CloudAve Software in Business. The Business of Software. Thu, 16 Oct 2014 13:51:55 +0000 en-US hourly 1 Copyright © CloudAve 2014 (CloudAve) (CloudAve) CloudAve 144 144 Software in Business. The Business of Software. CloudAve CloudAve no no What’s in a name in open source? Thu, 16 Oct 2014 13:47:00 +0000 What does community mean to you?
Community is an overloaded word, it can mean anything. Community can mean just people who use your product. Or maybe it's those who build your product, or maybe it's the business partners who are using it. Or maybe it's...

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What does community mean to you?

Community is an overloaded word, it can mean anything. Community can mean just people who use your product. Or maybe it’s those who build your product, or maybe it’s the business partners who are using it. Or maybe it’s those who are blogging about it.

This article is part of my talk, Open-Source Business Models. You can see the full transcript and the video of my talk on

Decide what kind of community you like, because there are different ones. Again MySQL had a total of maybe 100 contributors over its lifespan of code, and we hired many of them into the company. That part of the community was relatively small. The community of users was enormous and still is. And the community of those who build an add-on to MySQL was enormous. You have different ways of doing them.

Then finally, and this is perhaps the most remarkable insight I’ve made about open source licensing models and governance, it’s very much about branding. This has to do with the fact that an open source license stipulates nothing about the name. If they do that, it means the name isn’t free, it is protected by copyright.

So, if you use Android and you take it and fork it and you refuse to sign the Open Handset Alliance, you’re not allowed to call it Android, you must call it something else. You could use the code because the code is open source, but you are not allowed to call it Android.

That’s why Amazon took the Android code used it in their Kindle Fire, I think, but they can’t call it Android because they didn’t sign the Alliance that would have forced them to use Google Services. If you take Red Hat’s code and distribute it, you can do that, but you’re not allowed to distribute anything that shows the brand or the logo. The name Red Hat Enterprise Linux and all the marks that go with it, the visual, the JPEGs and PNGs, and the pictures, they are all proprietary.

I’m not sure the open source gurus who invented the licensing models and governance 20 years ago thought about this, that actually branding becomes the control point of how it works.

Similarly, the Apache Foundation had set a smart rule. They say whatever is in the Foundation has a name and those names must not be used commercially. If you use Hadoop, you can say this is built on Hadoop, but your commercial product cannot be called Hadoop. It has to be called Cloudera or Hortonworks or MapR or something. Branding actually becomes the way you control the behavior of the ecosystem.

We had that in the MySQL where we are holder of the brand, both the commercial and the non-commercial, and we were thinking, “Should we split them up?” Because we’re looking at Red Hat saying, okay Red Hat, they took the Red Hat name from the community and turned it commercial only. And the non-commercial name is Linux or Fedora. We asked ourselves at MySQL should we also split up the branding and have one name for the open source thing and one name for our commercial offering. And we never believed it was the right thing to do, but we spent a lot of time thinking about it.

We had our challenges either way. The fact that we had them together gave us certain challenges, and also certain benefits. So branding is more important than I realized when I was in the middle of it.

Further reading

So with that let me stop here, I’m ready for questions and discussion with you. You’ll find my Twitter handle there and my email address, if you would like to get in touch with me after this. Thanks for listening actively and intently, and now I’m ready for your questions.

Q: When you have a commercial product, what do you do if someone contributes a similar product that is open source?

A: A good question, when you have commercial add-ons, what do you do if someone contributes an open source product that does the same? We have decided to just welcome it; we did it at MySQL, and we are doing it at Eucalyptus. I’ll give a Eucalytpus example.

When you run Eucalyptus on Linux and KBM, you need nothing else and you can run massive clouds on that product. If you need to run it on VMware hypervisor, you need our commercial plug-in. Now, we think if you’re paying VMware all those millions you might as well pay us a few thousand bucks as well so we think it’s fair. And we also say, “Or then you write that plug-in yourself. If you think you can do it, then go ahead.” Because the platform is open and the API is open so anybody can do it.

That means that if somebody would contribute a competing component we would welcome it. Because we believe that, for those who do go through the work it will have benefit for them. For most customers they’ll say, “Yeah I know there are open source alternatives. I would like to have the one which comes from Eucalyptus Inc., which is tested and proven.” So we welcome those happenings.

That’s what I tell customers, I say, “We have these commercial add-ons but you can develop your own.” We saw it at MySQL where we developed a management tool that you paid for to manage large MySQL installations and many others developed their own commercial ones and non-commercial ones. And they existed in the ecosystem.

Of course, I had sales people who came to me and said, “Marten, we must crush this competitor to our commercial product!” I said “No, we don’t have to crush them, this is part of open source. There’s always an ecosystem of small players out there. They serve to demonstrate the openness and the lack of lock-in.” And the majority of customers will always come to the main vendor and say, “Okay, I understand I can get it cheaper or for free somewhere, but I want to deal with you guys.” You have to have that conviction, but you can easily get tangled into sort of distrustful relationships if you don’t go all in with this.

Q: What are the advantages or disadvantages of having a singular product with multiple brands?

A: The question was what are the benefits and disadvantages of having one brand for both sides. If you go to a branding expert who knows nothing about open source and you say, “Should I have two brands or one?” They would say, “One, of course!”

People have a limited attention span, they can’t remember two brands. Don’t make it complicated for them. We had huge benefit of this with MySQL because anybody who said “MySeQuaL” or “MySQL”, it came to us always, it was always ours. So we saw that benefit. But we had the problems when let’s say somebody built something on MySQL or forked it, and wanted to call it MySQL or wanted to call it the MySQL Administrator. We had to go to them and say, “We know you love us, and we know you did it with good intentions, but the naming convention ‘MySQL something’ is ours. You can call it ‘Administrator for MySQL’ that’s fine, but it’s only us who can call it ‘MySQL Administrator’.”

Sometimes when we did that we got very negative reactions because they say, “What is this, I’m helping you and you are ungrateful.” You have to deal with them softly and firmly at the same time.

I forgot to say that if you go into open source business models you are asking for a lot of trouble anyhow, so you might as well get used to it but you’re also asking for the most powerful disruptive force in the world. It’s well worth it in my mind.

Q: How much code was contributed to MySQL?

A: The question was how much was contributed to MySQL or MySeQuaL. It’s amazing how little it was. When I joined in 2001, 90% or 95% of the code was written by one single man. And over the next eight years when I was in charge of that place, like I said I think we had a hundred contributors. In terms of percentages or meaningfulness, it wasn’t meaningful.

I’ve told the world, I myself am of the firm belief that when people say open source they easily think about contributions. “Oh that’s what open source is about. Everybody is contributing and everybody is happy.” That’s not true! Open source is not necessarily about contributing code. There are many other things that you do in the community: you use the code, you test the code, you write add-ons. The act of contributing has both benefits and drawbacks.

We all know, I think we all know, that some of the best designs of the world are made by small teams. Steve Jobs said, “Small teams of A-players will run circles around large teams of B and C players.” And it’s so true.

If you’re building a monolithic product like MySQL with huge demands on concurrency and synchronicity and stuff, you should keep the team small to make a fantastic engine. Then everybody else is building around it. I happen to believe in that model. But we have other projects like the Apache Web Server where when you go and say, “Who was the chief designer of the Apache Web Server?”

They all point at each other. You know you can talk to the founders and they don’t have a view of who the main designer was. They say, “Well we did it together.” You have examples of projects that are very successful where there isn’t strict design governance, but I happen to believe that the most artful things must have a core philosophy and maintaining a core philosophy is very difficult if you don’t have a chief designer like Linux has Linus Torvalds, like MySQL had and has, and like others have that.

That’s why to me, if I could choose for an open source project, I don’t need code contributors. I need people who do something with the code. That’s more valuable. In my mind.

Q: How do you determine what to keep closed source?

A: Right, so drawing the line between what’s paid for and what’s not paid for is really difficult, and whatever you do you will regret it. And if you do nothing you will regret it even more. So welcome to the club.

I think we developed a good principle at MySQL which we are now using at Eucalyptus. We said, “We believe in open source. We will do open source as much as we can.” We also believe like with food, food without salt, may not taste that good. Maybe it’s healthy to not have salt, but add just a little bit of salt and it’s amazing. Similarly we think that with an open source product you can add commercial plug-ins that add something to them without being the major part.

We always said that the main open source product must be fully ready for mission-critical heavy use. You mustn’t take away something that’s vitally important because then you are questioning and second guessing yourself and your ambitions. You have said that open source is fantastic, so you should show it.

But then you go beyond that and say those who use it, some of them want convenience, some of them want assurance, some of them want ease-of-use, some of them are in a commercial setting and you find those borderline cases where they are actually looking for a reason to pay. We had many customers who came to us and said, “We would love to pay, give me something I can tell my boss that I’m buying and I will buy.” It wasn’t a difficult value proposition at the end of the day, you just had to have a clear distinction.

If you listen to Mike Olsen, he was interviewed somewhere recently, he said exactly the same thing, maybe even stronger. Mike Olsen has an even longer experience from open source than I do.

It’s a constant debate and you can move things from proprietary to open, you can’t really move from open to proprietary. That’s like shooting yourself in the foot.
But you can move the other way, and you can build new things over time that are useful but that are not essentially needed for the production workload.

Q: What advice do you have for a cloud-based service built to run on open source software?

A: Okay, yeah we have an example. Amazon, AWS RDS is MySQL as a service. Do they pay anything to the owner of MySQL, to Oracle? No. Is it bad? Maybe somebody thinks it’s bad, but the ones who created the product, meaning us when it comes to MySQL, we decided to make it open source and we have to stand our choice and our selection.
I don’t think you have to worry. You’re just making use of the license the way it was supposed to be made and if the originator doesn’t want you to do it, he or she should have picked a different license. I don’t see any moral question there. You use it under the contract that has been given to you.

Of course if you do build, if I were now to build, if I start a company to sell MySQL as a service, I would absolutely go to Oracle and say, “I’m going to do this, I would like to have a commercial arrangement with you so I get quick bug fixes, I get your help.” I would actually establish a business relationship because I think it makes sense.
I don’t think there’s an obligation moral or otherwise to do so because those of us who have produced open source code we exercised freedom zero, the freedom to set the license. The license then dictates what can be done and what can’t.

Q: What defensibility and strategic concerns are there for a cloud-based service run on open source software?

A: Yeah defensibility is difficult if you are not at the core of the development because we all now know that there’s a lot of software in the world, and owning the software is just one part of your business. You have to show that you can develop it and that you can keep it competitive.

I sort of think, yes you can drill into all the questions and you get these weird, sort of difficult questions. But at the end of the day it’s very simple. If you do a great job and you innovate you will have a business and if you don’t, you won’t.

It’s easier if you own everything, if you have control of everything and you own the brand name, you have much more control. That’s why MySQL became such a valuable property. MySQL was acquired for a billion dollars. Postgres has never been acquired by anybody. Technically Postgres is as good as a product as MySQL. Some people think it’s better and that’s fine.

MySQL became a business worth a billion dollars because there was a concentration of brand and skill, and innovation, and marketing and sales, and leadership and technology, and everything in one place. It does add up, but there are components. You can go either way. There are companies who are building businesses on MySQL without owning the code.

Q: How do you price support contracts for free software?

A: Right, how do you price support contracts for free software. I’ll start by saying I don’t believe support is a scalable business, so I don’t know how to price just support.
At MySQL and at Eucalyptus we price subscriptions. An annual fee that gives you everything you need: the features, the support, the legal indemnification, the priority with consultants, and so on. And we price it, we don’t know, somewhere, and then we look at the market and see how it reacts and we go up and down.

I’ll give you a wonderful example though. Our general counsel at MySQL, who would think that a lawyer would come up with it, but he’s amazing. He came up with the best marketing idea. He said, “We should sell something called MySQL Unlimited.” And everybody said, “What is that, we can’t do that!” Because the idea was to sell an unlimited license for a fixed price, as many servers as you had. We priced it at $40,000. We went out to the world and said, “If you pay us $40,000 per year you get an unlimited subscription to MySQL. You can have one server or a million servers and we will take care of you.” And $40,000 is the price of Oracle Enterprise Edition on one CPU.

That whole marketing trick was so powerful in the industry, that was the best thing we ever did with pricing. Then in reality we started building tiers into it, and said, “Okay, the 40,000 is for companies up to 400 employees and then it is 400,000.” And we built a great business around it, nobody was disappointed, it was still a huge saving. Our fear that it would cannibalize our support ability didn’t happen because in reality companies don’t grow their installations that fast. If somebody really has a huge number of MySQL servers, you want them as your customer anyhow because they’re a great reference.

We had a lot of pricing power because we had a business model and we could play around and test the pricing in the market. We did and it worked well. But you must have that courage to do some testing and experiments and apologize when you price it incorrectly, and come back and price it in a new way.



(Cross-posted @

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When Should Technical Founders Become CEO? Wed, 15 Oct 2014 14:59:58 +0000 Much has been written about when it is time to hire a “professional CEO” to run a startup company and of course that has long been a norm in Silicon Valley when founders find that their inexperience may be a limiting factor in company growth (know as the Peter Principle). Much less has been said […]

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ceo bitchMuch has been written about when it is time to hire a “professional CEO” to run a startup company and of course that has long been a norm in Silicon Valley when founders find that their inexperience may be a limiting factor in company growth (know as the Peter Principle).

Much less has been said about when the technical CEO is the best person to run the company.

Yet if you look at some very successful market changes in the last few years it does point to technical prowess in the number 1 seat. Case in point is the return of Larry Page to the role as CEO of Google. I don’t think that Google would have become the success story we all know without the leadership of Eric Schmidt through the years he led the company.

So why did Larry need to return?

It seemed that Google was being out innovated by another Silicon Valley technical leader, Mark Zuckerberg. Somehow in a world of rapid change Mark had been able to right his ship much faster than the highly bureaucratic organizations that places like Google, Yahoo! and Microsoft had become. Bringing back Larry seemed an effort to streamline, to innovate, to compete.

Of course Larry returning wasn’t the only Silicon Valley comeback. Steve Jobs is perhaps to most famous comeback in our industries history and while Jobs wasn’t quite the “techie comeback” relative to his replacement, John Sculley, who was a marketer from Pepsi, he certainly was a technical visionary.

In more recent times we have seen people like Matt Mullenweg – the founder of WordPress – step back into the company’s CEO role after 8 years.

In a way it seems the model has been bring in professional management to help a company through a growth spurt while technical founders focus on becoming an industry leader in terms of innovation and then when the less experienced technical founder is ready they step back in the role. In many ways that might be one way to interpret even Facebook where Sheryl stepped in as COO but by all accounts ran much of Facebook for a few years (other than product). It now seems that Mark is more firmly in control.

All of this is top of mind for me personally because I’m just now dealing with a technical founder – Nick Halstead – retaking the CEO mantle as we announced today at DataSift.

Our big news is announced in this DataSift CEO – Time for Growth post – it’s worth checking out.

I first met Nick Halstead in 2009 when he was running a company called Tweetmeme (the predecessor to DataSift) who had invented the Retweet button and actually helped Twitter develop its early API. He explained to me much of the Twitter infrastructure and why Twitter data would become super valuable. He focused not only on the Tweet text but also the meta data describing the Tweet (who sent the Tweet, from which location, on which device type, at what time of day, etc.).

Even more importantly he the probabilistic inferences you could draw from the data (who is the Twitterer following and who is following him or her?, was the sentiment of the Tweet positive or negative? what was the frequency of Retweets, @ mentions and so forth). Equally important he pointed out that since Twitter is a place you send links to your followers – crawling the link URL to read the text that was in the ultimate article being shared would tell you 10x more than the Tweet itself).

Nick was always and remains a huge visionary in where public, realtime data was heading. He’s one of those rare people that after every meeting you have with him you feel like you have much more insight into the future of the technology industry than before your conversation began.

We kept meeting at conferences over the next 18 months and he kept showing me what he was working on. When he had his prototype solution for DataSift and had secured re-syndication rights (the rights to resell Twitter data – which only 3 companies ever had) I knew I wanted to work with him.

Nick was based in Reading, UK (near London) which was a slight but not insurmountable problem. I didn’t mind heading out the England a few times a year – after all I lived there for a decade and even became a dual citizen. But I firmly believed the company needed to have a large presence in the US given our major data partners were all here and the biggest companies looking to buy our products were also based here.

I like technical founders so this wasn’t an issue. But when I asked Nick if he would move to the US he told me he preferred not to. Although he seemed to be in the US incessantly – his home and his family were rooted in England. When Roger Ehrenberg & I agreed to fund Nick’s first institutional VC round we agreed it knowing that he was staying in the UK, that he was building out product & engineering in the UK and that he was the CEO of the company.

But during the funding process we certainly asked whether Nick was open to hiring a US-based CEO so that Nick could focus on engineering prowess and leadership and not having to build out a sales, marketing & support organization in the US. Luckily for us Nick was extremely mature and believed it would be in the best interest of the company. So Nick drove strategy & tech from the UK and remained an active board member and CTO of the company.

That enabled us to bring Rob Bailey on board as the CEO and it was the best decision we could have made at the time. Under Rob’s leadership we built out an amazing organization of seasoned enterprise software veterans in the US market. He travelled tirelessly to clients, data partners and to the UK to make sure the global organization was synchronized.

Under Rob’s tenure DataSift grew to 10’s of millions in recurring revenue, signed up more than 1,000 enterprise customers, raised > $60 million in venture capital, hired more than 100 employees and has become one of the fastest growing SaaS companies in the industry. We simply wouldn’t be here today staring at this opportunity in front of us without Rob’s leadership.

Rob has written this incredibly thoughtful post on the topic if you’d like to hear it directly from a CEO’s perspective.

I learned much in watching Rob execute and enjoyed my experience in working with him tremendously. I think it’s fair to say that Rob managed me as a board member more than I managed him. Simply put – I’m 100% sure I’ll continue working with Rob Bailey – as long as he can put up with me again :)

So why on Earth would Nick be returning to the CEO mantle and Rob becoming a board member?

Our industry has hit such a fast pace where technical leadership can bring massive growth and fortunes to companies while missteps can mean a company’s quick demise. Here I quote John Sculley on letting Steve Jobs go

“I did not have the breadth of experience at that time to really appreciate just how different leadership is when you are shaping an industry, as Bill Gates did or Steve Jobs did, versus when you’re a competitor in an industry, in a public company, where you don’t make mistakes because if you lose, you’re out.”

Shaping an industry.

That is the opportunity in front of us. For years we’ve been a close partner of Twitter and despite Twitter having acquired our largest competitor GNIP we still maintain a very close relationship and partnership. And of course we have dozens of other data sources making us a much broader platform than Twitter data.

But we have to acknowledge that the industry has changed. 18 months ago Nick embarked on what I started calling our “Manhattan Project,” which defined the next major leap for the company from organizing public, social, big data to organizing all corporate enterprise data whether internal or external.

And because Nick is Nick he wasn’t content with just helping enterprise organize internal data & integrate it with public big data – he also decided it was best if he could build a machine-learning engine that would learn to recognize, interpret and integrate data-types without the need for data analysts and scientists to create and maintain schemas, tables and mappings.

He called this initiative VEDO and launched it quietly to some of our bigger customers.

So the next chapter of DataSift is underway. You’ll see more news from the company over the coming months. With Topsy purchase by Apple and GNIP by Twitter we remain the only independent public provider of realtime data streams. With Nick as the CTO we have created an enterprise-grade data management platform that we believe could be transformational in how large companies process, store, retrieve and make sense out of large volumes of big data.

And with this new phase – and with the fruits of Rob’s efforts that led to our 120-person organization – Nick is ready to step back into the driver’s seat and lead us to the next level. I’m excited to see what Nick can product. I remain as childishly giddy at Nick’s vision as I did in our conference hangout we had in 2009.

And of course I’m grateful to my good friend Rob Bailey who stepped into the role of CEO at a crucial time. He performed his role phenomenally well and now that he will become part-time (as a board member) I look forward to finding more ways to work with him in newer capacities.

Onward & upward DataSift.

(Cross-posted @ Both Sides of the Table)

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The Digital Wave & Business Leverage Tue, 14 Oct 2014 13:25:00 +0000 It is now common knowledge that digital is changing the fortunes of many business – impacting both positively and negatively, depending on their level of preparedness to embrace digitalization. In every industry, competing business leveraging digital technologies, platforms and relationship to win over rivals, get more customers and their business and loyalty, and thereby rewriting […]

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It is now common knowledge that digital is changing the fortunes of many business – impacting both positively and negatively, depending on their level of preparedness to embrace digitalization. In every industry, competing business leveraging digital technologies, platforms and relationship to win over rivals, get more customers and their business and loyalty, and thereby rewriting the rules of competing in business, is perhaps the order of the day.

Reimagining the possibilities for business by becoming a digital enterprise is a key expectation for survival in the future for many businesses around the world. That calls for going beyond creating revenue by mere digital substitution. A digital strategy that focuses on specific business outcomes leveraging various forms of digital technologies can create an edge for the enterprise and in many cases, a sustainable edge comes in where the inane physical resources mutate with the vibrant digital information to create new value. Winners in doing this get there by thinking big and small together transforming processes, creating/validating/rebooting business models and enabling new waves of customer experience. The reality is that any company large or small, old or new can leverage digital technology and principles to create a winning edge for its business and perhaps, its industry. Your customers, your competitors, and your suppliers are all digital now. You can’t address this change with a bolt-on strategy that adds an app here or a site there. You need a comprehensive strategy that embraces both digital markets and digital operations.

Firms like Amazon and Netflix, were born digital — they find embracing these digital principles far easier. Most others strive to have significant digital business and imbibe /embrace digital DNA as their core mantra. For some of them, who were not tuned in, a near extinction threat could be shaking them up. The good news is that, with the body of expertise and collected wisdom available, survival and being competitive is possible like Kodak and Burberry with varying motivations and expectations were able to reorient and restructure their commercial business and have created formidable digital business. The old and well established business of last century or the ones started in the century before are totally capable of successful digital transformation.

Being self-aware is the key to reinventing oneself – this universal principle holds good for enterprises as well. At whatever level of maturity an organization is, digital journey for enterprises would call for substantial degree of change with respect to organizational DNA – this would permeate the culture, organizational structure, operations and governance. As I wrote here, “digital transformation, for a company board or a transformation council could look like a large scale revamp, but in reality, it is a series of coordinated number of changes – on multiple dimensions – across various attributes covering some planned, known unknowns, unknown unknowns – the coming together of this creates a deep impact and effects change, leading into a converged advantage. One can say that the commonality across different true transformation initiatives would rest on ability to think differently about set ways of functioning and willingness and ability to revisit all known models and think and act on them to change to deliver different results”.

There are multiple ways to measure an enterprise maturity and determine the strong and weak points (the most common way to measure is to plot a two- by-two with internal capability vs delivered excellence or capability vs maturity etc). Digital Babies” Digital Natives”, “Digital Phoenixes”, “Digital Masters” etc. are some of the terms used to denote categories, depending on whom you choose to listen to. From Slow moving to Wannabe leaders to Visionaries to Path breaking leaders, the different players can be classified through an assessment. My preferred assessment, as a next step is to chart radar diagrams covering the entire customer lifecycle journey measuring the efficiencies of various attributes along the way and using the outcome to rate against overall expectations. With such classification at hand, depending on the industry trends, a rapid path – either as a protective measure or as a winning measure need to be laid out. The important thing to notice here is no enterprise needs to be left behind in this digital journey lest they suffer extinction over time.

The successful undertakers of the digital journey need to look beyond bolt-on initiatives and look at transformation possibilities holistically, covering digital experience, digital operations and process outcomes. The nature of digital business is such that there are a lot of players/processes that need to be aligned – and some of them could be internal and some could be external involving partners, customers etc. So, the overall ecosystem would matter to get the best experience and outcome to customers. Think travel business or something like how ozon, the leading ecommerce player in Russia achieved success.

The need for holistic view cannot be under emphasized. With the proliferation of digital touch points and increased range of services that customers are beginning to expect, it is unwise to look at each of these as discrete or sequential projects – as such an approach would lead to increased cost and take a long time to deliver overall best results for the enterprise. In an age where time-to-market is a key determinant of success, such approaches are not in tune delivering for the needs of the day for enterprises.

When we digitalize enterprises, we set the seed for destruction of the old practices and policies and instead embed new age practices and leading edge policies. The customer expectations, service levels, support mechanisms etc. substantially change in the digital age and as such, those types of changes cannot be avoided. How do we conceptualize and validate such changes? The answer lays in being able to think for digital solutions wearing the shoes of the customer. Should services be delivered separately or in combinations – should we restrict the combined services to what can be natively delivered by the enterprise or combine them with external services. These types of questions need to be objectively assessed and answers though through – the answers will in turn shape the contours of digital transformation covering both strategy and operations.

One of the defining characteristics of cutting edge digital solutions is the ability to seamlessly weave associated services available with a bevy of partners made into a seemingly single stranded service for the customers – imagine airline ticketing service or financial services like Intuit(Mint) or Amazon marketplace. This is both an opportunity and a challenge – opportunity is to provide service under one virtual roof, challenge lies in integrating a variety of services real time. The customer expectations would not care for challenges though – so long as some other enterprise is able to provide similar integrated services, the baseline of expectations get already set in. The key to note here is that by offering such services leveraging relevant partners/services, an enterprise protects itself from the competitive effects of digital disruptors.

Such an ecosystem of partners sharing data and services protects the players within, overall from competitive onslaught. In every industry, digital thinking for business forces non-linear thinking and the can provide disproportionate returns to the enterprise. As the Ozon case illustrates, the partners can be sometimes competitors but such arrangements done through smart working relationship frameworks can provide great agility and scalability to business and can provide endearing value to customers.For some, such outcome may not be magical – remember, it’s a journey and the game keeps improving. It’s truly transformative for some, but in ways that will feel right and sometimes may not even look so special, given that these may become second nature. Many times, we don’t realize that the future that we envisaged in the past, when it arrives look so reachable and understandable – every enterprise embarking on a digital journey, can feel that along the way, if digitalization is pursued in a vigorous way with discipline inside their respective enterprise.

(Cross-posted @ Sadagopan's weblog on Emerging Technologies,Thoughts, Ideas,Trends and The Flat World)

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Keys to turn your open source project into a business Tue, 14 Oct 2014 13:11:00 +0000 Broadly speaking, there are two types of open source software. The free software, which has a reciprocity requirement in it. Open source software which doesn't.

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Broadly speaking, there are two types of open source software. The free software, which has a reciprocity requirement in it. Open source software which doesn’t.

We can have debates about the merits of those two groups for the whole evening. I think both of them are needed and it depends on the usage and the purpose of your project.

This article is part of my talk, Open-Source Business Models. You can see the full transcript and the video of my talk on

When we come to making money on open source software, at MySQL we had about 15 million users of our product and 15 thousand paying customers. That was like the needle in a haystack. In a haystack of a thousand users we would find one paying customer, and we made it work. We had a business that produced cash and paid for our expenses, but that’s at the extreme end of open source software.

We always debated on how to balance the act between who should pay and who shouldn’t? We boiled it down to a principle which is here on the slide saying: “There are always people who will spend any amount of time to save money, and there are other people who will spend money in order to save time.” Typically in your life, or in the life of a company, you go from one to the other.

“Why does Facebook run on MySQL?” I asked Mark Zuckerberg a long time ago. And he looked at me and said, “Marten, I grew up on MySQL.”

So when he was 15 or 14 or something, he started using it, so of course he would build Facebook on the LAMP Stack. They were a big non-paying user for the longest time, and one day they came to us and said, “Our business is growing so fast, we have so much to do. Why do we have all these people here maintaining our MySQL databases? Could we buy a support contract and the services from you to keep the site going?”

Then they became one of our biggest customers. They shifted from the mindset of saying, “I’ll do anything with my bare hands to save money,” to “I have other more important things to do, so I’ll pay money to get it done.” This is a philosophical principle, it’s not a business model, it’s not a licensing term. But it guided us and it has guided many open source companies in figuring out how do you figure out how to make money and who you think should be paying for your stuff.

Because if you can’t live with the fact that 999 out of 1000 of your users are not paying you anything, you will never succeed. You must love those who are not paying you anything as much as you love your customers.

We said that! We said, “We love you, we really love you, but until you pay us money, love is all you get.” Meaning if you need support or anything else, then you pay us. And you must also know that no matter how much customers love you because they said, “I love your product it’s fantastic!” They don’t love you as a vendor. They have no mercy with you. If they can get away by not paying, they will. They can be the nicest people, the most fantastic company. There’s nobody who will pay voluntarily.

We had one customer at MySQL who paid us voluntarily. Craigslist. So Craig Newmark sent us $10,000 saying, “I don’t find anything to buy in your offerings, but I love you guys and I would like to support you, so here’s $10,000.” And that was the reminder to us that we had no good business model. We had to figure it out and we had to build that which we called hard differentiation that said, “If you don’t pay you get this, if you pay you get this. You can take it to your boss, because it’s your boss who is the problem.”

When you sell, it’s never a problem of selling to the person you’re selling to; it’s that person who has to go up to the budget boss and say, “Boss, I just paid $50,000 for something I could have gotten free of charge.” You can’t do that. You must say, “I just paid $50,000 for something we uniquely get as a paying customer.” You must build that differentiation.

You must be comfortable being on both sides of the fence. If you don’t like your free users, you won’t have a business. Then you shouldn’t be open source. You should be a closed source vendor. So, do it only if you are really committed to being open.

I was checking through some old documents, and I found an article written by somebody a few years ago that had a list of 17 open source business models. That again is a description of the trauma of open source. We struggled for so long to figure out how to make money and in some cases we couldn’t. And there are companies who didn’t and who went out of business. I’ve again tried to simplify it for you, and I believe that there are two broad models for building an open source business.

Two broad open source business models

The one is the foundation-originated model where you have some non-profit organization or place that spits out code all the time. And then you have a set of vendors around them who take the code, turn it into a product, and sell it to their customers. Linux is the best example: we have, we have The Linux Foundation producing the main Linux Kernel, and then we have distros turning it into products and selling them. But they all say we sell Linux. There’s Red Hat Linux, there’s SUSE Linux, there’s Ubuntu Linux, and so on. That’s one business model.

The other business model is the singular one where the open source project and the open source company is practically the same thing. I would say that MySQL was the prime example of this. We had the Swedish company MySQL AB that had the whole project in its hands, and it maintained both and And there are many others, MongoDB is such a thing. Eucalyptus is following that. I have a lot of names there on the list, but it’s a one-to-one relationship. Of course, others can fork it and they do.

Take MySQL, there are forks of MySQL sold by others. I’m not saying that it’s strictly a singular, I’m saying it’s basically a singular model. I’ve now learnt only later that when you do make that choice you’re sort of forced to a certain business model. In the foundation-originated one, and here Hadoop would be an example. There are many Hadoop vendors but they draw the Hadoop code originally from the Apache project. In the foundation-based model, many differentiate from each other through the binaries.

Take Red Hat. Can you get access to the binaries of Red Hat Enterprise Linux? No, you can’t. But it’s open source, why can’t you? Well because they have perfected their model in a way that their best binaries are given out only to paying customers and if you want something from Red Hat that doesn’t cost you anything, it’s called Fedora and it’s different binaries.

When you have that common platform called Linux, the way they differentiate is through different binaries and the fact that they are tested, certified, trustworthy, they’re maintained, they have security fixes, and so on. When you’re a singular vendor, you can’t do that. At MySQL if we had said, and we tried but it failed, that the best binaries are for our paying customers and our community gets slightly worse binaries, we wouldn’t have had a community. Because nobody else was providing it. So, at MySQL we had to give our best binaries, the best executable to everybody.

If you give that to everybody how do you make money? That’s where I think the only viable model is to have commercial add-ons that you give only to paying customers. Some of you are saying, “But Marten, we can sell support can’t we?” Absolutely you can, but that’s not a scalable business model. I’m assuming you’re building scalable businesses. It’s great if you build nice businesses that don’t scale, there’s nothing wrong it. But I’m talking about scalable business models and therefore, I believe you must build a commercial differentiation. You see that Cloudera has that, Eucalyptus has that, MySQL has it. If you go to Acquia, because you’re a Drupal user, Acquia in their commercial offering has stuff that you don’t get if you are not a paying customer, features and characteristics of the product. You must have some sort of hard differentiation that comes on top of it.

The open source product is fully-fledged, ready-to-go, mission critical, capable, stable mature, tested, all of that. It’s an amazing platform. But it lacks something that appeals to enterprises, something that appeals to those who are ready to pay money in order to save time. I think this is how it’s happening now in terms of business models.

As always, there are always exceptions.

Take the Mozilla Foundation, how did they make money? Selling ads. Well they gets tens of millions per year, maybe a hundred million per year from Google for having the Google toolbar in the browser. Then Mozilla isn’t technically a for-profit organization, so you could say, “Is it a business model or is it just a funding model?” We could go deep into those questions.

I’m saying, broadly speaking, generally speaking, if you are building an open source business you choose between the foundation based where many companies draw from the same upstream place or the singular where it’s one company with one product.

Like NGINX is a new one, for the last 15 years, we’ve all used Apache as the web server and now slowly but surely, and maybe not even so slowly, we’re seeing the market share of NGINX growing in the world of web servers. Because NGINX is more performant than plain Vanilla Apache. The company NGINX is now building a business around it.

So you have those two models, and you have to have hard differentiation that you can sell. I have gone through all these tests and experiments with MySQL and I’ve taken all the flack that you can get for doing it. Wherever I go, there’s always somebody who thinks that it’s bad what we are doing. Because we are building a business, we have to add a closed source component. We’re doing something like that.

I believe that’s the only way to build an open source business. And you must have the courage to stand in front of the crowd who’s demanding that you give away everything for free.

Because customers have no mercy with you, they don’t mind if you don’t make money. They have demands and you must have the courage to say, “I do all of this for you, but this I need to make money on.” I think you have to have that sort of a mindset.

You can also say that commonly, if you are building a product and nobody is against you, if you have no detractors, well then you are not really being popular. A measurement of popularity is that you have different groups and some of them criticize you wildly. That’s a sign of success in a way. But as an open source vendor you have to have very thick skin for all that input you have.

Once you say you are an open source company they will assume that you are ready to share everything, your thinking, your plans, your finances, your product, your code, everything; and they will have a sense of entitlement to what you are doing. It’s sort of true, and you have to live with it.

At MySQL, we had so many people who came to us and said, “We made you successful.” Like, “Okay, but we’ve been working hard here for ten years and we did all the code, coded everything, and tested everything, and fixed all the bugs, and you just helped us here and there.” No. They believe and sort of know that they made us successful and it was true. MySQL couldn’t have been successful without those passionate users all over the place.

Like once when we were in Rio de Janeiro with the MySQL founder. He had a MySQL T-shirt on him and we were down in Ipanema Beach. And you would think that young men on Ipanema Beach would be focused on something other than middle-aged men. But, once they saw this MySQL T-shirt and realized who it was, they were just all flocking around him. They forgot all the fun stuff and all the girlfriends they had there because it was so amazing to meet the founder of MySQL. It sort of shows this weird relationship that they completely buy into it and are passionate about it, and then they say, “It’s partly mine, I have an entitlement to it.” You must live with it.

Winner takes all

I wrote something about the foundation-originated business model. I wrote, “Winner takes all.” Then I thought I had to write it on the other side as well. And this is a little bit disturbing, but I sort of grew up in the open source business when there was a number of Linux distros. Turbolinux, we had Mandrake, we had the one in France, we had SUSE, we had Red Hat, and so on. Today, 90% of all money that’s made in Linux is made by Red Hat, so you can say it’s a winner take all.

Then you say, “Okay, but now we have Android. Everybody is building something on Android.” Well guess what, 95% of all profits in the Android world are going to Samsung. Samsung is the one that makes real money on Android, and Google on their ads, but actually using Android.

I’m not sure it’s completely true, but there’s a trend of winner takes all in that space that can be a little bit challenging for those who know that by definition there are many vendors there. Long term it seems that only one can really win.

Then I was thinking about the other side, the singular ones. There it’s also winner take all, because either you win or you don’t. If you are MongoDB then, if the open source product is successful the company will also be successful at the same time. So you could say it’s a winner takes all. But what then when there are different vendors in sort of the same category? There I don’t think we have an answer yet. We have a traditional example of JasperSoft and Pentaho—both in practically the same space, both are open source, both are doing well, neither is killing the other. So there you see a healthy ecosystem.

Or you could take the new NoSQL Databases, sure MongoDB might be the biggest one, but you have CouchBase, you have Cassandra, you have Neo4j. They are smaller and larger and they have different styles, but in the new world of databases there is a healthy ecosystem of different players that seem to be doing well. I’m hoping that would happen because that gives more hope to all the entrepreneurs in that space.

Keys to turn your open source project into a business

If you are starting an open source project and if you decide to turn it into a business, here’s some key things to think about:

First, why are you producing open source code? Some share it to make it technically even more viable. Facebook when they shared Cassandra, they thought, “Hey, if others start using it, it will evolve and we will benefit from it.” Netflix open sourced Chaos Monkey and Asgard, Edda and all their cloud management tools for the same reason. So there’s a lot of good stuff coming out from users there. I don’t need to make money, I just want to insure the longevity of this product. B) is build a business on it, like MySQL. MySQL always wanted to build a business. Always. The purpose was always to build a business. And there are many others, MongoDB and so on. They are building a business. And then there is C) grow and install base for some benefit or monetization opportunity.

When Google came out with Android they were not planning to make money on Android. They were planning to make money on those who make money on Android. Meaning when you sign the Open Handset Alliance and you start using Android in your phones, you bind yourself to using Google services, Search and so on, and that’s business for Google.

You can build an open source product that indirectly serves you. This is important to know if you are in that space because you can have asymmetric competition from somebody. You can have competition from somebody who doesn’t have to make money on what they are doing because they are open-sourcing it. So you need to know why you are doing it.

Then you need to decide on what the governance is. How do you govern the roadmap? Meaning you have a great open source product, who decides what happens with it, what features get put in and what features won’t? Who decides on what contributions you’ll take and what you won’t take?

There are many models here and the great thing with open source is that it has figured out ways to handle it, but it’s a choice you have to make.

In a company like MySQL or in Eucalyptus, it’s easy. We have a hierarchal organization, at the end of the chain is a CEO and he can make decisions. You can get very fast road map development and you can be customer-focused, you can do a lot of that. Others take a different approach. Take Cloud Stack, which was a company like Eucalyptus, now they donated the code to the Apache Foundation. Which means governance of the roadmap is now in the Foundation’s hands.

When Citrix, from where it came, want to implement a new feature, they go to the foundation and they have a steering committee that votes about it. They’ve given up control of their roadmap, counting that the support they get is more valuable than the control they lose.

It’s for you to decide what you want. And some of you are passionate founders, and you will never give up control of anything. Linus Torvalds is like that, he’s not building a business but boy 20, how many years is it?—22 years after he started the project, he’s still the guy who makes the ultimate decisions on what goes in and what doesn’t. He really is passionate about his project.

(Cross-posted @

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Why Has LA Suddenly Gotten So Much Attention from VCs and Entrepreneurs? Tue, 14 Oct 2014 13:00:16 +0000 “There’s something going on in LA.” It’s the most common refrain I hear from investors and even entrepreneurs these days. I hear it right after people have decided to come by for a few days to “check out what all the fuss is about.” I hear it when I visit LPs (the people who invest in […]

CloudAve is sponsored by, and Workday.

“There’s something going on in LA.”

It’s the most common refrain I hear from investors and even entrepreneurs these days. I hear it right after people have decided to come by for a few days to “check out what all the fuss is about.” I hear it when I visit LPs (the people who invest in VCs) all across the country, “Yeah, I haven’t been out there for a few years but I keep hearing that something is going on there.”

Or if you ask the venerable Greg Bettinelli, he’s #LongLA

So what is actually going on in LA? Is it true that the ecosystem has changed? Has it begun to mature or is it just better marketed than in was say 5 years ago? This is the task I set out to answer with the master of analysis at Upfront Ventures Glenn Poppe who deserves the bulk of the credit for our work.

LA By The Numbers

When you begin to peel back the onion some surprising data presents itself. Let me start with the obvious baseline that most people probably know instinctively: Los Angeles is the 3rd largest technology startup ecosystem in the US. Given our city is the 2nd largest metropolitan area in the country this is hardly surprising.


LA 3rd largest ecosystem in the US

But to answer the actual question “Is there something going on in LA?” in 2014 the data seems pretty conclusive because LA has now become the fastest growing tech startup region by numbers of companies being started and those of us here have noticed this pace accelerating. I know that many VCs instinctively knew this even without the chart below because I’ve noticed the frequency of high-profile VCs (Bill Gurley, John Doerr, Roelof Botha, Marc Andreessen) recently backing companies in LA, spending time throwing dinners & events and even some very experienced VCs (David Lee, Chris Sacca, Erik Rennala) have relocated to Los Angeles.

LA Fastest Growing Tech Market

In fact, data released just yesterday (10/16/2014) in this report by the LA Economic Development Council and released by the LA Mayor’s office showed that LA now has more people employed in high-tech jobs (368,500) than any other metro region in the US, accounting for 9% of all of LA’s jobs and 17% of total wages (that obviously highlighting some other issues that need to be addressed). They estimate that high-tech work contributes $108.3 billion dollars of regional GDP. What is perhaps different from other regions is that we have large indigenous aerospace industry and a big high-tech import/export trade as opposed to a lot of software companies. But even this is changing. More on both trends later.

Given how efficient markets are when a large market like LA starts to blossom it attracts capital pretty quickly. In the last full year where we have data LA attracted $1.5 billion in venture capital to LA’s technology startups and 2014 will shatter that figure.

Over the past 4 years LA’s tech fundings have growing at a 30% compounded annual growth rate (CAGR) which is > 4 times the US average VC CAGR (7%). In the last month alone (ie not captures in the $1.5 billion 2013 figure) have been massive financings at Honest Company ($70mm), JustFab ($85mm), ZipRecruiter ($63mm) and lord only knows how much SnapChat has actually accumulated.

Prominent LA Financings


What Has Given Birth to This New Movement in LA? 

Many people don’t realize that the majority of the monetization of the Internet originated in Los Angeles but was perfected in Silicon Valley. When my friend and the father of LA’s tech startup community Bill Gross first demonstrated his company (renamed Overture) on stage at a TED conference he was actually booed (True story. You can hear many other amazing stories in this 1:1 interview). What was Bill Gross’s heretical idea as portrayed to the tech elite? He presented a system where your search results would be ranked based on companies bidding for placement and where merchants would be charged on a “cost per click” basis (CPC).

Booed. So much so that if you read Ken Auletta’s wonderful book “Googled” you’ll see that Larry and Sergey had for years stated they would never do paid search results. The monetization engine of the Internet that powers the most profitable business perhaps in history was invented and perfected in Los Angeles and is what you now know as Google Ad Words. The patents Overture held became known in small circles as Google’s ’361 problem as outlined here. Yahoo! acquired Overture for $1.63 billion (Upfront Ventures was an early Overture backer).

Yes, Google won. Of course that’s not disputable. My point is that historically the ecosystem in LA has bred innovations in monetization and technologies but to date hasn’t reached the kind of scale of our major NorCal brethren.

And it wasn’t just Google Ad Words that originated in Los Angeles. Google’s Ad Sense did, too. Ad Words as you likely know are the paid results you see when you do a Google search. Google Ad Sense are the results you sometimes see on non-search pages that show you ads that are seemingly relevant to the words on the page. This method was perfected by Gil Elbaz and his team at Applied Semantics in LA and in what some have called “the most important acquisition ever made by Google” they acquired the company for $102 million before Google had even IPO’d.

What do Bill Gross and Gil Elbaz have in common that portends well for the future of LA Tech?

Both graduates of one of the most premier science institutions in the United States: Caltech. Both are massively funding other LA tech companies through what Fred Wilson once defined as “recycled capital.” Both had super talented senior executives that are now running (and funding) tech startups in their own right, like Gil’s brother Eytan Elbaz or the countless graduates of Overture. Both Bill Gross & Gil Elbaz are building their next companies in LA.

I think there is also no denying the role that Richard Rosenblatt has played in building the LA tech ecosystem and spawning great entrepreneurs who followed in his footsteps. He built & sold iMall in Internet 1.0 for $565 million to Excite. He led and sold MySpace to Fox for $650 million. He built & IPOd Demand Media. And while none has yet had the lasting power of the much bigger NorCal successes I imagine his next moves will continue to be closely watched by those in the know and the countless younger LA entrepreneurs who count Rosenblatt as a mentor may leave an even more lasting impact.

LA 1.0 Begets LA 2.0

But the “monetization heart of the Internet” doesn’t stop at Overture, Applied Semantics and MySpace. Over the past decade we’ve had high-profile exits at many companies that pioneered monetization techniques now used across the web including Commission Junction, Value Click, ShopZilla, Price Grabber, LowerMyBills and a newer breed including Invoca, Burstly, Shift, Rubicon Project, Gravity, Convertro, Retention Science and so forth. Many of the early winners sold for north of a half a billion dollars.

Success begets success. The seeds planted by those who came in the 90′s have begun to blossom 15 years later literally into seed capital, blossoming new entrepreneurs and an ecosystem of experienced operators that powered LA 1.0 and are guiding LA 2.0.

But Is This Really That Surprising? Isn’t the Overall Market Just Booming Now? 

Aren’t some of the recent successes in Los Angeles just emblematic of the overall long tech boom we’ve seen nationally and has led to growth in funding in NY, Boston, Seattle and San Francisco? To some extent – of course they are.

But this time there really is something happening in LA. It is different. More substantive. Lasting. Structural. This time we won’t stop at a mere half a billion but we seem destined to create the kind of tent-pole successes that have brought lasting change to markets like Seattle.

LA Big Structural Results

Of course most of you know SnapChat, Tinder & Whisper and many people immediately associate the success of Los Angeles under the SoLoMo banner (Social, Local, Mobile) and you wouldn’t be wrong. But many people forget that we have 2 relatively recent IPOs that are substantive companies: TrueCar (Upfront backed) & Cornerstone OnDemand. We don’t seem to get credit as a community for SpaceX or recognition as one of the fastest growing communities for commerce: Honest Company & JustFab. You probably know that Disney recently paid nearly $1 billion to acquire Maker Studios (Upfront backed) and that is really just the 1st inning for online video companies hatching out of LA.

If you throw in Oculus into the mix along with TrueCar, Rubicon, Burstly, Beats and others LA Tech has seen more than $8 billion in exits in 2014 alone. As Adam Sandler would say, “not too shabby.”

LA’s 2.0 – this time it really is different.

From Infrastructure to Applications – The Three C’s

In order to contextualize the opportunity that exists for the Internet outside of Silicon Valley these days you can take inspiration from the history of technology evolution across many markets throughout history. In her well-regarded (but boringly named) book “Technological Revolutions and  Financial Capital: The Dynamics of Bubbles and Golden Ages” Carlota Perez outlines the history of many of our great leaps forward in innovation.

Each followed a predictable path of building out infrastructure followed by a bubble then a crash followed by a more rapid deployment of the technology throughout industry and society. No less than Fred Wilson has credited Carlota’s work with having a major influence on his investment strategy at USV.

Application Layer with Other Industries

At Upfront Ventures we have long argued that the same trend was underway with the Internet but when you’re in the midst of the “infrastructure phase” it can at times be harder to perceive that a separation is happening. I grew up a computer programmer, a builder of computer networks and fascinated with infrastructure so in many ways I felt like I existed at the inception of many of these great technologies.

In order to have the great companies we now know today: Uber, DropBox, Airbnb, SnapChat, Twitter, Facebook and so forth we first needed the “Internet rails” beneath us. We needed routers, switches, databases, caching software, load balancers, application servers, browsers, compression algortyhms, streaming technology, low-cost storage, management consoles, programming libraries and on and on. We saw booms & bubbles in both telecom infrastructure and Internet infrastructure and now, of course, those two things are largely the same.

Once the railways are built most countries (except for some odd reason the US) start to build better versions of their infrastructure so you get high-speed railway in Japan, Germany, China, France and now even connecting France & The UK. So I’m not arguing that the infrastructure building phase of the Internet is over – to the contrary. We see big data storage solutions and processing platforms. We see improvements in wireless transmission and in real-time programming languages.


With the foundation laid the application layer has had its moment. It’s no surprise to see billion dollar companies like Honest Company & JustFab in LA. We are the largest textile and apparel center in the country and now we have a way to reach billions of people in this globally connected Internet. Deflationary Economics now favors us.

Is it any surprise to see Zulily in Seattle, Wayfair in Boston, ExactTarget in Indianapolis, TrueCar in Los Angeles, GroupOn in Chicago or BuzzFeed in NYC? I think it’s the era of the application.

And our belief is that consumer applications — almost all of the things consumers DO on the Internet — that ride on this Internet infrastructure layer fall into just three buckets we call “the three c’s”: content, commerce and communications. These are industries ripe to succeed in LA & NYC. These are industries that start to open up new commercial zones like Cincinnati (home to P&G & Kroger) and Chicago.

LA The Three Cs

Content: It should be intuitive to most that LA is well-suited to take on the world of content meets tech as we’ve seen with Maker Studios, Fullscreen, AwesomenessTV and Big Frame. With all of those companies gobbled up the market is now focused on the next generation startups like TasteMade, MiTu Network, StyleHaul and so forth. We believe there is no denying that the future virtual reality (VR) world will be stimulated in LA where you have the great 3d special effects companies, content creators and movie studios.

Commerce: What is less known is just how important LA is as a commerce hub. Around $400 billion of imports & exports pass through the LA ports each year, which set the national high-water mark in 2012. 36% of all apparel jobs in the US are in Los Angeles. And LA is the largest retail & trade employment metropolitan zone in the country.  It’s not accident we have so many great startups targeting commerce including Tradesy, DailyLook, NastyGal, Honest Co & JustFab just to name a few.

Communications: Of course comms companies are springing up globally including WhatsApp, Line, KakaoTalk, WeChat and the dominant platforms of Facebook & Twitter. But there’s no denying that we have more than our fair share of great startups in this space that have emerged recently including SnapChat, Tinder, Whisper and TextPlus (which while much smaller still has millions of monthly active users – Upfront is an investor).

And of course we have great public companies that have spanned content & communications like J2 Global whose market cap as of this writing is a cool $2.5 billion.

Stuff you may not know about LA?

There are so many misconceptions about Los Angeles and these stereotypes of course have been reinforced by tech journalist outside of LA covering our market and trying to draw simple conclusions.

So it’s probably worth pointing out that LA is a town built upon entrepreneurship even if not always underpinned by technology. We literally are a land in which people left their stable East Coast homes in search of opportunity and a chance to start fresh. LA in fact has more entrepreneurs as a percentage of its population than anywhere else in the country.

LA Largest Entrepreneurship

Intuitively most people know that LA isn’t just the entrepreneurial capital of the US but it is also the creative capital. LA is the largest metropolitan area in the US for people employed in art, design and media and the local creative economy of LA generates more than $140 billion in economic output – more than the GDP of many countries. In fact, 1 in 7 or nearly 15% of Angelinos are employed in a creative field.

But what about tech talent?

Yeah, we got that, too.  It may surprise you to learn that LA graduates more engineers than anywhere else in the country. We also have more grad student enrollments each year in computer sciences than anywhere else in the country. So we produce them en masse and we produce them with deep knowledge.

LA Largest Graduates in Engineering

Where do all of these engineers end up? Of course many have been employed for years in the video & music industries and a larger amount have even been pulled into aerospace and defense over the past 30 years. As a result we have a large number of locally employed engineers with video experience that will fuel the next boom of the Internet (Americans watch 5.3 hours of television per day – a number that is not declining and much of this video is now moving online) but equally important is that we are now a rich source of hardware expertise and innovation that is increasingly becoming important as the hardware markets boom.

But our best Internet software engineers have historically been exported on a net basis to the Bay Area. I’m sensing that trend reversing as companies like SnapChat have been able to import large volumes of Stanford grads lured to creating a next gen Internet powerhouse in Venice, California (which by the way, doesn’t suck :) GQ magazine just dubbed it “the coolest block in America.”). Nicole LaPort recently highlighted this trend for Fast Company, the so-called “SnapChat Effect” in a recent post on the topic of LA attracting great Silicon Valley talent.

You may also be surprised to know that not only does LA graduate more engineers than anywhere else in America but we also have more top 25 engineering programs than anywhere else in America with nationally acclaimed programs at Caltech, UCSD (my alma mater), USC, UCLA and Harvey Mudd.

LA Most Top 25 Engineering Schools

What Do We See From the Road Ahead?

The infrastructure phase of the Internet is over. It will still garner much investment as it improves in terms of quality, speed and reach but the application layer will rise in it’s dominance. The three C’s: Content, Communications and Commerce will ride on the tracks that have been laid for us and LA has shown itself to be a prominent player in this application phase.

We have the engineers who are graduating from top engineering schools and believe me if they have the opportunity to remain in this dynamic, affordable and pleasant city many would choose to. We now have 2nd and 3rd time entrepreneurs fueled by recycled capital and mentors who have built startups to successful outcomes and have seen scale.

We have our emerging tentpole companies like SnapChat, Oculus, TrueCar and large investments and teams from Google, Facebook & Microsoft.

LA Great VC Community

I also surveyed the list of local VCs and while we are slim on total available local capital I also realized just how many new funds were created over the past decade and how much more modern the skills are of this generation of local VCs are than those of the past.

With the founders, the funds, the application layer of the Internet, the attractiveness of Los Angeles in terms of cost-of-living and climate I think it’s fair to say that our moment in the sun has just begun.

LA There Really is Something Going On


And here is your moment of zen … the full deck with many additional slides. Use any you want. Tell a friend. Forward the data. Silence the doubters.


(Cross-posted @ Both Sides of the Table)

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Digital Transformation & Digital Advantage Mon, 13 Oct 2014 16:40:00 +0000 On my flight to Boston, I came across this article titled: We Need Better Managers, Not More Technocrats from Harvard Business Review. This set me thinking for not many articles have touched the issues of digital transformation at its core, in so far what I have seen and so mentally egged me to draw this […]

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micro management dilbert

On my flight to Boston, I came across this article titled: We Need Better Managers, Not More Technocrats from Harvard Business Review. This set me thinking for not many articles have touched the issues of digital transformation at its core, in so far what I have seen and so mentally egged me to draw this note. The part of the article that set me thinking started with the perspective: “digital technology is not the true story. Digital transformation is “and adds, “ Leaders need to engage their people in a process of redefining how they work and what their companies do. Digital transformation is therefore the key managerial imperative for today’s business leaders”. This implies that enterprises need more proactive technical and business leaders, willing to shake the tree and get deeper to challenge the established norms of doing business in their respective business. Transformation possibilities come out of beating the status quo and propelling powerful forces forward.

The article adds that those companies that get the greatest benefit are those that:

- Make smart investments in digital technology to innovate their customer engagements, and the business processes and business models that support them

- Build strong leadership capabilities to envision and drive transformation within their companies and their cultures.

To my mind, to gain advantage many things need to happen at the enterprise level to deliver sustainable results. It’s not just managers alone who matter, there are a whole host of issues that enterprises will need to focus on, besides leadership commitment.Let’s now focus on what this digital transformation is all about and the range of issues and opportunities that come into interplay.

What’s Digital Transformation?

Every transformation efforts brings along with it substantial degree of risk. Digital proponents leverage the fact that the business strategies that embrace. New process models and couple powerful new technologies are transforming the way we do business and the vibrant nature of the marketplace. It’s clear that yesteryears paradigm of economic and business models are too inadequate to secure future years success. New paradigms need to be created, starting with the vision to innovate and enormous energy and skills to stay the course and realize quantifiable benefits. The core ability needed to enable digital transformation rests around customer centricity and a focus on making their businesses different through technology but not per se on the technologies. No technology should be deployed without a fully thought through vision of how it advances business goals, addresses customer needs, or both. Beyond that, technology should be so tightly inter twined with strategy that the two drive and reinforce each other.

Seen at one level, transformation is a proactive process that begins with a large and bold vision centered around making customer linked processed and operations to be made global class and the drive in support of this to effect appropriate changes in the environment. At the highest level, this is the common denominator that enterprises strive to achieve – call out the objective, introduce the variables (exogenic factor) and focus on transforming this into new order of creativity and innovation. To me, digital transformation, for a company board or a transformation council could look like a large scale revamp, but in reality, it is a series of coordinated number of changes – on multiple dimensions – across various attributes covering some planned, known unknowns, unknown unknowns – the coming together of this creates a deep impact and effects change, leading into a converged advantage. One can say that the commonality across different true transformation initiatives would rest on ability to think differently about set ways of functioning and willingness and ability to revisit all known models and think and act on them to change to deliver different results.

Digital Transformation is not a silver bullet, as seasoned business executives would confirm – there is no permanent state of advantage in an enterprise’s digital transformation journey. The true meaning of this journey is that the exogenic factors enables new avenues of powerful possibilities of change and too often this in turn opens the floodgates of passion, creativity and innovation. In a typical digital transformation journey, such release of convergent forces produce massive doses of change on the enterprises model of delivering value, the underpinning culture leading to authentic and visible transformative ways of doing business.

To repeat the often repeated cliché, “Progress can’t be achieved by doing the same things we’ve always done and expecting different results”. It’s plain talk : Unless new, progressive models are employed, true transformation can’t occur. Yet in the real world, its only to be seen that lag metrics centered thinking hold executives to protect the past. An Amazon’s way of thinking and action on growth, investments and customer advocacy efforts would substantially vary with most other business today. But that level of challenging set ways of thinking and busting assumptions are needed to effect true digital transformation efforts that can bring in sustainable success. From incubation to creating a large digital platform at enterprise level calls for ability to both think big and small, deep and wide, create capabilities at scale and target narrow skills in some cases. A clear plan, well thought through investment, and a rigorously focused implementations involving cross functional units are key to rope in success.

Creating an operational blueprint centered around digital ops would become a key requirement to carry forward the journey, an area mostly underfocussed on early on in the digital transformation journey – a big mistake.. A digital operation framework ties in executives to work together across functions to demonstrate early success that enterprise can build on. The to-be state of operation should appropriately balance opportunity upsides, core execution strengths and leverage differentiated business models. As the scale and maturity of adoption of digital transformation inside enterprises increase over time, it will be critical to replace guesstimates with more directly captured metrics leading to set the stage for repeatable, measurable and scalable outcomes.

Why are digital ops so important? Because early success and quantifiable returns feed more momentum and so is important to think through early enough in the enterprise digital journey. A well-executed strategy of putting in place a robust digital transformation framework would enable enterprises to

1) Optimize ROI at an earlier stage in the funding lifecycle of each initiative, and collectively across the enterprise; self-funding models are also being demanded by enterprises;

2) Bring in linkages and transparency between strategies, funding model, execution model including digital ops

3) Relentless prioritization for improved performance, value, and sustainable growth.

True transformation entails transforming from outdated methods to new, more productive ways of conducting business to produce new ideas, profound change, dynamic innovation, and sustainable opportunities and all these are directed at enhancing customer experience provides lasting value.

Digital transformation is not a linear process where a step follows another in a predictable way. Parallel initiatives, competing attention needs will be the order of the day inside many enterprises. The advantage is going to be accrued by those enterprises, who envision, plan and execute well leveraging on the rapid advances in the marketplace and behold, we have not seen much here compared to what’s going to come with sensory and analytics technologies providing a whole lot of new perspectives about how much the digital transformation boundaries can be pushed. As I noted earlier, there is a need for enterprises to completely re-visualize the possibilities by becoming a digital enterprise. That calls for going beyond creating revenue by mere digital substitution. A digital strategy that focuses on specific business outcomes leveraging various forms of digital technologies can create an edge for the enterprise. It must be noted that a sustainable edge comes in where the inane physical resources mutate with the vibrant digital information to create new value. Winners in doing this get there by thinking big and small together transforming processes, creating/validating/rebooting business models and enabling new waves of customer experience. Any company large or small, old or new can use this digital technology to create a winning edge for its business and perhaps, its industry.


(Cross-posted @ Sadagopan's weblog on Emerging Technologies,Thoughts, Ideas,Trends and The Flat World)

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Don’t Fire Your “Worst” Customers. Hire Them a Psychiatrist Instead. Mon, 13 Oct 2014 07:35:29 +0000 There’s a lot of Internet advice that makes a lot of sense, but not necessarily in SaaS.  Somewhat bad advice that entrepreneurs share again and again, without having really tested the ideas behind that advice. One bit of advice you hear again and again, that I 93% disagree with, is “Fire The Customers That Don’t […]

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Screen Shot 2014-03-21 at 9.31.11 AMThere’s a lot of Internet advice that makes a lot of sense, but not necessarily in SaaS.  Somewhat bad advice that entrepreneurs share again and again, without having really tested the ideas behind that advice.

One bit of advice you hear again and again, that I 93% disagree with, is “Fire The Customers That Don’t Fit.  Fire Your “Bad” Customers.”  The ones that suck up too many scarce resources relative to the revenue they generate.  I really think, at least in SaaS, this is some of the worst advice you can get.

Everyone gets the issue(s) that’s been through it.  You get to a certain point, say 1,000 customers, or $2m in ARR, or wherever, and your customer base starts to segment.  One piece of it — say 10% — constantly complains.  And/or, one piece of it — say 10% — uses an edition of the product that you don’t really want to keep investing in and supporting, because you want to invest in the other 90%.  Or more simply, sometimes the bottom 10% of your customer base in terms of ACV just takes way too much time.  The small guys suck up all your customer success and support resources, even though they make up only a small percent of your revenue.

I totally get it.  At EchoSign, the single largest consumer of our customer support resources was our Free users.  The second largest consumer of support resources was our $15/month customers.  The guys that paid > $100,000 a year?  While they had a lot of needs from a solution architecting and onboard perspective … but … from a day-to-day basis, on a relative dollar basis … the least demanding.  They paid 100x or more per year but took basically the same or less amount of customer support resources, and even when you add in customer success, they still took far less resources to support per $ of revenue than the smallest customers.

So fire the small ones, the annoying ones, the non-core ones, you say?

I say think about it differently:

  • First, you will be shocked — shocked — at how little complaints are correlated to renewal rates and customer “happiness”.  The customers that are really going to churn because they are so frustrated they aren’t going to renew … they don’t complain.  They don’t whine.  They just quietly leave the weeks before the renewal is up — for your competitor.  Seemingly out of nowhere, sometimes.  Complaints by contrast are often a sign of deep engagement with your product, coupled with frustration.  No product is perfect.  But these complaints don’t mean the customer isn’t all-in and committed.  And complaints can also sometimes just come with the territory.  Some customers just plain like to complain.  I can tell you from personal experience, the most complain-y customers also renewed at very high rates.  You should hear the complaints, try to address them, and recognize the learning in them.  But don’t assume the customer is lost, or not worth investing time in.
  • Second, those customers you fire may turn out to be the growth layer you want just a few months down the road.  The ones that push your product in a way you don’t want to support today?  That want stuff on your feature roadmap from 2 years from now?  The ones that constantly threaten to leave, and that suck up tons of time from your support team?  You may be surprised that they are actually showing you the future.  A good future, at least a small part of it.
  • Third, even the customers that cost more to support are probably ROI positive if you add in second-order revenue. I know you may think a customer that only pays you say $150 a year and creates 20 tickets a month can’t possibly be ROI positive.  But … what if you keep that customer for 4 years?  And she refers you 2 more customers, one way or another?  All of a sudden, that customer is worth $1800.  Is that really not enough to pay someone $15-$20 an hour to support?  At least while you’re growing, I’d argue it might be.  Not all your customer segments have to be profitable, as long as the (vast) majority of them are.  You can still learn from the ones you just barely break even on.

So what’s my uber-advice here?  If you have a customer segment that is (x) annoying, that you don’t really want today, that sucks up all your customer support time … but (y) that is generating at least $20-$100k in revenue per year as a segment … then don’t fire those customers.  Instead, (z) hire them a psychiatrist.

Screen Shot 2014-10-12 at 5.23.16 PMI mean this almost literally.  Hire a new person to your team, brand new, without baggage.  There’s enough revenue here in the segment, or will be, that you can at least cover her basic costs, this new hire.  He or she probably can’t solve any of the complaints, the problems, the issues.  But she can listen.  Take over the complainers.

That alone can relieve all the stress on the existing team of having to deal with these issues.

This new hire or hires will just listen.  Do on-site visits, maybe, where practical.  Talk through the concerns.  Track the issues and concerns with the customers … but probably not really change anything.  Not burden the product and support teams.  In fact, just be a buffer.

Then, you can keep the revenue.  Capture any positive second-order effects.  And, most importantly, see where these customers take you later.

The last thing you’d want to have to do is re-earn those customers.  It’s so hard and expensive to acquire customers in SaaS.  Keep them as your laboratory to learn from, if nothing else.

(Cross-posted @ saastr)

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The Authoritative Guide to Prorata Rights Mon, 13 Oct 2014 04:35:41 +0000 Prorata rights are one of the most important rights of a private market technology investors and yet are seldom fully understood. They often create the biggest tensions between investors who are investing at different stages in the business. These tensions seep out in some angels or seed funds publicly or semi-privately deriding later-stage VCs for […]

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Prorata rights are one of the most important rights of a private market technology investors and yet are seldom fully understood. They often create the biggest tensions between investors who are investing at different stages in the business. These tensions seep out in some angels or seed funds publicly or semi-privately deriding later-stage VCs for their “bad” behavior. I have seen bad behavior from later-stage VCs, believe me. But I have seen equally bad behavior from super early stage investors.

As always a balanced perspective is in order. Here’s what you need to know.

1. Why investors care about prorata rights
Prorata investments rights given investors the right to invest in your future fund-raising rounds and maintain their ownership % in your company as your company grows and raises more capital. This is important for nearly every institutional investor because once you have 25-50 investments being able to “follow” the investments that are working well is critical to making money. It’s why I often advise angel investors to be careful about assuming that being an angel investor is a profitable exercise unless you have the ability to have a wide-enough portfolio to have a few companies doing extraordinarily well plus deep enough pockets to follow your winners.

For institutional money prorata rights are compulsory and usually non-negotiable. Put simply – if you invested early in Google, Facebook, Twitter, LinkedIn, etc. would you want to give up the right to invest in subsequent rounds?

2. Do investors always take up their prorata rights in later rounds?
The simple answer is “No, investors don’t always take up their prorata rights.” Some do, some don’t. Why would somebody pass on takign their prorata rights? For starters some funds are small and thus while they put $750k into your company to own 10% of your company they might not be able to write another $2 million if you then raise a $20 million round (10%). Or your A-round investor who wrote a $5 million for 25% of your company may not be well positioned to write another $5 million (25%) of a $20 million round. Their strategy might be to have 25 companies of $3-7 million total invested and thus $10 million might be more risk in one deal than they typically like to have.

So the answer is: sometimes they take it, sometimes they don’t. And sometimes they take part of their prorata right. The other reason to understand is that sometimes early investors prefer lower prices (say $8 million pre) and if markets are efficient then when your company raises its next round at say $50 million pre that earlier investor might think that they are less likely to make a return on a $10 million financing where they put in $2 million than they are to make a return on their earlier capital.

Thus begins the dance. New investors sometimes want early investors to put in money to “prove” they have confidence in the new price. New investors sometimes want older investors NOT to participate so that the new investor can take more of the round.

All the confusion you hear from friends or read in the press is related to this nuance that early investors demand prorata rights and sometimes fight like hell to maintain them (Facebook problem) and sometimes prefer not to take them (overvalued company that they perceive isn’t doing as well as new investors coming in think).

Finally, some early investors specifically like NOT taking up their prorata. This is for a more complicated reason I call “the mark-up game.” If you invested at $8m pre-money and put $2m in (thus you own 20% of a company at a $10m post-money valuation) and if you put another $2m into a round at a $40m valuation raising $10m ($50m post) you end up with half your money at $8m pre and half at $40m pre thus your average price goes up dramatically. You now own 20% of a company valued at $50 million but you’ve put in $4m to get that. If you didn’t write any money then you would own 20% for your first investment but this is reduced by 20% for the next investors stake (assuming they put the full $10m) so you now own 16% of the company at $50m post (with $2m invested).

In the first case my stake is worth $10 million (20% of $50m) for $4m invested or a 2.5x return (on paper). In the second case my stake is worth only $8 million (16% of $50m) but it’s only on $2m invested so my return multiple is 4x. Neither case is better or worse – they more depend on investor strategy and their outlook on the potential of the company. Generally the larger the investor is the more they will want to invest in subsequent rounds and the smaller the less likely they will always want to. A first or second-time fund has an easier time fund raising when they can show a few 4-8x’s in their portfolio than if they always average up. That’s why I call it “the mark up game” and I’m generally not a fan.

3. Why prorata rights used to be less of a big deal to angels
In the old days there weren’t many fights about whether angels would take their prorata rights in financing rounds. In part this is because conventional wisdom for angels was that it didn’t make sense to write a $1 million+ check in later rounds to follow your prorata. Plus, many VC rounds traditionally didn’t guarantee angels prorata rights unless they were “major investors” which often means they wrote large checks in the angel round. Also, because the entire industry has changed because it is cheaper to start a tech company these days – there are simply way more angel rounds.

4. Why prorata rights are becoming a bigger deal to angels
There are just one hell of lot more insanely rich angels where writing a couple of million dollar checks in a follow on round is actually achievable.

But perhaps the biggest change driving angels these days is just how much more valuable prorata rights actually are. I believe I was one of the first to point this out publicly. A day after I published this Changing Structure of VC article I noticed at least one “Angel Prorata Fund” on AngelList. So if there are platforms like AngelList that help scoop up the prorata rights of angels in deals like Uber, AirBNB, DropBox (or the future companies like these) then perhaps the prorata fight gets worse.

Why? Because tech companies are getting bigger more quickly than at any time in history. Because companies are raising way more capital in private markets than they ever did in the past. And because they are so much larger by the time they go public (think: Facebook $104 billion, Twitter $18 billion, Alibaba > $200 billion) the private value of the most successful companies pre-IPO is more more valuable than it ever was.

5. Why prorata rights are now sought out by LPs
People all across the value chain have taken notice including Limited Partners who are the people who invest in VC funds in the first place. These are typically: University Endowments, Foundations, Public Pensions, Insurance Companies, Family Offices, Sovereign Wealth Funds and Fund of Funds. The number of these groups that did “direct” investments in venture capital used to be relatively small. Direct investment strategies usually mean that they invest in several VC funds and then wait for opportunities to invest in their portfolio companies directly. The challenge historically was that if they were getting a call by VCs to invest they would have to ask themselves the question, “Why am I so lucky to get this call in stead of a later-stage VC?” There are some valid reasons but a healthy dose of caveat emptor has been in order.

But with the massive growth of seed funds being raised and the huge value increase of prorata rights many more LPs have stepped in to take their VC (industry term is GP) position. What would you do as an LP fund if you backed a seed-stage GP who had a position in Twitter, Pinterest, etc. but didn’t have funds to back-up their prorata rights?

6. Why prorata rights are being guarded by VCs
But there is never a simple answer. As I pointed out here, many VCs have raised or are raising “prorata funds,” which are sometimes called “overage funds” or “opportunity funds.” The simple reason why? Prorata rights. On the one hand it makes sense because if you have 20 LPs and 8 of them want direct investments how do you choose? The best way is an opportunity fund as long as the economics are favorable to LPs. The challenge is that if too many opportunity funds are set up and they follow quickly on their “obviously winners” (Shoe Dazzle, Fab, etc.) some may get caught out paying too high of prices for what perhaps will be great deals but not at the prices being paid.

Oy. If only this industry were easy.

7. The prorata fight – between the rounds
Much of this historically didn’t matter to entrepreneurs. At every round there was the “funding dance” between early investors and late ones. Usually it was the later ones forcing earlier investors to write checks to prove that the new investor wasn’t being suckered into a higher price. But these days with many “mega funds” ($600m – $1b+) often they care more about writing a large check and getting large ownership percentages than they do about proving the earlier-stage investor has confidence. If they trust their own due diligence process why worry about a silly thing called “signaling?”

So now the fight often happens. Angels / seed want their full prorata. Later stage investors want a maximum size check. As the rounds progress more and more people are fighting. How does this get resolved?

If you ask an early-stage investor it’s the “greedy late-stage investors who are screwing me out of my prorata rights.” In fact, I was at a recent early-stage VC/LP conference where this was accepted as conventional wisdom. Late stage investor are saying, “You guys got your ownership – if we’re going to ‘pay up’ and write a $30 million check you need to be fair and step back from your full prorata. Maybe take some. Maybe take none.” So they play hard ball and say, “If your investors won’t give up prorata rights we won’t invest.”

Entrepreneurs can be caught in the middle.

8. What a second, what about entrepreneurs? Aren’t they getting screwed?
Sometimes entrepreneurs get screwed. This might happen because to meet all investors needs they end up selling too much of the company, taking too much dilution and feeling beat up. If you listen to conventional wisdom this is the only thing happening.

As I like to point out, the truth is often more nuanced. Smart entrepreneurs have often used this competition / appetite to invest to their advantage. How? Have you noticed the increase of founders selling their personal stock in what is known as a “secondary?” As in – the company may or may not ultimately succeed but I’m going to take $2-5 million off of the table now to derisk my personal situation. This is a direct result of the prorata shuffle more than just goodwill by investors.

There are 100x entrepreneurs to investors and 10x early-stage funds to late stage funds and the earlier the more likely to blog. That’s why you keep hearing how smart convertible notes are when they truthfully screw founders daily. Angels were called that originally because they once were so benevolent that they acted often out of founders’ interests than their own. Now that “angeling” is a big business and seed funds are booming – I think the term angel has become a bit of an oxymoron. All investors should be considered exactly that.

So what I would say as somebody who actually is an early-stage investor but tries to be more philosophical about motives across the value chain and not ascribe “good guys” and “bad guys” nomenclature but rather look at motives and realpolitik … the fight over prorata rights has goods & bads and smart entrepreneurs can use this to their advantage in a bull market like now. Times won’t always be good. The rules change and when they do they change quickly. As of the time of this publication – prorata rights are more the entrepreneurs friend.

9. VC approaches to prorata rights & how we’re solving this at Upfront Ventures
Often VCs don’t allow small investors prorata rights. I actually understand this a bit. If you as a VC are dealing with a larger downstream VC and decide it’s in the best interest of the company to give up half your prorata right (even if you prefer not to) you don’t want 15 other earlier investors saying they won’t give up any of their prorata rights.

So historically many – including myself – including the “major investor” provision so that anybody who wrote a large check would get the guaranteed rights. To be clear – that doesn’t mean angels don’t get prorata rights – it merely means they aren’t guaranteed. I liked this because then as a group we could decide what to do rather than requiring unanimity.

I have a new approach I’ve started implementing. I don’t want angels to get screwed. So I’ve started allowing angels prorata rights regardless of their check size. But I’ve started putting in a rule that the majority of our class of preferred shares can vote to waive these rights entirely or in part. And to the extent that I waive my rights (if we constitute a majority) then everybody in the round must waive their rights. That is the most founder friends AND angel friendly way of doing it that I have found.

BUT. And there’s always a but.

I include a clause that to the extent that the majority does take part of its prorata it must offer the same to angels who have participated in that round in the exact same proportion as the majority takes. So if I as 80% of a round work with the CEO and determine that it makes sense for us to only take 40% of our prorata to make room for a new, important, investor and not overly dilute management then I can require all people in my round to do so. But I can’t secretly take 50% while offering angels 0%. That seems fair. We are all bound to the same economics. And it is worse not to have a “majority” clause because if larger investors give up rights you don’t want to negotiate with each and every angel.

That’s my approach. This is my view about prorata rights. I’d love for people to weigh in. I have to race to the airport so I can’t edit until later. Excuse the typos. Forgive any sarcasm. Let’s have a fuller debate in the comments section. Our industry needs to figure this out.

(Cross-posted @ Both Sides of the Table)

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Planning to Do a SaaS Startup? Don’t Forget the 20 Interview Rule. Fri, 10 Oct 2014 16:35:00 +0000 Recently I spent some time with two seemingly similar SaaS start-ups.  Both are at about $100k in MRR (congratulations!).  Both have happy, enthusiastic customers.  Both have really great products and are organically growing.  Both have great founder CEOs. But even though both are now at $1m ARR … one is just so much better positioned […]

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Screen Shot 2013-10-09 at 9.14.50 AMRecently I spent some time with two seemingly similar SaaS start-ups.  Both are at about $100k in MRR (congratulations!).  Both have happy, enthusiastic customers.  Both have really great products and are organically growing.  Both have great founder CEOs.

But even though both are now at $1m ARR … one is just so much better positioned than the other for success getting to $5m and $10m in ARR quickly.   And at least in this case, in this case study, the difference to me is clear:  the Better Positioned $1m ARR SaaS Start-Up Knew Its Customers From Day 1.  The other one at $1m ARR, figured it out on the fly … and really, is still figuring it out.

What’s the difference you might ask?  They both got to the same place, at the same time, more or less.  Well the difference is architecture.  Not just software, but the whole company.  The start-up that didn’t know who its core customer would be is behind on team, behind on market presence, behind on how to market and sell to its core customers, and behind on visibility at the prospect level.  And the start-up that knew who its target customer was has a more appropriate team for its customers needs, and accelerating visibility at the prospect/market level.

I know everything can’t go according to plan in any start-up.  It certainly didn’t for me.

But let me just make one suggestion if it’s early days:  Don’t Forget the 20 Interview Rule, if you are planning to sell to the enterprise / businesses of any meaningful size.

The 20 Interview Rule is simple:  Before You Write a Line of Code, Interview 20 Real, Potential Customers.  Not your friends.  Not people you know.  They have to be real potential buyers.  I.e., if you hope to sell to sales managers, you can’t interview a rep.  You have to interview a VP or Director of Sales or Sales Operations.

And you have to do 20.  I know it’s hard to get to 20.  But it’s the right number:

  • You need the First 5 Interviews just to truly understand the white space and the current opportunity.  Yes, you probably think you already understand it.  But you are the vendor, not the purchaser.  You need to understand your prospective app from the purchaser’s perspective, for real.
  • You need the Next 5 Interviews to confirm your pattern recognition.  You learn from the first 5, you confirm in the next 5.
  • You need Interviews 11-20 to Nail Your Pitch and Hone Your Thesis.  Once you truly understand the white space from a buyer’s perspective, and you’ve figured out the nuances and challenges … it’s time to nail your pitch for real.  And by doing this, you’ll also hone your thesis and strategy.   That’s what interviews 11-20 are.  To get real critical feedback on what you’ve learned.  To learn about corner cases that may in fact be critical insertion points for you to win.  To dig in on what is really 10x better, not just 2x or 5x better.

And let me tell you, at least from my experience, don’t expect all 20 to be positive.  Many of My 20 Interviews in both my start-ups were very critical.  Or worse, lukewarm.  Lukewarm is even worse, because it says yeah it’s sort of interesting … but no way I’d buy … and implicitly … your idea is a huge waste of time.  I’d rather get the negative feedback ;)

I get the Steve Jobs thing.  You just have to build it.  You do.  But this is SaaS.  You’re solving a business’ problem.  They don’t know how to solve it, or what you should build.  But they do now how to express their problem.  Acutely, and thoughtfully.

So even if the specific feedback on your product and idea is off-point — the learnings on the true pain point you’re solving will be perfectly on-point.

So if you haven’t started yet, as fun as it is to just build the wireframes and get a codin’ … do the 20 Interviews.  For real.  Don’t skimp here.  And listen.  And if nothing else, force yourself to make key changes to your assumptions based on those learnings.  It will pay off.


You may want to read Bob Warfield’s reaction:

Secrets of When and How to Talk to Customers at a Startup

(Cross-posted @ saastr)

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Come to the SaaStr Sessions at Dreamforce — And Win a Free Ticket to the SaaStr Annual in February (And Other Good Stuff) Thu, 09 Oct 2014 14:05:17 +0000 We’ve got 2 great SaaStr sessions at Dreamforce on Wednesday, October 15 at 1pm and 3pm.  Each has about 15 seats left so add them to your Dreamforce event planner now! To make it (even more) fun, we’ll give away 2 free tickets to the SaaStr Annual on Feb 5, 2015 in San Francisco (details […]

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We’ve got 2 great SaaStr sessions at Dreamforce on Wednesday, October 15 at 1pm and 3pm.  Each has about 15 seats left so add them to your Dreamforce event planner now!

Screen Shot 2014-09-16 at 6.29.52 PMTo make it (even more) fun, we’ll give away 2 free tickets to the SaaStr Annual on Feb 5, 2015 in San Francisco (details coming soon) to attendees, which will be an awesome all-day, hands-on day of SaaS founders teaching you to get from $0 to $100m faster, with fewer mistakes.   We’ll also give away 20 SaaStr T-shirts as well!

So be there.

Previews of the 2 sessions below.  The first is on Benchmarking — How Well You Really Have to Do.  And we’ll have 2 live case studies there with 2 outliers — Talkdesk and GuideSpark.  Pretty cool.

The second session is The Entrepreneur’s Survival Guide – The Best of SaaStr.  We’ll go through all the learnings about getting to Initial Scale and beyond.  It will be pretty fun and a great way to connect our most popular themes and learnings on SaaStr.

See you there!

Screen Shot 2014-10-03 at 1.35.52 PM

(Cross-posted @ saastr)

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Mission impossible? White House looks for new CIO Thu, 09 Oct 2014 14:00:05 +0000 As President Obama seeks a new U.S. Chief Information Officer, it's time to examine the opportunities and obstacles associated with this important role.

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white-house-274x300Among Chief Information Officers, the U.S. federal government CIO stands in the unusual position of being a national policy leader and operational executive overseeing a $75 billion IT budget [.XLS].

At the same time, the size and political complexity of this role present significant challenges to accomplishing meaningful change.

Recently, the second U.S. federal CIO, Steven VanRoekel, left hisposition to become Chief Innovation Officer for USAID. Among those whose names have been raised in speculation for the role are two former CxO-Talk guests: Dr. David Bray, CIO of the FCC, and Dr. Alissa Johnson, Deputy CIO of the White House.

As the White House seeks a new federal CIO, it is a worthwhile time to discuss this important role. Technically, the E-Government Act of 2002 PDF full-text download, created the office of the federal CIO and the CIO Council. The first person actually to use that title, however, was Vivek Kundra, who left the position to become an executive with Steven VanRoekel was, therefore, the second to hold the title of U.S. federal CIO.

Just after leaving office, Vivek Kundra wrote a New York Times piece criticizing “IT cartels,” incumbent technology vendors and services providers who create inefficiency and unnecessary cost by wielding excessive influence over IT procurement. These inefficiencies show up as late, over-budget, and ineffective projects collectively known as IT failures. The long list of failures includes and many others chronicled in this blog.

Vivek Kundra’s efforts to address the problems included creating the federal IT Dashboard, to bring transparency, and embracing a cloud-first policy. His leadership helped focus broad attention on the enormous problem of IT failures while giving government-scale credibility to the cloud and software-as-a-service.

These accomplishments are important because transparencyand new models of computing are necessary foundations for the long-term reform of federal IT. However, despite his efforts, it is reasonable to question whether Kundra’s initiatives did much to reduce the number of failed IT projects. After all, high-profile project failures continue to this day. That said, the root causeof IT failures has little to do with technology, but results from organizational and procurement decisions spread throughout the government.

Projects fail when buyers procure technology and services without incorporating sufficient safeguards and accountability, on both the government and vendor sides. Policy decisions alone cannot solve this massive problem; it requires thousands of IT personnel throughout government to rethink how they buy and execute projects.

As the second U.S. CIO, building on the efforts of his predecessor, Steven VanRoekel, introduced several innovations. According to former White House CIO, Brook Colangelo, who is now Executive Vice President and Chief Technology Officer at learning company Houghton Mifflin Harcourt (and was also a guest on CxO-Talk), VanRoekel did a “great job.” Colangelo told me that VanRoekel accomplished three important things:

  • Raising the profile of federal CIO role

  • Creating a pipeline for talent with the Innovation Fellows program

  • Beginning an effort to transform federal procurement related to IT

Colangelo notes that both federal CIOs brought significant attention and openness to government IT: “Without people like Steve and Vivek, we would not have the opportunity to continue this conversation. They both fought to do innovative work while trying to keep the lights on.” He also explains the importance of the federal CIO:

Because of where the role sits, it is incredibly powerful. The federal CIO sets the IT budget for the entire government and has tremendous influence. For example, Vivek’s cloud-first policy helped spark a broader move toward the cloud.

Creating the U.S. Digital Service is one the important accomplishments in which VanRoekel participated. The Digital Service built a playbook of best practices for running technology and IT projects in government. It’s a practical guide to modern thinking about project management and digital transformation.

The playbook is consistent with another federal organization, the 18F group, hosted by the General Services Administration, which tries to bring current methods to digital services in the government. Yet another playbook, for modern practices related to Federal Acquisition Regulation, called the TechFAR playbook, looks at federal technology procurement from an Agile perspective. All these initiatives demonstrate pockets of significant innovation within federal IT.

Despite innovation going on in parts of the federal government, changing the system remains a formidable task, so I asked Alex Howard to place VanRoekel’s accomplishments into context. Howard is a columnist for TechRepublic and the founder of “E Pluribus Unum”, a publication focused the intersection of government, technology, civil society and digital journalism; he is also another past guest on CxO-Talk:

As U.S. CIO, Steven VanRoekel was a champion of many initiatives that improved how technology supports the mission of the United States government. He launched an ambitious digital government strategy that moved further towards making open data the default in government, the launch of the U.S. Digital Service, 18F, and the successful Presidential Innovation Fellows program, and improved management of some $80 billion dollars in annual federal technology spending through PortfolioStat.

As was true for his predecessor, he was unable to create fundamental changes in the system he inherited. Individual agencies still have accountability for how money is spent and how projects are managed. The nation continues to see too many government IT projects that are over-budget, don’t work well, and use contractors with a core competency in getting contracts rather than building what is needed.

The U.S. has been unable or unwilling to reorganize and fundamentally reform how the federal government supports its missions using technology, including its relationship to incumbent vendors who fall short of efficient delivery using cutting-edge tech. The 113th Congress has had opportunities to craft legislative vehicles to improve procurement and the power of agency CIOs but has yet to pass FITARA or RFP-IT. In addition, too many projects still look like traditional enterprise software rather than consumer-facing tools, so we have a long way to go to achieve the objectives of the digital playbook VanRoekel introduced.

There are great projects, public servants and pockets of innovation through the federal government, but culture, hiring, procurement, and human resources remain serious barriers that continue to result in IT failures. The next U.S. CIO must be a leader in all respects, leading by example, inspiring, and having political skill. It’s a difficult job and one for which it is hard to attract world-class talent.

We need a fundamental shift in the system rather than significant tweaks, in areas such as open source and using the new Digital Service as a tool to drive change. The CIO must have experience managing multi-billion dollar budgets and be willing to pull the plug on wasteful or mismanaged projects that serve the needs of three years ago, not the future.

Let’s hope the next U.S. CIO can even start to fulfill these lofty aspirations.

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

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What is the Definition of a Seed Round or an A Round? Tue, 07 Oct 2014 16:33:28 +0000 Marc Andreessen kicked off another great debate on Twitter last night, one that I’ve been talking about incessantly in private circles for the past 2-3 years – what actually IS the definition of a seed vs. A-round.   This is something I think entrepreneurs don’t totally understand and it’s worthwhile they do. My view: “Spending […]

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Marc Andreessen kicked off another great debate on Twitter last night, one that I’ve been talking about incessantly in private circles for the past 2-3 years – what actually IS the definition of a seed vs. A-round.

Screen Shot 2014-10-07 at 6.27.58 AM


This is something I think entrepreneurs don’t totally understand and it’s worthwhile they do. My view:

“Spending any time or energy trying to game the ‘definition’ of your round of fund raising is a total waste. Nobody cares. No VC will be so naive as not to see straight through it. And actually many will probably find the gamesmanship as a bad sign of lack of property priorities or perspective.”

Here’s how all the drama started for me.

When I first became a VC, seed rounds were typically $500k – $1.5 million. There weren’t a lot of seed funds in 2007 so this was often done by angels, funding consortia or sometimes early-stage funds that existed then (First Round Capital, True Ventures, SoftTech VC, etc.). A-rounds back then seemed to be anywhere from $2-3 million (LA or NYC) or up to $5 million in Silicon Valley. $5 million was always the classic definition of an A-round between the late nineties (crazy financings aside) and say 2007.

What changed — and why the definition changed — was it became 90+% cheaper to start companies and thus seed funds appeared en masse as did angels so the size of seed rounds actually INCREASED and the size of A-rounds in many instances decreased. Why the latter? My speculation is that entrepreneurs had more options and wanted to take less dilution so the old $5 million for 33%-40% of your company no longer made sense and on the VC side it made no sense to pay $20 million pre ($25 million post, which implies the VC gets 20% of the company = 5/25). [If you're newer to VC math here's a great primer]. So VCs started writing some smaller A-rounds.

If you want a great primer on how the VC and startup funding scene changed here’s a great primer.

But. [and there's always a but]

Entrepreneurs started demanding that VCs call their first-round financings “seed” rounds even if they were $3 million.

I saw this myself a few times in a row. I had very smart entrepreneurs where I gave the company $2-3 million and we raised anywhere between $3-5 million and when I put A-round in the term sheet they had their lawyers change it back to seed rounds. I found this annoying (I can’t think of a better word for the behavior) because it seemed like entrepreneurs were more concerned about the optics of the financing round than who was participating, would the lead (me) but supportive or simply focusing on building a great product and trusting that the financing nomenclature would work itself out. I think it would have been equally annoying if I had chosen to be dogmatic about it. If I had said, “You MUST call it an a round because be honest – it is an A-round” I think would make me a bit hypocritical. So I did not. I simply said, “Call it whatever you want but frankly I don’t understand why you’re obsessed with this. It seems such a silly thing to focus on.”

But since it was equally silly for me to fight, seed rounds they became. Equally silly were advisors & entrepreneurs insisting that founders use convertible notes but we funded a few of those, too.  I have come to realize that since the great tech boom started in 2009 and given the massive increase in first-time angels, first-time seed funds, first-time accelerators … the market is just filled with well-intentioned, but inexperience advice. Whom you take advice from really matters.

So back to reality. If it looks like an A-round, smells like an A-round & tastes like an A-round … it’s an A-round. My personal definition? It is less about actual money and more about structure of your Cap Table. If you have raised $2-4 million from a bunch of high-net-worth individuals I simply don’t see it as an A-round. If you raised $2 million from two small seed funds I probably don’t either (although in the past I would have). But if you raised $3-5 million from well-known seed funds or from a VC and you’re asking for $8-10 million in your next round … that next round is a B-round no matter what we collectively decide to call it when we VCs fund you.

I think an easier definition is “first institutional capital” which is what most A-round VCs think about what their personal funding strategies are. They want to be early and first.

I haven’t obsessed about what definitions people choose for precisely the reason I would advise entrepreneurs not to. It’s simply not worth the time, effort and drama. But I would say a couple of things:

– I now believe that entrepreneurs who are overly obsessed about the optics of the nomenclature of A-round probably set off some invisible red flag in some VC investors mind even if the VCs don’t internalize it themselves. I know it does in my mind. Obsessing about the wrong things in starting a company says something about one’s priorities even though this is subtle and hard to define. I’m not saying I won’t fund somebody who did a $4 million seed round before I got involved. I will. But if I’m funding their “first institution capital” round and they are obsessed about what we call it that is probably not a great sign for me.

– What Marc said above. Please know that I have never met an experienced VC who can’t pierce through any mechanics in your deal and see your company history in a fairly accurate light. If you raised $1m, then $1m, then $500k over a 2-year period they will most likely assume you had a hard time raising capital. That’s ok. It’s hard building a startup. But no amount of “spin” will change how they view you so it’s best just to be honest. And if you have raised $6 million from non-startup-type investors they will probably see you as an entrepreneur who prefers easy, dumb money over putting in the effort to find the right long-term investors no matter how you try to convince them your hedge-fund buddies really make great funding partners for a startup. If you have raised $6 million in a “seed” round and you’re looking for $10-12 million for your A-round they simply will mentally adjust that they’re funding your B.

In the end, life most things in life, none of it will matter unless you build shit people care about and use en masse and thus you can attract capital even if you call it a Z-round. But my advice to entrepreneurs – stop sweating the silly optics. It’s more likely a negative signal to VCs than a positive one.

(Cross-posted @ Both Sides of the Table)

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I Never Lost a Customer I Actually Visited Mon, 06 Oct 2014 18:11:57 +0000 There’s a lot to talk about in customer success about churn, and about upsells.  Together, they are one of the most critical topics in recurring revenue business models. To all that, I wanted to add one very tactical insight:  of the 1000s of customers we closed when I was running EchoSign … while we lost a few […]

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There’s a lot to talk about in customer success about churn, and about upsells.  Together, they are one of the most critical topics in recurring revenue business models.

Screen Shot 2014-10-03 at 11.15.31 AMTo all that, I wanted to add one very tactical insight:  of the 1000s of customers we closed when I was running EchoSign … while we lost a few over time for many reasons, indeed we lost some great customers … we never lost a single one I actually visited. At least not on my watch.  Not one.

Why is that?  Is it my scintilating conversation?  My electric personality?  No, and no.

It’s because we generally, naturally, misunderstand why we lose customers, and where to spend our time.  My somewhat non-obvious learnings:

  • Complaints are not, directly, an indication of a customer at High Risk.  Whiny customers will stay.  It can be alarming, blood-pressure raising, when a critical customer complains about your product, your features gaps, your team, or even, ahem, talks about switching to the competition.  But it turns out, complaints = engagement.  Your customers that complain, they do care.
  • On the other hand — satisfied customers will “mysteriously leave”.  Some of your highest-utilization, least-complaining, never-raised-an-issue, maybe even gave-you-a-testimonial customers … will leave.  Seemingly out of the blue.  Maybe your competitor sold over your champion’s head.  Maybe there was an RFP you never even were a part of.  Maybe it can from the CFOs office, or the CIOs office, or the GCs office, or somewhere you don’t have great ties.  You turn around, and your reasonably — or even super happy — customer is gone.

It can get even more extreme that this.  At EchoSign, in particular we had a lot of customers that bought us together with Salesforce, SAP or other systems at the time they were implementing them.  They’d buy Salesforce, buy us inside of Salesforce … and then a year would go by, and they’d never deploy Salesforce.  Because of that, they’d never use us.  And yet — they’d all renew.  Often even for the third year.

So what’s actionable here, if you can lose happy customers without a hint of notice, and magically keep angry ones?  I don’t have all the answers.  Measuring everything helps (and luckily we now have software tools to do this for you).  Building deep relationships across the organization with your customers helps too.

But it turned out for me, at least, one thing always worked, as a founder CEO.  Flying to visit the customer.

Because in the enterprise, customers aren’t just buying bits.  They’re not just buying software, as it exists today.  This isn’t on-prem software.  It’s SaaS.  It evolves.  A little every quarter, a lot every year, and dramatically over time.

Screen Shot 2014-10-03 at 11.44.04 AMSo when your prospects and your customers actually meet you, they’re buying you.  Not just your product as it exists today.  But also — your vision, your strategy, and your commitment to making the product better and better over time.  And they’re buying, and getting, your social contract to deliver for them over time.  So they get a win in the organization.  Not just some tool.

If you get on a plane, I can’t guarantee you’ll win the deal.  But I can guarantee two things.  First, your odds of closing it go up if you show up and your competitor doesn’t.  And maybe even more importantly, given how critical second-order revenue is in SaaS … if you go there, and you present your vision, passion and commitment … and you maintain that connection over time … I don’t think you’ll ever lose that customer.

Not never.

(Cross-posted @ saastr)

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Is Reddit’s Decision To Kill Off Remote Workers A Good Idea? Mon, 06 Oct 2014 13:45:22 +0000 The popular user generated content site reddit just killed off their remote worker program and issued a mandate that everyone must move to San Francisco or they are no longer going to be employed by the company. Clearly this is causing a lot of discussion and while I don’t think we have the exact details […]

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RemoteWorkingThe popular user generated content site reddit just killed off their remote worker program and issued a mandate that everyone must move to San Francisco or they are no longer going to be employed by the company. Clearly this is causing a lot of discussion and while I don’t think we have the exact details around this, I do have some thoughts on the announcement, in fact we recently released a whitepaper on this very topic called, “The Manager’s Guide to Leading Teams Working Under Flexible Work Arrangements.”

The big issue with many physical workplaces today is that they are a poor reflection of how we want to work, the year that work in (we live in 2014 and work in 1975), what we value, or how we see ourselves. When your physical environment doesn’t align with your values, approaches towards work, or how you work- you start to resent it. This is why so many people despise cubicles and why so many offices today seem antiquated.

However, having just come back from the AirBnB headquarters in San Francisco I can say that there plenty of office spaces around the world that do a great job of getting employees to WANT to work there. Lithium Technologies, Pixar, Airbnb, The Motley Fool, and others all do a wonderful job of this. These companies also don’t force a standard 9-5 work day. In other words, your office is your home base but if you need to leave at a certain time to run an errand or pick up a kid from school, you can do it.

I strongly believe that we don’t HAVE to rely on offices as the only place that work needs to get done, in other words, I don’t agree with a “you have to come into work every day from 9-5″ approach. Still, we have to remember that flexible work and tele-work are not the same thing. Flexible work gives employees a choice of when and where they work but an office can be one of those choices which means that you can ask for some common “physical time” every week but not require that ALL work be done in an office. Today, we can work from anywhere we have an internet connection so it seems a bit nuts for any company to force people to come into the office unless that is what their corporate culture supports.

The corporate culture clearly plays a big role here, there are many companies around the world that have full-time remote employees which are always location independent and timezone independent. Some companies force a 9-5 in office work-day and others seem to be more willing to meet in the middle.

But, if companies want employees to come to an office they should absolutely create a physical environment that people will actually want to come to, otherwise what’s the point? I see nothing wrong with flexible or remote work.

So back to Reddit, overall I don’t agree with their approach for several reasons, many of which were outlined in the article above:

  • the very employees who helped make reddit successful are getting canned
  • talent doesn’t only exist in SF
  • I haven’t seen data which shows that remote work hurts of hinders collaboration
  • the cost of living in and around SF is among the highest in the nation so forcing people to uproot and move there is a bit extreme
  • many companies around the world have part/full-time remote workers and flexible work programs and are doing quite well with them

What do you think about their recent announcement?


(Cross-posted @ The Future Workplace)

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Three Words Entrepreneurs (and VC’s) Should Take to Heart Mon, 06 Oct 2014 07:05:18 +0000 Note: this is a non-religious post. This weekend was Yom Kippur, holiest of the Jewish holidays and the day of atonement. It’s also the day when most Jewish minds are least focused since one needs to fast for 24 hours. I sat in schul listening to the rabbi’s sermon and given my mind is prone […]

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Note: this is a non-religious post.

This weekend was Yom Kippur, holiest of the Jewish holidays and the day of atonement. It’s also the day when most Jewish minds are least focused since one needs to fast for 24 hours.

I sat in schul listening to the rabbi’s sermon and given my mind is prone to ADD anyways I must admit that my consciousness often floats around the room but even more so on Yom Kippur. But our rabbi captivated me this year and reminded me of one of the most important lessons I learned myself 15 years ago.

She started with a story — a parable — as Jewish people are wont to do. She told of the teaching of the Talmud – a book which scholars use to debate doctrine and from which Jewish people are reminded to always learn and to debate.

“A rabbi is teaching a young Jewish scholar and he says, ‘Two men go down a chimney, one is dirty and the other is clean. Which one takes a shower?’

‘The dirty one takes a shower says the young scholar.’

‘Are you sure? What if the dirty one saw the clean one perhaps he would assume that he himself was clean. And if the clean one looked at the dirty one perhaps he assumed he was also dirty and thus took a shower.’

‘I see. I guess maybe the clean one took the shower thinking he was dirty.’

‘No. How can you say that? Perhaps there was a mirror in the room and each could see whether he was clean or dirty.’

‘Oh, you’re right. Of course the dirty one took the shower.’


‘Rabbi. I don’t understand? You first told me the clean boy may have taken the shower. You then told me the dirty boy took the shower. I’m confused. Which one took the shower, Rabbi?’

‘That is the wrong question to even ask. You should be asking yourself … how could two boys go down the chimney and one ended up dirty and the other ended up clean?!’

The correct answer is ‘I don’t know.’ ”

And that was the lesson from the rabbi to us. She reminded us that in the world we live in we are often expected to be experts. We are expected to know everything and many people rush to conclusions given a limited set of information.

The Talmud, like much of Judiasm, encourages debate and discussion and we are taught to always question our assumptions.

Learning comes from starting with a point-of-view that says, “I don’t know.” I said I learned this 15 years ago because that is when I stopped being a consultant. I enjoyed the first half of my time at Andersen Consulting (now Accenture) because I was a computer programmer and had to build stuff that actually worked. But as I rose in my career (and post MBA) I moved into a role in which I was to advise board-level executives on topics where I was expected to rapidly become an expert.

Some areas were easy because they were technical and the answer was knowable or estimate-able. I did a study for a large European mobile operator on whether they should bid for 3G spectrum and if so how much was it worth. That was an awesome project and the answer was quantifiable.

But much of the work was unknowable. What is the right organizational strategy for a large UK conglomerate to operate more effectively? How should a large European telco deal with a rival “free Internet access” startup? What would the right technology strategy for Telecom Italia be in 5 years. The problem with consulting is that they hire very smart, young people out of top colleges who come in to evaluate data and advise large organizations but the people doing the work are often only book smart.

As a consultant you’re not paid to say “I don’t know,” you’re paid to come up with an answer. And the problem is that you know that you’re being paid a lot of money to seemingly know the answer and to almost know it even before the work has been done. Consultants spend all of their time pretending to know these answers. In the end my guess is that many internally feel conflicted because it never feels nice to pretend to have all the answers when you really don’t.

If you started every project assuming you really didn’t know the answers and if  you were in search of experts who probably had more experience than you, the chances are you would expand your consideration set when you chose how to tackle each problem.

In my experience many VC’s fall into this “I’m expected to know all the answers” trap. For me, after nearly a decade in the trenches of being an entrepreneur I felt I was un-brainwashed from trying to pretend I had all the answers.

I remind my colleagues this all the time. I believe that our job can be stripped away to its core: We have to be really good at identifying talent and we have to be competent enough in startup operations and finance that they want to work with us and figure out the answers together. We are their sparring partners, their sounding boards. We are not to lead them into some vision in our head of how their markets should work. It is unknowable. Any true disruption will change all the rules.

The more self-assured the VC is and the more impressionable the entrepreneur is the worse the outcome. You have on one side somebody really smart pretending to know the answers and on the other side somebody who is staring at the problem, the facts and the data every day but trusting the judgment of somebody who is faking as though they know what to do. Every situation is different.

I don’t know.

I sometimes see VC’s come up with “thesis-based investing” and I get this at 20,000 feet because we can be smart enough to know the general fields where we believe innovation will have attractive properties. That’s part of the value we provide.  But then we must go in search of teams who are passionate about solving these problems and going to battle every day in their respective fields. It’s ok for us not to be the experts.

I often hear pitches and think to myself, “that sounds plausible” but I nearly always start with the position that I’m not sure. I love the intellectual challenge of trying to figure out what hypothesis I think holds for each opportunity. And often the better question for me than whether this solution will work is, “Will this entrepreneur be able to figure out which solution will work over time given 95+% of the time I won’t even be there to debate with him or her?”

I’ve already blogged about how I work through this process: I triangulate. And I encourage entrepreneurs to triangulate as well.

It helps as a founder or CEO to start with a position that you don’t know. To quickly assemble experts and ask them 50 questions until you have a point-of-view. Don’t start by thinking you know all the answers. Don’t feel that you need to. I find that most people respect others who are willing to learn rather than preach.

Sometimes in your own small organizations you feel like you’re expected by your staff to have the answers. To the extent that your organization feels this way you could form networks of your peers, hold lunches and share knowledge. The funny thing about peer groups is that the more you open up about the issues you’re struggling through the more you’ll find your peers will open up, too.

In fact, I would go as far as to say that when I encounter entrepreneurs who I can see pretending to know everything I tend to be more skeptical. I am never put off by somebody who answers one of my questions with, “That’s a great question. I’m not totally sure. I would think a, b, c. But let me spend more time thinking about that and get back to you.”

Willingness not to pretend you know all the answers lightens your burdens. Opening your mind to the fact you may not always be right will force you to seek others opinions more readily. As a leader you have to make tough decisions with incomplete information but that is different from pretending you know the right answer.

The right answer often is, “I don’t know.”

(Cross-posted @ Both Sides of the Table)

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One Company’s Quest To Eliminate Email Thu, 02 Oct 2014 15:40:51 +0000 In 2011 the Chairman and CEO of Atos, Thierry Breton, publicly announced that he was on a mission to become a zero email company by 2013 (at least as far as employee communication and collaboration was concerned). When he announced this a few years ago it’s safe to say that their were plenty of cynics […]

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In 2011 the Chairman and CEO of Atos, Thierry Breton, publicly announced that he was on a mission to become a zero email company by 2013 (at least as far as employee communication and collaboration was concerned). When he announced this a few years ago it’s safe to say that their were plenty of cynics and skeptics, after all, how could a global information services company with over 76,000 employees in 47 countries get rid of email? However, Thierry realize that email is not an effective way for employee to work, collaborate, or communicate, instead it was decided that a shift towards more collaborative platforms was required.

This infographic helps tell the story of the Atos zero email initiative:


He [Mr. Breton] estimated that barely 10 per cent of the 200 messages his employees received on an average day were useful, and that 18 per cent were spam. Managers spent between five and 20 hours a week reading and writing emails.”

The article went on to say that,

“When 300 Atos employees measured their email traffic for a week, they found they had sent or received 85,000 messages. Within Atos, 73 per cent of employees estimated they spent more than one quarter of their time managing email, and 82 per cent said they had trouble keeping on top of it. Most importantly, the majority felt this time was wasted and added no value to their day or to the company.”

Clearly these numbers are a bit scary and demonstrate clear justification for the need to go email free. So, three years later, how is Atos doing with their initiative? Well, they aren’t email free yet but Gartner recently did a report on them and here are some recent numbers.

  • 2013 operating margin is 7.5, up from 6.5 percent in 2012. Free cash flow increased year over year from €267 million to €365 million, earnings per share increased more than 50 percent, and selling, general, and administrative costs declined from 13 percent to 10 percent. It’s hard to give all of this credit to email reduction but it is correlated.
  • Atos did reduce email by 60% going from 100 email messages per inbox per week to just under 40 by the end of 2013. The average number of internal email messages dropped from 100 per mailbox per week in 2011 to fewer than 40 by the end of 2013, a 60 percent reduction. The goal was to reduce this by another 20% by mid 2014 but I wasn’t able to find any current numbers on if this actually happened
  • Through using their own internal collaboration platform (called blueKiwi, which they acquired a few years ago) they now have over 74,000 employees who are participating in around 7,500 communities and posting nearly 300,000 times per month and viewing almost 2 million pages per month.

Through their report Gartner identified four key practices to help with major corporate culture change (in this case, getting rid of email)

Clear and compelling justification- Managers were very clear and specific with how zero email impacts employees and what this initiative means to how they work. The effort must make sense for employees as individuals, a point that I have been driving across for several years!

A sense of urgency- Setting a clear deadline and making this effort public and tangible was key.

Big investment and complete commitment- Atos tied bonuses and performance evaluations to the zero-email effort (10% of an executives bonus was tied to this). Gartner estimated that Atos is investing 500x more than what a typical company invests in their collaboration efforts. This might sound like a lot but I can tell you from personal experience that most of companies I have worked with or researched are actually under investing in their programs!

Collect success stories- Atos collected and shared as many success stories as they could. One story came from a service desk in Brazil where it was reported that customer issues were resolved up to 30% faster as a result of this effort and that both employee and customers were happier.

Clearly what Atos is attempting to do falls on the “outlier” scale but it should be an inspirational call to action for other organizations around the world to take steps towards creating a more collaborative organization where communication doesn’t depend on technology that was invented in the 70′s. As I’ve long stated, we shouldn’t have to live in 2014 and work in 1975. If a global organization with 76,000 employees can reduce and almost eliminate email, than so can your organization.

Now…go check your email.


(Cross-posted @ The Future Workplace)

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Open source history, present day, and licensing Wed, 01 Oct 2014 09:00:00 +0000 This article is part of my talk, Open-Source Business Models. You can see the full transcript and the video of my talk on My name is Marten Mickos and I’m the CEO of Eucalyptus Systems. As Tom mentioned, I was the CEO of MySQL for eight years. I was de facto the only CEO […]

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This article is part of my talk, Open-Source Business Models. You can see the full transcript and the video of my talk on

My name is Marten Mickos and I’m the CEO of Eucalyptus Systems. As Tom mentioned, I was the CEO of MySQL for eight years. I was de facto the only CEO that the company ever had from 2001 to 2008 when it was sold to Sun, and then one year at Sun Microsystems. I’m here tonight to talk about open source business models which is a difficult, complex, complicated nuanced topic that doesn’t really allow itself to be structured and summarized, but I’ll do my best anyhow.


I thought I would ask how many of you use open source software, and that’s a silly question because everybody would have their hand up. But, do we have open source vendors in the space, in the audience—people who are building an open source business? There’s one, okay, two, three, four. Excellent!

We also have others who are using it or maybe are participating in it. I’ll try to cover all of that in the next 20-25 minutes and then we’ll do questions and answers. Then, I do have a relatively hard stop, so if you see me rushing out of the space it’s not because I don’t like the discussions, it’s because I have something else I’m going to. But you can absolutely email me afterwards if you have some question or something I can help you with.

Joining MySQL in 2001

I can tell you that when I joined MySQL in 2001, I knew practically nothing about open source. I knew something about databases, and I happened to be friends with the founders of MySQL. They called me in December of 2000 and said, “Marten, we are sitting here in the kitchen and we need a CEO and we think it’s you.” And I said, “No!” That was my first response. It turned out that I joined as CEO and I had to decide to learn about open source, and I decided that year to become an expert on open source business models, which back then practically didn’t exist.

There was Red Hat out there, a famous open source company, but those of you who remember and who were there at the time know that their initial business model was selling boxes with CD-ROMS and the reference manual and the box. That was the business they had and they went public on it with a huge valuation. It took them several years to develop the real subscription business model that they are now following and that many open source companies are following.

About Eucalyptus

So first quickly about Eucalyptus. It’s an open source private cloud software platform. The name is an acronym which makes it easier for you to remember what it does. EUCALYPTUS stands for an Elastic Utility Computing Architecture Linking Your Programs To Useful Systems. Yes, it’s very funny, but it’s true. That is what the software does. It is the only private cloud platform that behaves like Amazon Web Services. If you run Eucalyptus on your own servers, you have a region that you control. It’s like having your own Amazon region.

MemSQL did. They have 35 servers for dev and test running completely in Eucalyptus and it all behaves like Amazon which means they can move workloads back and forth through the public cloud and the private cloud. And I’m quoting myself here in a tweet. Just a few days ago I tweeted that, “When you run on Amazon, you run on your credit card and when you run on Eucalyptus you run on your servers.” And smart people want a choice of where they run. There’s huge convenience running on Amazon. There’s huge control and power of running on your own servers. And you can do both because the APIs are the same, EC2, S3, EBS and so on behaving the same way on both environments. So that’s what the company does.

History of open source business models

Let’s move over to the business models. I want to set the stage here by noting that I think generally when the world evolves, and the universe evolves, we go from one stage to the next and what we solved in the old stage becomes legacy, and it’s used, but that’s not the new thing. And for every new era we have some new things being invented. I believe that exists even on a physical plane. When the universe started to exist, we had small particles then they said “Why don’t we get together and become atoms?” And then the atoms said, “Why don’t we get together and become molecules,” and so on.

So in small scale in the software business, in the eighties, that’s a long time ago but I was there at the time, I joined the software business. It was all about the shift to client/server. From mainframes and mini-machines we shifted to the PC era and the client/server era. And back then we said that the new process architecture, which then would be called x86, was an open architecture for everybody. So the level of openness back then was the hardware architecture, and everybody built operating systems and software that ran on the same CPUs. It was seen as a fantastic level of openness. Then, 15 years later we got into the web era and the big shift that disrupted half of client/server. It disrupted the client. In client/server you have an application running on your machine. On the web you have just the browser and everything runs on the back-end somewhere and in the web at the same time.

Open source happened and openness was then about openness in the source code.

It’s not an exact comparison because you can claim that there was open source code before that and it had different origins. But when you think about the real mechanisms of the industry, it was in the mid-90’s that people started waking up to open source software and we saw the birth and the growth of all these important products. Like Linux, started in ’91, MySQL started in ’95 and Apache and PHP and Python and all those created at that time.

The business was about building web applications and the openness had moved from the hardware level to source code and suddenly to be really creative and to share things, you opened up your code and the whole open source movement started then. Or, it didn’t start then, but it became relevant then. It wasn’t even originally called “open source.” Just as cloud wasn’t originally called “cloud.” Why is Eucalyptus called a “Utility Computing Architecture?” Well because back in 2007 that’s what we called it. We didn’t really call it “cloud” back then. It was called “utility computing.”

Anyhow, back to the trend. So we got the level of openness in source code and that’s why we now have open source businesses. I would now claim, that 15 years later again we are now moving to cloud and we take the final farewell to client/server. We are breaking the server side now as well and we are deploying our workloads in a way that’s completely different from what we learned back in the 80’s. It’s again, a huge shift. It’s disrupting everything.

New vendors are emerging, old vendors are struggling and shrinking, and again there’s a new level of openness that’s emerging. I believe it is APIs where we see the openness today. I think it’s so early that we haven’t really seen it play out.

For hardware, the name of openness was x86—the architecture that then everybody started using. With open source, we had the licenses, GPL licenses and then the Apache license. For the API of today we haven’t agreed on a complete openness yet, but we can see how the innovation is happening on an API level. Whereas ten years ago, many of you, or whoever then were building things, were looking at source code. Now to get stuff done, you look at APIs because you have so many different things you need to work with.

MySQL grew on the notion of the LAMP Stack. Every website of any size or fame ran on the LAMP Stack. Google, Yahoo, Facebook later on,, Wikipedia, all of those. And LAMP Stack was Linux, Apache, MySQL, PHP, Perl or Python. Today, in your applications you have many different databases, many different languages mixed in one application, set up in one workload. And the question is more about the APIs.

This goes a little bit beyond the topic of tonight, but I’m throwing it out to you so that you can tell me: If sort of my generation built open source businesses, what kind of API businesses will there be over the next ten to fifteen years? I don’t know. But you may know because you are the ones building it. You are the Linus Torvalds-es of today.

Free and open source software today

If we then focus on open source softwares and say, “How do you build a business? What kind of business models are there?” I believe that there are four types of players that you need to be aware of and they are partly overlapping and you can belong to more than one of them. We have a big group of end users who produce free and open source software.

FOSS stands for Free and Open Source Software. You have end users who use it, who are customers and users of it. Then you have vendors who produce it like MySQL was, like Eucalyptus is. And you have foundations who produce them, like the Eclipse Foundation, the Apache Foundation the Linux Foundation, the Open Stack Foundation, and so on. There is the Mozilla Foundation who are building them.

It has meaning for the business models in that, in the closed source world it doesn’t look like this. If you think about source code that’s closed, there are practically no foundations for closed source development, collaborative development. And there are practically no end users who produce closed source software and give it out to others. In the world of closed source software you have vendors and you have buyers and that’s it. But in the world of open source you have a much more dynamic environment and it’s important because the end users produce a ton of open source software.

If you are aiming to become a successful, profitable, fantastic open source company you must know that there can be software coming out of end user organizations that will affect your business. In good or bad.

Take Facebook, they needed a simple, scalable, powerful, reliable storage so they developed Cassandra. What happened to Cassandra? Facebook didn’t need it anymore. Already from the beginning they open sourced it, gave it to everybody. Now we have a company called DataStax that commercializes Cassandra and further develops it. For DataStax that was a fantastic starting point for a business—to take an existing product that had been developed by somebody who really needed it. They knew it was a useful product. For them it was an opportunity, but for others it can be a threat.

When you are developing some absolutely amazing software and you have five developers or eight developers, and suddenly it turns out that the big end user organization is developing something similar and they have no limits on their resources, they can have 100 developers working on it; you must think about what kind of code you may get out from those end user organizations. You could look at big data which you can trace back mostly to Hadoop, and you can trace Hadoop back mostly to MapReduce, and MapReduce you can trace back mostly to Google who developed and perfected the algorithm. You saw several end users there. Google and then Yahoo developed it, and now Hadoop is a project of the Apache Foundation and we have a number of vendors building a business on it.

This has remarkable influence on the ecosystem of open source software in a way that doesn’t exist in the closed source world.

I see it as the power of open source. Because we have always said that the majority of all software developed in the world is developed by users, not vendors. In the closed source world you don’t get access to the productivity of end users.

Looking at open source softwares particularly, this is a fact that is probably useful to you if you are thinking about business models, many people don’t care about it anymore. We talk about FOSS, Free and Open Source Software, but if we really are strict there’s a difference between free software and open source software. On the left, I have free software which most typically is GPL software. Software where the license insures freedom. It gives freedoms to you as a user, but it also requires that the freedoms are maintained.

On the right-hand side, you have open source software which is open for all, but it also allows you to close it. So here we come back to the famous clause of the GPL license, the reciprocity requirement which says, “If I am open, you need to be open.” So software that comes under the GPL license carries with it something that other people call a virus. I call it a blessing because I think it’s great if all software becomes open.

It practically says that if you are distributing a derivative work—so two D’s, Distributing Derivative works—they have to be licensed under the same license. If you don’t distribute them or if they are not derivative works, you’re fine, you don’t need to share anything. But if you distribute derivative works then they have to be under the GPL license as well.

This is a very powerful construct that Richard Stallman and others came up with called copyleft which insures that the openness persists. There are huge debates about whether that’s good or bad.
Some people say the open source software is more business friendly because it puts less requirements on you. Other people say, no, we must insure openness, because otherwise it will not continue and persist.

Take an example: How many of you have Apple laptops? Is the operating system open for you? No, but what was it originally built on? The BSD operating system which was open source. But BSD was licensed under its own license which didn’t require derivative works to be open, so Apple could take it, modify it, add their own stuff and keep it completely for themselves. If you take Linux and modify it and create a new fork of Linux it must continue to be under the GPL license. That explains the power of Linux—you can take it, you can do anything you like with it, you can fork it, you can modify it, but it must always remain GPL when you distribute a derivative work. It ensures and maintains the openness.


Examples of GPL software for each of those groups, there are tens of thousands of examples, but some of the most famous ones are:  Linux, Java, MySQL, Asterisk, the PBX software. Eucalyptus is GPL licensed. And the other examples of permissively licensed ones that have the Apache or the MIT or the BSD license or one of the other permissive licenses, are:  Apache, everything under the Apache Foundation, the Open Stack Foundation, the Cloud Stack, which is part of the Apache Foundation and so on.
With everything I say here, there are variations and exceptions. A variation of the GPL license is the AGPL license, the Affero GPL license. It takes the requirement on openness one step further. MongoDB is probably the most famous example of an AGPL license product.

Where I previously said that GPL says, “If you distribute derivative works, then it has to be open.”  In AGPL you don’t even have to distribute. If you make public use of AGPL software and you have made modifications, those modifications must be open as well.

Then you have Android which is a mix of GPL and Apache license which is perfectly alright, you can mix the two — you take the Linux kernel and the stuff from Linux and there’s Apache license stuff built around it, perfectly okay. The GPL part will always have to be kept open and the Apache parts don’t have to. On the other side, variations and exceptions, there is the BSD license, the MIT license. There’s a long list of open source licenses. I simplify it for you by talking about the Apache license and the GPL license, in reality there are tens of them. But those are the most prominent examples.

Then you have really extreme ones like SQLite, an amazingly popular, lightweight database that Richard Hipp developed and that he operates and develops in his own little company. He decided to put it in the public domain. All the others when they come under an open source license, they are still owned by somebody. And you as a user or a company, when you use them you must explain under what right you are using them. You say, “I’m using them under the right of the Open Source license.”

But Richard Hipp put SQLite under the public domain. He says, “This is owned by everybody and nobody.” There’s absolutely no restriction because he’s already made it common property of all citizens on this planet or the whole universe. There are exceptions like that.

The next article in this series will continue my talk, Open-Source Business Models. You can see the full transcript and the video of my talk on


(Cross-posted @

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Focus On Your Customers And Not Competitors Wed, 01 Oct 2014 07:49:00 +0000 A lorry is a symbol of Indian logistics and the person who is posing against it is about to rethink infrastructure and logistics in India. Jeff Bezos is enjoying his trip to India charting Amazon’s growth plan where competitors like Flipkart have been aggressively growing and have satisfied customer base. This is not the first […]

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A lorry is a symbol of Indian logistics and the person who is posing against it is about to rethink infrastructure and logistics in India. Jeff Bezos is enjoying his trip to India charting Amazon’s growth plan where competitors like Flipkart have been aggressively growing and have satisfied customer base. This is not the first time Bezos has been to India and he seems to understand Indian market far better than many CEOs of American companies. His interview with a leading Indian publication didn’t get much attention in the US where he discusses Amazon’s growth strategy in India.

When asked whether he is in panic mode:

For 19 years we have succeeded by staying heads down, focused on our customers. For better or for worse, we spend very little time looking at our competitors. It is better to stay focused on customers as they are the ones paying for your services. Competitors are never going to give you any money.

I always believe in focusing on customers, especially on their latent unmet needs. Many confuse not focusing on competitors as not competing. That’s not true at all. Compete hard in the market but define your own rules and focus on your customers. Making noise about your competitors and fixating on their strategies won’t take you anywhere.

But there’s also some opportunity to build infrastructure from scratch. When you think of facilitation commerce between small shops and the end-consumer there would be things you would build – I don’t know what they are, we will have to invent some of these things – that you might not build in other geographies where infrastructure grew for different purposes.

All emerging economies are different and India is a very different market. Bezos does seem to comprehend that. Things that you take for granted and things that you would invest into in the western countries are vastly different in India. Amazon has a great opportunity to rethink logistics and infrastructure.

The three things that I know for sure the Indian customer will still want 10 years from now: vast selection, fair, competitive prices and faster, reliable delivery. All the effort we put into adding energy into our delivery systems, reducing defects and making the customer experience better, I know those things will be appreciated 10 years from now. We could build a business strategy around that.

Innovating doesn’t mean reinventing strategy, the “what.” What holds true in the US is likely hold true in India as well. It’s the execution—the “how”—will be different.

Speaking of Amazon as a growth company:

I like a quote from Warren Buffet who famously said: You can hold a ballet and that’s okay and you can hold a rock concert and that’s okay. Just don’t hold a ballet and advertise it as a rock concert. Are we holding a ballet or are we holding a rock concert? Then, investors get to select. They know we have a long-term viewpoint. They know that we take cash flow that gets generated from our successful businesses and invest in new opportunities. India is a great example of that happening.

Even though Amazon has been in business for a long time with soaring revenue in mature categories the street sees it as a high growth company and tolerates near zero margin and surprises that Jeff Bezos brings in every quarter. Bezos has managed to convince the street that Amazon is still in heavy growth mode and hasn’t yet arrived. In short term you won’t see Amazon slowing down. They will continue to invest their profit in their future to build even bigger businesses instead of paying it out to investors.

When asked whether Google is Amazon’s biggest rival:

I resist getting in to that kind of conversation because it is not how I think about our business. There are companies who in their annual planning process literally start with: Who are our three biggest competitors? And they’ll write them down. This is competitor number one, two and three. Then they’ll develop strategies for each of them. That’s not how our annual planning is done. We do have an annual planning process and actually we are right in the middle of it now. We start with,`What’ll we deliver to our customers? What are the big ideas, themes?’

Amazon has innovated by focusing on what customers really care about and not what the competitors do. This approach has paid off and I can see why Bezos is keen to do the same in the Indian market.

I really liked what he said when asked about being gifted and being kind:

I believe that humans would achieve anything that we are determined to achieve, if we work hard. So, celebrate your gifts but you can only be proud of your choices. And, cleverness is gift. You cannot become Einstein no matter how much you work. You have to really decide on how you’re going to make choices in your life. You get to decide to be a good husband and a good father.

I strongly believe in why making right choices is more important than being gifted. I share this with as many people as I can and I also tell them, “you control your effort and not the outcome.”

Photo courtesy: Times of India

(Cross-posted @ cloud computing)

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Higher education: Innovation and digital transformation Tue, 30 Sep 2014 14:30:06 +0000 Lisa Davis, CIO at Georgetown University, explains how colleges and universities must adapt to the changing landscape of technology in education.

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Our exploration of digital transformation continues with a conversation about higher education. Colleges and universities face a combination of forces that require rethinking business model; re-considering relationships with constituencies such as faculty, students, and administrators; and understanding the rise of technology as an enabler of change.

Lisa Davis, CIO, Georgetown University

Lisa Davis, CIO Georgetown University (image courtesy of CxO-Talk)

For a report I wrote with colleagues on innovation in higher education, we interviewed 10 higher education CIOs and one CTO. These executives focused on business issues such as:

  • Student retention
  • Student recruitment
  • Fundraising
  • Reduced costs and higher operational efficiency
  • Greater classroom innovation

These business issues represent points where schools must evaluate current approaches, to keep up with both innovative peers in other institutions and the activities of private companies. Startups such as CourseraUdacity, and Khan Academy pose a significant, long-term competitive threat to established brick-and-mortar schools.

The CIO of Georgetown UniversityLisa Davis, was among the CIOs we interviewed for that report. Given this history, it was a pleasure to welcome her as a guest on CxO-Talk. The conversation focused on innovation and transformation in higher education and the role of technology in driving future changes.

You can watch the entire discussion and see the short, summary video embedded below.

Much of the conversation with Lisa centered on digital transformation – how Georgetown thinks about a future mediated largely by technology and what the institution is doing today to prepare. Here are edited comments from CIO Lisa Davis on these topics.

On business model disruption: How we structure things across the University is changing. Georgetown has been experimenting with an initiative called technology enhanced learning, where we had faculty submit proposals of how they would embrace and leverage technology in the classroom.

There is also another initiative, designing the future university, not at the course level but at a curriculum level. A lot of data shows that a three-year BA is imminent. How do we change what we do, structurally, to support changes in a traditional curriculum, which required four years to get a bachelor’s degree; can we do it in three years? Can we do a three-year BA/MA?

If you think about the structural changes necessary to allow that curriculum to change, that’s where the impact is. [We have had] a lot of discussion about online learning, adult learners, and the revenue model.

On generic vs. unique institutional competencies: MOOCs [massive open online courses] showed us what parts of our curriculum were generic and interchangeable; also what could be pulled out and delivered at a lower cost, such as Intro to Statistics, Intro to Biology, and 100 / 200- level courses. It forced all of us in higher education to think about how we would embrace and incorporate that as we start making curriculum changes and building our universities for the future.

On cloud, social, and mobile: Our students expect that intersection of social and mobile now. You know, I think I saw a statistic from last week that students check their mobile devices 43 times a day. Even although students are still bringing a laptop to campus as the number one device, we’re still seeing a growing number of mobile tablets being brought to campus today.

So absolutely, I think it will change the business model, and it’s forcing institutions to think about how we embrace it. It goes back to those structural changes that we need to make – how we do business, how we think about the business, what curriculum that we offer. It impacts the cost of the education.

On competitive advantage: When we develop our services and capabilities, modernize our applications, and build our mobile platforms, [we consider], “How do we enhance the learning experience for our students? How do we personalize that experience?” I think that’s where you’ll see institutions go more and more, and what will be a different differentiator.

At one point, maybe technology gave you a competitive advantage. But, technology today is table stakes, even to be relevant and competitive with the top 25 institutions that we like to compete with. Technology has to enhance the learning and the academic missions of the university.

On digital transformation and cultural change: I don’t think we can talk about digital transformation without thinking about cultural transformation, because I believe they go hand in hand. When I came to Georgetown, two and a half years ago, we had zero mobile presence, which was hard to believe. Today, we have 35,000 students, alumni, and faculty engaging on a mobile platform.

Innovation occurs, first and foremost, [when] you deliver and show results and provide the basics. I’m a big believer in first things first, to make sure that IT delivers – whether it’s keeping the networks running, delivering Wi-Fi services, making sure that our applications stay up and running – to build trust that IT is no longer a service provider but a partner.

I don’t think you can talk about innovation or digital transformation until you’re doing the basics right. We focused a lot on doing the basics and building upon those successes and delivering a record of results and performance.

On partnering with the business: We have very strong academic partners; technology cannot do this alone. We’re a partner and an enabler. The academics have to figure out how to infuse technology into our classrooms and our curriculum. So, I don’t want anyone to think that technology does this alone, and we absolutely need strong partnerships to be able to do this on our campuses today.

On the CIO’s role: I think the role of a CIO has changed dramatically; we are no longer the chief infrastructure officer.

To be a successful CIO today, you have to play many roles and wear many different hats. Maybe that’s a chief integration officer. You’re the chief innovation officer; the chief digital officer. You have to understand and know these technologies and you really have to grow with those partnerships, with your stakeholders across your companies and institutions.

IT is not just a service provider; IT today is a broker and partner.

- – -

Lisa Davis is one of the top Chief Information Officers in higher education, with a significant focus on using technology to drive innovation. Georgetown has adopted cloud applications such as finance and human resources, with Workday, and Lisa recognizes the importance of exploring new business models that respond to changes in the education environment.

Be sure to note her comments on the role of MOOCs in helping expose aspects of the curriculum that create differentiation for Georgetown. Organizations moving to the cloud must consider which processes (or, in this case, student courses) are unique or generic. Many executives fall into the trap of thinking all their processes are unique and different from competitors; in reality, core functions like accounts payable, for example, rarely create meaningful differentiation.

When undertaking digital transformation and moving to the cloud, therefore, dispassionately evaluate processes to determine which add distinct value and which can remain generic, undifferentiated from standard industry practice. Distinguishing between innovative processes and generic processes will help focus the organization to invest more heavily in those areas providing the greatest long-term value.

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

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Radio Show Interview: Collaborative Innovation at Scale Tue, 30 Sep 2014 14:00:01 +0000 The area of collaborative innovation is a natural extension of the social business movement. It’s the extension of social into purposeful collaboration, a term Alan Lepofsky uses to describe the evolution of the social business market. In the innovation-focused radio show, Women Who Innovate, host LeAnna Carey, innovation expert John Lewis and I talk about […]

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The area of collaborative innovation is a natural extension of the social business movement. It’s the extension of social into purposeful collaboration, a term Alan Lepofsky uses to describe the evolution of the social business market.

In the innovation-focused radio show, Women Who Innovate, host LeAnna Carey, innovation expert John Lewis and I talk about collaborative innovation at scale. In other words, what are the benefits of, issues with, and techniques for getting hundreds and thousands of people to share ideas and insights, toward a common goal. It’s a different task than getting small teams to collaborate. The recording of the show is below:

This event had a unique twist. It was run in conjunction with the weekly innovation conversation on Twitter, Innochat. In both the radio show on on Twitter, the following topics were covered:

  1. How important is it to get diverse people to contribute to innovation, vs. singular creatives to generate innovations?
    • Doesn’t Steve Jobs point to the primacy of singular genius?
    • What is the model for cognitive diversity to generate innovation outcomes?
  2. What differentiates sharing in large groups vs. small teams?
    • How much does familiarity mean trust?
    • How to handle different personalities that will intersect?
  3. In environments where employee skepticism reigns, how do you change attitudes to open up sharing?
    • What are the ways in which skepticism can creep in?
    • What is the #1 issue that must be addressed?
  4. What are motivations for employees to contribute to an innovation program?
    • How much does “what’s in it for me?” come into play?
    • What are the intrinsic and extrinsic motivations?
  5. What techniques help drive participation in crowdsourced innovation programs?
    • What influence do senior executives have?
    • What influence does peer participation have?
    • How can gamification drive greater participation?

It was a thorough, fast-paced discussion. If you’re considering crowdsourced innovation programs, it’s worth a listen.

(Cross-posted @ I'm Not Actually a Geek)

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