product management process for gathering data from the field and prioritizing feature requests based on market and customer need. In some cases, it may make sense to give a feature request higher priority as a number of prospects and customers have asked for it.  In other cases, you will have to make a decision of whether or not to build a one-off feature to close a deal or lose it to a competitor.  While every situation is unique, in general, you have to be extremely careful of going down the slippery slope of customized versions of your product for every customer as the one-off requests will suck up your resources.  It is easier said than done, but the simple rule is don’t add features if the market does not need it.

In the end, I never like my portfolio companies to end up in feature/function wars.  That is a losing proposition.  Rather it is important to take a step back sometimes to see if you can change the playing field on your competition by positioning yourself differently.  This includes understanding the customer and market, pitching a longer term vision and product roadmap that maps to the customer and market needs beyond today’s purchase, and then making them feel that tactically you have enough of what it takes to solve their problem in the short term.  If done right, you can help the customer understand why one missing feature today may not be so critical since your company is the only one that can meet their needs in the longer term.

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From an evolutionary perspective, the ASP business model is quite interesting to examine. While every piece of software should not and will not be delivered as a service, it is also quite clear that customers are tired of buying expensive software products with large upfront licenses, expensive hardware to purchase, manange, and maintain, followed by expensive professional services to get the product up and running. From this backdrop, it is easy to see why reducing complexity and simplifying technology for customers is a big driver to more rapid adoption of products. It is also easy to see why reducing complexity for the customer also helps reduce complexity for the vendor, lowering the friction to sell and deliver its product. This means a more capital efficient business model, one which would hopefully scale much quicker and cost less to build product, sell, and support customers. For the vendor, it makes it:

1. Easier to sell
-shorter sales cycle-do not have to test extensively in a customer’s environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget

2. Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train them over the phone, and get them up and running
-all of this means that the business can scale rapidly

3. Cheaper to support
-browser-based delivery and richer client interfaces like DHTML make it easy to use for the customer=less training=less customer support costs

4. Easier to integrate
-standard APIs make it easier for software delivered as a service to integrate disparate systems
-once again, reduces costs to deliver product to customers and also removes obstacles to getting customers

5. Cheaper to build
-versus a few years ago, you now have much cheaper bandwidth, storage, servers, and software
-think Linux, Intel boxes, cheap bandwidth, commodity software stacks, and smarter entrepreneurs changing the economics of building and delivering software as a service.
-the economics speak for themselves

Given this, it seems to me that the ASP business model will only get more attractive with time. The ASP model makes it easier for vendors to sell and get customers up and running, lending itself to a more scalable and profitable business model. While I am not suggesting that every product will evolve this way, it is clear that simplicity rules. The ASP model is certainly one way of accomplishing simplicity. Appliances are another way. Packaged software with huge installation costs is not.

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Instead of making a single ad, the agency can now create its 30 second stories as a sequence of swappable components using Visible World software. The file is then sent to servers, already installed at Comcast’s cable centers, which instantly assembles hundreds or even thousands of different versions of the ad and send them to particular groups of viewers. The ads can be updated or modified automatically, just like a website. “In the winter, an airline ad could say, “It’s 52 degrees warmer in Miami today, ” Haberman tells the group, “Or an ad for a limited-editiion Volkswagen Beetle could say there are only 392 cars left, creating a sense of urgency.

I encourage you to try the demo to customize a few ads on your own. Username is Business2 and password is visibleworld. The bet is that a more effective and more personalized advertisement will stop some viewers from hitting the fast forward button on their PVR remote. The good news is that Visible World has already worked with some blue-chip companies like Bank of America, Ford, and United Airliness. In addition, via deals with cable companies like Comcast, Visible World will be able to reach 30 million households by the end of 2004.

Comcast says it can direct ads to narrow zones of 1,000 to 20,000 homes in a growing number of cities, including Boston, Chicago, Dallas, Detroit, Miami, and Phildelphia. But to Haberman, that’s just the beginning. Within the next 2 years, he hopes to offer advertisers the ultimate prize: targeting ads to individual households based on criteria such as age, marital status, favorite leisure activities, preferred airlines, and credit cards–though understandably, this very notion raises delicate privacy issues that have yet to be negotiated.

The cool part of this comes when the Internet and television actually do merge to create true interactive television and direct response fulfillment. Imagine its winter and you see the same customized airline ad about Miami, it’s 52 degrees warmer there, and you can take advantage of a special vacation package by clicking a URL and purchasing the plan through your television? We are clearly not there yet, but the potential exists. And before the $60 billion of television and cable advertising moves somewhere else, I hope advertisers give Visible World a shot to make the medium more effective.

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Here is a quote from Fed Ex’s CIO in a recent New York Times article:

The information technology strategy at FedEx, the package delivery service, points to that conclusion. “Technology is coming to us in much smaller bundles that cost a lot less,” said Robert B. Carter, the company’s chief information officer, whose budget is slightly more than $1 billion. “Our intent is to hold the line on I.T. spending and get more bang for the buck.”

The flat spending does not suggest any lack of enthusiasm for technology at FedEx, a sophisticated corporate user of technology. Mr. Carter reels off a series of projects for helping customers use the Web, e-mail alerts and wireless messages to track inbound and outbound packages, trim inventories and fine-tune operations.

“The global interconnectedness and technology services available are growing at an unbelievable pace,” he said. “We are at an inflection point in the adoption of these technologies.”

This theme of doing more with less continues to echo in my brain as I meet with more and more CIOs and technology arhitects. As I mention in an earlier post, it seems that many in corporate america are going through a fundamental rearchitecture of their systems to a service-oriented model, one that will take a number of years, but one in which startups will have plenty of opportunities to thrive even with flat to limited growth in IT spending. Trust me, it would be great if corporations continue to grow their IT budgets. However, I am not worried as the great news is that new architectures and hardware equals lots of new software opportunities. There will be plenty of chances to make great investments in this environment.

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