K9 Ventures started  investing in 2009 with our first fund, K9 Ventures, L.P., which was a $6.25M fund designed to be deployed over 3-4 years, making initial investments between $100K – $250K in concept and seed stage technology companies located in the San Francisco Bay Area. The objective for K9 was to invest only in a handful (4-6) of companies each year and to be actively engaged with those companies during their seed stage. Over the the course of three years, K9 Ventures has invested in 18 startups, including CrowdFlower, Twilio, DNAnexus, HighlightCam, CardMunch, Lytro, Zimride, IndexTank, BackType, EasyESI, card.io, Baydin, LucidChart, Torbit, Occipital, TapCanvas, and 3Gear Systems.

Four of the portfolio companies have had successful exits: CardMunch was acquired by LinkedIn, BackType was acquired by Twitter, IndexTank was acquired by LinkedIn, and just this week, card.io was acquired by PayPal. Several of the portfolio companies have gone on to do their Series A (HighlightCam, Zimride, Occipital), Series B (CrowdFlower, DNAnexus) and Series C (Twilio, Lytro) rounds led by top tier venture firms, and the seed-stage companies all continue to track well on building product, team, and/or, revenue (imagine that!).

With K9 Ventures II, for the most part everything remains the same as with the first fund, with just one major change: the initial investment amount. With the new fund K9 Ventures will be able to invest between $250K – $750K as an initial investment in the companies we back. This will allow us to potentially lead the seed round, while maintaining an active engagement with these companies (as with Fund I). K9 Ventures II will still be syndicating most investments with other seed and angel investors.

Most importantly, the investment criteria for K9 Ventures II remain the same as the investment criteria for K9 Ventures’ first fund. These criteria have been vetted and work well for filtering the types of companies K9 would consider investing in. The necessary, but not sufficient, criteria are:

1. Technical Founders: Founders with the ability to build their own product and have the potential/inclination to lead the business. The team must not only be technically able, but also have the utmost integrity and a willingness to consider the advice and feedback they receive.
2. New Technology or New Market: The product must involve some kind of new technology or a new market. Not interested in me-too businesses.
3. Direct Revenue: The company must have a way of getting direct revenue from its customers (“I deliver value to you, you pay me”). No three-way business models and no content, media, advertising-based companies.
4. Capital Appropriate: Companies whose capital needs over the life of the business make sense given the potential size of the opportunity/exit.
5. Hyper-local: The entire team should be located in the SF Bay Area. No distributed teams, no overseas teams, and definitely no companies that rely on “outsourcing” to build their core technology.

Note: These are qualifying criteria (necessary but not sufficient). Even if a startup meets all of these criteria that doesn’t mean that K9 will invest. These are the objective criteria; the rest is subjective and often comes down to a gut call. We reserve the right to have exceptions to these qualifying criteria, but for the most part follow them closely.

This new $40M fund is backed by several high quality institutional limited partners including university endowments, foundations, family offices and fund of funds and key individuals. I’d like to thank each of the new limited partners in K9 Ventures II for their support and for the confidence they have expressed in me and in K9 by making this commitment.

An even bigger thank you goes out to all the limited partners of the first K9 Ventures fund for taking the leap of faith before anyone else. The advisors for K9 Ventures (with a special mention for Liam Donohue of .406 Ventures and Brad Feld of Foundry Group) played a pivotal role in helping me and the fund get to this milestone. You all know who you are — thank you.

And most of all, I would like to thank the founders of all the portfolio companies for their outstanding work in building their respective companies. Their success is what drives K9’s success.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

Some days in Silicon Valley it feels like there are more investors than there are entrepreneurs. And there absolutely are more investors than there are good deals. There is simply too much capital chasing too few good deals. (Although it certainly doesn’t feel that way when you’re an entrepreneur trying to raise money for your own company. The question most entrepreneurs keep asking themselves is why isn’t that capital chasing me? While it it may not feel that way, the data suggest that there is indeed too much capital in the system — especially so at the seed stage, with more and more individuals and larger funds trying to invest in companies at this stage.)

Before we proceed, it is important to understand two important points about institutional venture capital. For most venture capital funds money is a commodity. It is a tool. They use that tool to buy ownership in a company. VCs care less about how much money they have to put in, and more about the amount of ownership they can get. VCs also operate in a limited time window that is determined by the duration of their funds. This time window is required by LPs (the folks providing the VCs the money to invest) as LPs are afraid to enter into an open-ended arrangement where they don’t know what the time horizon on the fund’s investments will be. This in turn gives VCs a short window of time (between 5-10 years depending on where in the life cycle of the fund they invest) to get a company to exit.

Now, combine those two motivations that venture investors have: 1) ownership, 2) quick growth, and what do you get? You get a situation whether investors are incentivized to put in more money into a company, not only to buy more equity, but also to fund the quick growth. In fact, it becomes a vicious circle. First, a company may get encouraged to raise more money that it really needs, just so that the venture fund can get to its desired level of ownership. Then the same company gets encouraged to spend that money to accelerate and to grow quickly, which in turn means it runs out of that money more quickly, and then needs to raise even more money.

This situation is not always in the best interest of founders. Founders typically get their equity in a company once — at the time of founding and then get diluted with each subsequent round of financing. For venture funds, they almost always have the ability to participate in future rounds to preserve their pro-rata and sometimes even increase their ownership position by investing more capital in future rounds.

For VCs working for funds that have a lot of money under management, the incentive is to encourage companies to grow quickly. Growing quickly is not a bad thing, but it forces the companies to spend more in order to try to accelerate that growth. This is when you start paying expensive recruiters for retained searches to fill out those open positions as quickly as possible with “experienced” people, this is when you hire that ridiculously expensive PR firm on a retained basis to get the company some attention, and this is also when companies begin to prioritize user-growth over figuring out what is the right revenue model for the company (see my post on Revenue Development).

The VC focus on quick growth is not without reason. Yes, sometimes it’s because the market opportunity demands moving quickly, but sometimes, VCs push growth on their companies more to push their own agenda, than what’s right for the company.

Whenever I’ve tried to describe this in the past, the next question is invariably: “Then why do founders raise more money than they need?” First, because any founder in his/her right mind knows that having a little bit of extra gas in the tank is probably a good thing. Having just a little more runway, so that in case things don’t go according to plan, they have a little cushion, a little buffer, and therefore a higher chance of survival. So that explains founders taking on a little bit more than they need, but why then do so many founders take on an excessive amount of capital? My answer to that is because every founder believes that they are different and smarter than the founders of other companies. Unlike all the other founders that went before them, they believe that they will have the will-power and the self-control to be able to spend the money wisely and to not waste it. But little do they know that they are human, just like everyone else.

Some founders like to think that if they raise a lot of money now, they will never need to raise money again. Baloney! Regardless of how much money you raise, you will be out raising money again in 12-18 months! This is because excessive capital becomes toxic for an early stage company. What’s another thousand dollars when you have a couple of million sitting in the bank?  Despite the best intentions even the most principled founders fall into this trap. They will invariably lose the financial sensibility that they had in their scrappy years. The company culture begins to morph and before you know it the company’s expenses balloon out of proportion. The same founders who a short while ago felt they would never need to raise money again, now start to justify why they need to raise another, and bigger, round to feed the monster that they’ve let loose.

Companies which end up raising monster Series A, Series B, or Series C rounds all seem to exhibit a similar pattern of problems, one that is akin to indigestion. The rush to hire results in a relaxation of “hire only A players rule.” The rush to get product built faster, results in a reliance on consultants, contractors, outsourced development and other faux pas, which invariably result in huge amounts of overhead costs, and often result in failed attempts at launching product. There are few cases where this can be the right approach, but it requires a very clear definition of what’s the core product, technology, and knowledge that needs to be built and retained within the company and what can indeed be done by an external team.

In some extreme cases over-capitalization and its supporting mantra of “growth first” often leads to the company subsidizing its product and offering it for free (see my post on The Case against FREE), and in the process failing to discover the right business model. Yes, there are some cases where growth makes sense, but companies need to be careful that in their attempt to achieve growth they don’t just give away the crown jewels. The example I use most often for this is Plaxo. Plaxo’s most valuable feature was that it backed up your contacts from Outlook. Outlook/Exchange were horribly unstable at the time and Outlook would often end up losing all your contacts in case of a file corruption. Plaxo saved my rear on multiple occasions because it had a copy of all my contacts that it would seamlessly sync back down to Outlook upon re-installation. But, Plaxo gave this feature away for free. What did they want to charge for? For removing duplicates from my contacts. I think I can live with some duplicates in my address book, but losing it altogether is something I couldn’t live with.

There are some venture funds (usually large funds) which seem to have over-capitalization as their m.o. I don’t believe they do it with any malicious intent, but they probably have lost the perspective that providing companies with the right amount of capital is more important than trying to achieve rocketship growth. Sometimes companies, the markets they operate in, and even the founders who start them all need time to mature, and no amount of capital is going to accelerate that. Nine women can’t make a baby in one month.

My advice to portfolio companies has been to raise the amount of capital that they can reasonably expect put to work in the next 18-24 months. Assuming they’re out raising again in 12-18 months, then that still gives them a buffer of 6 months. But if they claim that they will raise a mega round because they will never have to raise another round again, or worse yet, claim that they want to raise more because they “don’t like fundraising,” then all I can do is to call bullshit. If you really don’t want to raise another round, then prove that to me based on what really matters: Revenue. Or better yet, the ultimate measure: Profit.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

One of the questions I get asked very often is “What does it take to get funded?” My answer is universally that it’s all about Hope and Numbers and some combination thereof. The seed round happens on hope. The Series A happens on a combination of hope and numbers. And the Series B and beyond, happen largely based on numbers.

Seed Round: the Hope Round

At the concept/seed stage, there isn’t a lot of concrete “stuff” (where stuff is a highly technical term) that early stage investors can look at to evaluate a company. In most cases it comes down to the team — whether they have the ability to execute and whether they have the right vision. The rest is hope. You hope that this founder/founding team will be able to figure things out. Will be able to recruit the right people around themselves. Will be able to build the product. And that the product will be something people love. And that it will be something they are willing to pay real dollars for. There’s LOT riding on hope, and there are very few numbers.

So getting funded at the seed stage is really about who you are, and about telling a credible story. Showing that you have 100 users, 1000 users, or even a million users may not matter much. It can help to show that at least someone is willing to use your product, but it doesn’t say anything about whether it will scale. More importantly users are not customers, and seed stage companies often have to spend  fair amount of their effort on what I like to call Revenue Development.

Seed stage funding it all about convincing investors to believe in you and have lots of hope.

Series A: the Hope+Numbers Round

When you’re ready to go out for a Series A, by this point investors expect you to have figured a few things out, and to have some level of what’s referred to as “product-market fit.” Or in other words, you’ve built something, figured out who’s going to pay for it, and things are starting to click. At this stage the numbers are not compelling, but they’re starting to emerge and are trending in the right direction. A Series A investor will look at these numbers and will hope that things will continue to trend in the right direction and in the best case scenario will start to hockey stick.

The Series A is about showing some credible numbers that can point towards a trend, and the rest is about convincing investors to have hope that those numbers point to something bigger.

Series B and beyond: the Numbers Rounds

When you get to a Series B, it’s almost all about numbers. Show that you have a compelling product, with lots of people using it, and willing to pay for it. At this stage the investment decision for most investors becomes a matter of crunching the numbers. There’s little room for hope and the numbers need to tell a convincing story.

Series B and beyond are raised on the strength of numbers.

This is not a prescriptive framework by any means, but it is a framework I find helpful to think about when founders are preparing to raise money at different stages. When you raise your seed round, think about what it will take for you to raise a Series A. When you raise a Series A, think about what it will take for you to raise a Series B.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

Whenever I’ve mentioned this problem to others, their response is usually “Manu, you need an assistant.” Well, I’ve never had an assistant, and I manage my calendar pretty tightly. It’s possible that with time to reverse engineer the complicated heuristics I use to optimize my calendar, a human assistant may indeed be able to relieve me of this work. However, as a technologist, my preference is to find scalable solutions to problems. Having a human assistant may solve the problem for me, but does that mean the millions of people out there who have the same problem should all have human assistants?

Over the years I’ve developed a fairly streamlined way of managing my calendar. When I’m on my desktop, I usually have two browser windows open side by side — one with GMail and the other with Google Calendar. On my laptop, there are still two windows, but in different spaces (virtual desktops). When I’m processing scheduling-related emails, I bounce back and forth between these two windows. I need to check if I’m free on certain days and times, often propose multiple time slots for meetings, and once we agree on a date/time/location, add it to my calendar. I make it a point to add it to the calendar before I respond to the email as otherwise I run the risk of confirming a meeting but not having it on my calendar. All of this isn’t rocket science, but it takes up so much time to be switching between email and calendar over and over again.

Email, calendar, contacts, and todo lists are the picks and shovels of information workers. Think about it, so many of us spend more of our waking hours in our email than with our family and friends.  It’s a sobering thought.

It baffles me that companies like Microsoft, Google, Yahoo, and, Apple haven’t done a better job of building tools that address this space better. There is stagnation of innovation in productivity tools — because they all ended up in big companies – where things don’t get done unless it’s a billion dollar business (hat tip to @hunterwalk).

Outlook… uh, don’t even get me started on that. In all fairness the front-end that Outlook provides is actually better designed and better integrated than all the other offerings out there. The real problem with Outlook is the backend: Exchange.

When Google released GMail (2004) and Google Calendar (2006) there was hope for a better future. But GMail and Google Calendar have stagnated. In fact, GMail has regressed — it looks and performs worse than it did in the past, but that’s a whole other blog post. It’s shocking to me that with all the location data that Google has access to, Google Calendar has zero location integration. It doesn’t remember places I frequent. It doesn’t even look up places in a location database. And most of all GMail and Google Calendar don’t really know much about each other. I’m sure everyone in Google uses GMail and Google Calendar, so they’re eating their own dog food, but alas it’s still just that — dog food.

Fortunately, the kick-ass (and I don’t use that term lightly) team at Baydin decided to take a fresh look at the problem of productivity. They started with Boomerang for GMail which helps you to schedule when you send and receive emails. (Yes, you can schedule when you want to an email to come back to your inbox — it’s awesome. Try it!).

Enter Boomerang Calendar. With Boomerang Calendar, GMail and Google Calendar users can streamline their workflow. Boomerang Calendar is kind of like the missing glue between GMail and Google Calendar.

Boomerang Calendar (BCal) detects potential meeting times in-line in your email. When you hover on the highlighted time, it shows you the agenda for that day. If you click, it  shows the calendar for the week. You can add the event to your calendar with a single click. It does a best effort attempt at guessing the right date and time of the event for you (BCal is currently in beta — its guesses will get a whole lot better yet!). If you’re offering times to someone you can do that on your calendar and it will create the email template for you. All right there in your inbox. Without ever having to switch windows over the the calendar. It’s all about intelligent use of contexts and defaults.

Scheduling a group event with Boomerang is somewhat mind-blowing. The email that is sent to the attendees updates as folks respond.
Check out this video about Boomerang Calendar:So when you open the email, you can already see all the times proposed by others, right there in your email, without opening up yet another tab. And you get to respond to the suggested time in a form in your email. Yes, I have a biased view since it’s one of  my portfolio companies, but I was amazed at how well they thought through the information flow here.

Check out this video about Boomerang Calendar:

The value of Baydin’s tools is in the fewer clicks, the lower cognitive load from keeping things in short term memory, the reduced context switching and most of all in the minutes and hours of your life that you get back every day and every week by just being a tad more productive than you were before.

The beauty of what Baydin does comes from better observation and understanding of how people work. It’s not about building better email, or better calendaring. It’s about making people more productive. Helping them to get the mundane stuff that we all need to do out of the way faster so that we can work more (if we choose to!), or have more fun.

What hundreds of people working at the Internet giants have not been able to improve for years, is finally being improved by a small team of four in Mountain View. Congrats Team Baydin: Alex Moore (@awmoore), Aye Moah (@ayemoah), Mike Chin (@mikejchin),  and Jeremy Long (@jeremyaaronlong).

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

Or so we thought. The Web has changed. Performance is no longer a server side issue. It’s a client side issue! As our sites become richer, and especially as they become applications rather than pages, the time it takes for the code to parse, render, and execute the code in the browser has today become the dominant factor in web performance. The time it takes to lookup the domain, connect, transfer the data is now only a small fraction of the overall time it takes for a page to finish loading and be ready for the user to view and interact with.

Till today this was just a theory. It was a theory because all we had available were spot checks of client side performance with browser add-ons like YSlow. Today, that theory now has real data to support it because Torbit has launched Insight. Torbit Insight lets you identify if you have a performance problem on your site and it also lets you pinpoint where that problem may be coming from.

Check out this 1-minute video about Torbit Insight:

The best part is, Torbit does all of this without slowing down your site! A little javascript embed on your site collects the data on the client side. It is simple to install and you see the results come in in real-time. Make a change to your website and boom, you can see what impact that had on the load time for the visitors to your site right away.

If that wasn’t enough Torbit lets you tie in your site’s conversion rate to show what impact speed has on the bottom-line.

For most sites, getting their site completed and launched on time is hard enough. For the site developers (I use that word loosely, since site performance pervades different aspects of site development, including the graphics, CSS, HTML, Javascript and server side components) to focus on performance is generally an afterthought. It’s usually a case of functionality first, performance later — and ‘later’ may never happen.

Add to that the problem that site performance optimization needs to take into account the client (i.e. device, OS, and browser) that the optimization is being performed for. If your site is being viewed on a phone, tablet or desktop, you may need different types of optimizations. There is a fanning effect as a result of the proliferation of different devices, OSs, and browsers.

The Torbit team realized that optimizing web-performance is becoming a client side problem. And they recognized that optimizing sites for different clients is a hard problem that can take a lot of time and effort and cost a lot for an organization to undertake. Additionally, the people who are developing a site may not be experts at optimizing performance. So Torbit also created the Site Optimizer. The Site Optimizer will optimize your site on the fly, without any significant effort by the developers of the site.

With Insight and Site Optimizer, Torbit is providing the next generation of tools for both measuring, analyzing, and optimizing web performance. Kudos to the Torbit team and especially to founders Josh Fraser (@joshfraser) and Jon Fox (@jfox85) on identifying a real problem and building a suite of products to solve the performance problems of modern web sites.

Speed on.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

When trying to describe this constraint in a more light-hearted way, I often say that “I only invest within 30 miles radius from the Stanford Oval.” Now that last statement is a little off, since I have a portfolio company in Berkeley and one as far south as San Jose. Maybe if I make it 30 miles as-the-crow-flies, it may still hold! I must admit that I do also have some exceptions to this rule – LucidChart is based in Provo, UT, and Occipital is presently in Boulder, CO. But, in both those cases, I’m still working hard on getting them to move here!

I’ve already written about why I want the whole team to be in one location, but in that post, I didn’t address why I want the entire team to be in Silicon Valley. I get a lot of push-back on this point. Almost every day, if not every other day I have to explain my rationale for this. So I figured it’s about time to put this down into a blog post.

Most people, and especially those outside the Valley, think that the reason for this geographical constraint is because “Investors are lazy,” or, “They want their portfolio companies to be within driving distance.” I’ll admit that I am not a fan of getting on a airplane, but my reason for hyper-local investing has nothing to do with either of these common misconceptions.

There may indeed be some lazy investors, but I have yet to come across even one amongst all those that I have met in the Valley. They wake up earlier than a lot of entrepreneurs do, and, I get a lot of late night emails from VCs working through their email inboxes late at night. I’m not saying that VCs work harder than founders do, but they’re not slacking off either. And, even though I do enjoy meeting up with the founders in my portfolio for lunch every couple of months, the majority of the interactions with my portfolio founders still happens over email or phone. I suspect this is also the case for most VCs. So why then do I still insist on having the startups being located here?

Here’s why:

1. Serendipity: There is a serendipity to the Valley — things happen because you are here. It may be something as simple as you’re walking down University Ave in Palo Alto, and bumping into someone you know. You may chat for just two minutes, but in those two minutes, he/she may say something useful, or suggest you meet someone else. It’s that casual interaction that makes things happen. This serendipity is why startups in the Bay Area have a higher chance of success than those located elsewhere.  Until you experience this first hand, it’s hard to describe. It is even harder to quantify, and you can argue against it all you want, but this is the single biggest reason why I want the startups I work with to be located in the Valley.

   I’ll give the example of the acquisition of CardMunch by LinkedIn. Before CardMunch even launched its product, I ran into some folks from LinkedIn at an event and in casual conversation mentioned what CardMunch was trying to do. A few months later, after the product had launched, the CardMunch team went to an event, and happened to run into an engineer from LinkedIn. Again a casual conversation transpired. This happened on at least 3-4 different occasions, until one day I get a call from a friend at LinkedIn wanting to talk about CardMunch. When we were starting the company, we had speculated that this would eventually be interesting to one of two companies: LinkedIn or SalesForce. We did not expect to attract their attention this early on, but the serendipity of being in the Valley made that happen.

2. Funding environment: No one can question that Silicon Valley has the most developed venture capital and funding environment for startups. Even the place that ranks second to the Valley (arguably New York, which has overtaken Boston) is a far cry from how active and developed the funding environment here is. There are more venture capital funds, micro-VCs, super-angels, angels and incubators in the valley than probably in the rest of the world combined (exaggerating to make a point). The plethora of funding sources for every stage of development of a company makes for a very efficient funding environment.

   After being in the Valley for almost a decade, I now say that there is no such thing as a capital efficient company here — only companies that attract capital and those that don’t. But, if you are a company that attracts capital, there is no place better for it than Silicon Valley.

3. Eco-system: Experts of allkinds are here. They are the best in the field, and the best in the world. Lawyers. Technical experts. Designers. There is a culture of helping. A culture of paying it forward. A culture of re-investing. In fact, some would argue that it is this culture of re-investing that has made Silicon Valley the powerhouse that it is today. And to top it all off, the eco-system in the Valley is exceptionally fluid, i.e the flow of information and connections happens quickly and efficiently.

   I often meet founders from other cities who tell me that they already have a strong network in place in their hometown and moving here would mean that they would have to start from scratch. My response to them is always the same: “Don’t make the same mistake that I did.” That was exactly my reason for not moving to the Valley sooner. Having now been here I’ve seen first hand just how quickly entrepreneurs get plugged-in into the eco-system. Within a short period of time, the network that you build here in the Valley will be orders of magnitude richer and more useful than what you may already have elsewhere. The combination of your existing network plus your Valley network can prove to be even more potent.

4. Respect for Effort and Learning: Folks often say that the Valley tolerates failure — that here you’re allowed to shoot for the moon (or chase windmills) and it’s okay if you fail. In my view, the Valley often swings too far with this one. People start to glorify failure. IMHO it is not a tolerance for failure, but a respect for the lessons that can be learned from failure that matters. If you figure out why you failed, that does not mean you’ve figured out how to succeed. But like learning to ride a bicycle, if you fall down once,  in the Valley you’re not told that you’re not cut out to ride a bicycle. Instead, there are people here who will help you to get back on the bicycle and try again — provided you learned something from falling. Having a healthy respect for effort and learning is important. The Valley has that.

Put simply: “What happens in Silicon Valley simply doesn’t happen anywhere else.”

I did my startups in Pittsburgh, Pennsylvania. They were both highly successful. We beat the odds of being able to raise angel money in Pittsburgh, and we built an awesome team on the shoulders of graduates from Carnegie Mellon and by selectively stealing away the best talent from other local companies. Don’t get me wrong. I love Pittsburgh and I especially love my friends, co-workers, advisors, mentors, and investors. I love Carnegie Mellon — it is by far one of the most academically rigorous schools you could attend. Andrew Carnegie’s quote of “My heart is in the Work” is engrained into the soul of every graduate from Carnegie Mellon. But, now looking back, with 20/20 hindsight, if there is one thing I would do differently, I would move to Silicon Valley the day I decided to do a startup.

The Valley has a 10x multiplier to anything you do. Take two companies doing the same thing, having similar technology and I’ll bet that the company that’s located in the Valley will be 10x the size, or 10x the revenue, or whatever other success-metric you want to apply. For the four reasons mentioned above – the serendipity, the access to capital, the eco-system, and the tolerance for trying again and again till you succeed — the Valley outperforms.

Doing a startup is hard. Really hard. You have enough things working against you. Geography doesn’t have to be one of them. That’s an easy one to fix (even if you are in a foreign country and have visa issues, just remember that the mark of a true entrepreneur is resourcefulness. Real entrepreneurs find a way to make it work. In fact, real entrepreneurs will make it work even outside of the Valley). You want to stack the deck in your favor by at least being in a location where you have a higher likelihood of success.

As my friend, mentor, and one of my favorite people in the world, Jack Roseman (author of Outrageous Optimism: Wisdom for the Entrepreneurial Journey) once said to me: “If you want to be an actor move to Hollywood.”

Implications for investing: As a venture fund, if you’re in Silicon Valley you probably have ample deal flow to where you can focus on primarily investing in companies that are located here and still build an awesome portfolio. If you’re a venture fund outside of the Valley — even if you’re in Boston or New York, chances are you’re going to have to broaden the net. It’s a simple density/deal flow issue.

Likewise if you’re an LP, you have to make sure you have reasonable exposure to Valley investments. While I haven’t done a scientific analysis of this (LPs can afford to hire someone to crunch the numbers for them!), I would argue that venture funds that invest in startups in Silicon Valley have better returns than funds that use a regional-only philosophy (for a non-Valley based venture fund).

For me, and for K9 as a micro-VC fund with a solo-GP, the hyper-local investment strategy makes a lot of sense. Take all the reasons above, and add to that I don’t have to travel to find great investment prospects, which also means I get to spend that time instead helping portfolio companies, looking at potential new investments, or writing the occasional blog post

Clarifications: Before people start assuming some things that I am not implying in this post, I figured I should clarify a few of them. This post doesn’t mean that you can’t build a hugely successful tech company outside the Valley. There are numerous examples of those. It does imply that your odds of success may be better here. For investors, this post doesn’t imply that Valley investors are in any way better than investors who are not based in the Valley — but that they might just have better pickings in their backyard. In fact, some of my favorite investors to work with, and many of my advisors and mentors, are not in the Valley.

As an entrepreneur, your mission, should you choose to accept it, is to maximize the chance of success of your startup. Whether that is in Silicon Valley, or Timbuktu, or anywhere else, that is for you to decide.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

If there is one piece of advice I would give to the founders of BST, it is to consider selling a part of their personal stock in the company at that stage. I’m not talking about F-U money here, but only enough money to not have to think about whether you can afford to go out to dinner, or finally trade-in that jalopy you’ve been holding together with duct-tape. My recommendation is that founders should consider selling between 5%-10% of their stake (so if the founder held 20% at this stage, he/she could be selling shares equivalent to a 1%-2% stake in the company) once a company gets to a high-priced Series B or a Series C.

The objective is really to be able to get some risk off the table for the founders and not leave all their eggs in one basket. If you can use that money to set aside a financial cushion for yourself, or maybe in a really good scenario, make a down-payment on a house, that’s a great outcome. If things go well, and your company succeeds beyond your wildest dreams, it will end up being the most expensive house ever (because you could have held your stock and made a lot more on it). But, if things go south, then you’ll be thanking your stars that you at least got that little something for all the effort and years you put in.

I have been amazed that most VCs who are on the boards of these companies don’t counsel founders to do this. To the contrary, I suspect that lots of VCs don’t like this idea. They want to keep the founders “all-in” in the startup, because they feel that otherwise the founders won’t be motivated enough. When I run into that kind of thinking, all I can do is call bullshit on it — it just makes me fuming mad.

If you’re a founder who has worked your tail off for many many years (where “many many” is usually >>4 years) and you have succeeded in building a fair amount of value in the company, then why shouldn’t you be able to take some of that value off the table? VCs invest in a portfolio of companies. So they’ve already reduced their risk by spreading their $$s across a number of companies. Not only that, in most cases VCs aren’t even investing their own money, they’re investing OPM – Other People’s Money. Founders, by contrast, have everything tied in to the success or failure of their startup. They’ve usually scraped by for many of the early years, paying themselves (if at all) less than they could earn if they took a job rather than working on their dream.  Yes, they do it because they are passionate about it and couldn’t imagine doing anything else, but, if the founders build a company that is being valued at many tens, and sometimes hundreds of millions of dollars by VCs, then IMHO they deserve to see some of that value in cold hard cash.

Founders who end up taking some money off the table and build a financial cushion for themselves, are more likely to want to “go long” in the company. It aligns the incentives of the VCs and the founders better so that the founders are then comfortable enough that they are willing to take that moon-shot.

By the time a company gets to its Series B or Series C, it is quite common for the founders to have lost control of the board or the company in general. By this point in time, the VCs usually outnumber the founders on the Board and can set the direction of the company (For instance, blocking when the company can be sold. There are far too many cases where the VCs want the company to shoot for an even bigger exit and in the process miss the window for an exit leaving the founders with nothing). If the founders cannot control the direction of the company, why should they leave 100% of their risk on the table? If they’re giving up control, that should come in exchange for having some recognition of the value they have created so far.

Of course it is important to note that all my comments above apply only when the company is doing well and is seeing significant up rounds. And that too usually when there is sufficient investor demand for the next round, i.e. the leverage needs to be in the company’s hand (rather than investors) for any type of founder liquidity to even be an option.

There are several arguments against providing founder liquidity:

1) The money doesn’t go to the company, but into founders’ pockets: Yes, the money from founder liquidity does go to founders’ pockets, but that’s entirely the point. If this argument is being brought up, then the only test is to see whether the capital needs of the company have already been met or not. If they have, then there is no reason the founders shouldn’t get some liquidity of their own.

2) Fairness to other early employees in the company: This is a very critical and important point, that is often overlooked by founders. I firmly believe that if there are early employees who have been with the company long enough and have meaningful enough stakes in the company, they too should have the opportunity to sell some of their vested stock, or vested and exercised options. This does lead to a discussion around what’s the right threshold to set for whom this opportunity is offered to and to whom it isn’t. I believe this is something that needs to be determined on a company-by-company basis. In most situations that I have come across, the founders usually have a significantly longer tenure working at the company than even the earliest employees and so a founders-only cut-off is acceptable. However, if that’s not the case, then more thought should be put into determining that threshold.

3) Setting a precedent for the price of the Common Stock: This is the biggest issue with founder liquidity. Founders typically hold Common Stock in the company, but they (obviously) want to sell the Common Stock at the same price as the Preferred price or close to it. By selling Common Stock there is a risk of setting a precedence for the price of the Common Stock, which can then impact the price at which future options can be granted. It is important to note that this transaction is one data point for the price of the Common. So when a valuation firm looks at the complete picture, the movement in the price of the Common Stock may either be small, or the price may not move at all because the transaction can be considered to be a one-off transaction (i.e. if someone else were to go and sell Common Stock in the company, it wouldn’t be valued the same way, especially as there isn’t really a liquid market for it).

There are creative solutions to the problem of setting the price of the Common Stock which have been devised and used by many startups. This is by no means a comprehensive list, but here are just some of the approaches that I’ve heard of:

1) The founders stock is purchased by a neutral third party, rather than a VC who is an investor in the company. If the VC is already an investor (and especially if he/she is on the Board) then that person already has a lot of knowledge about the company, and it will be difficult for any purchase by the VC to then be considered a one-off transaction.

2) The company can repurchase the founders’ Common Stock at the fair market value (FMV) price of the Common Stock, sell an equivalent amount of Preferred Stock, and then give the founder a bonus for the price differential between the Preferred price and the Common price. The downside is that while the purchase of the Common Stock results in capital gains, the payment of the bonus, results in taxable income for the founder. Additionally, the company now just added on additional liquidation preferences — but this may be acceptable since the founders are likely to be the largest holders of the Common.

One advantage of this approach is that the purchaser of the stock could even be a current or new investor and doesn’t have to be a third party. This may even turn out to be a good approach for the new investors to get to their desired ownership in the company or for current investors to reduce their dilution.

3) In some cases, if the founders, or their lawyers had enough foresight, some portion of the founders stock may have been issued as Preferred Stock. The concept of the Series FF stock is a good example of this. In this situation, since the founders own some portion of their equity in Preferred Stock, the issue of the Common Stock pricing doesn’t occur. However, setting up a company with such a structure is uncommon and more importantly doing so can send a negative signal to the early investors in the company and potentially create an additional risk for the early financing for the company. (I have more extensive views on this, but this post is getting long enough!)

In summary, I think it is important for founders to consider getting some amount of liquidity when a company gets to a high-priced Series B or a Series C round. It’s a rational thing for the founders to do and I would also encourage the VCs who are investors in these rounds, to consider counseling founders on this option. Whether the founders exercise that option or not is a different issue, but at least it should be an informed decision. To that extent, I hope this post sparks some discussion on this topic, which typically doesn’t get much air time and stays something that only gets discussed behind closed doors.

In my humble opinion, when used correctly, founder liquidity can be a tool that rewards founders for their years of effort in building a valuable company, and aligns the incentives of the founders with the VCs to build an even more hugely valuable company.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

In fact, when starting K9 I used my own startups as an example such capital efficiency. In my first company, SneakerLabs, the total capital raised was $1.15M. I started the company in December 1996, we sold the company in March 2000 (3+ years). We had just under 20 people prior to the acquisition at over $100M — that’s a pretty capital efficient company by any definition. My second startup (iMeet/Netspoke) raised a combined funding of around $2M — not a lot of capital for a company that grew to 60+ people before it was acquired. So I argued that I want to try and find companies which can follow a similar model. Raise a modest amount of capital and then have a great return. Sounds plausible right? Well, today I’m going to explain why I now believe that this thinking is flawed (for Silicon Valley at least, not sure about other geographies).

While the reasoning above is mostly sound, it doesn’t take into account one very critical variable: maturity of the funding ecosystem. I’ve since realized that the reason why my startups were so darn capital efficient was not because they didn’t need that much capital. In fact, our Valley-based competitors (eGain, Kana, WebEx, Placeware etc.) had raised a lot more capital than we had. The real reason was that we simply didn’t have access to capital. This was partly due to us being located in Pittsburgh, where there are only a handful on local venture capital firms (neither of which funded either of my startups). The other part was because I was still learning how the system worked and in hindsight didn’t do a good enough job of attracting venture capital from firms in the Valley or the east coast.

So, we were capital efficient, but only because we had no other choice. I now claim that:

“There is no such thing as a capital efficient company (at least in Silicon Valley). There are only two types of companies — those that attract capital, and those that don’t. And you obviously want to be the former.”

Let’s dissect that a bit. If you look at most of the recent (<5 years) Silicon Valley tech companies that we consider “successful” today, most of  them have raised a lot of capital. They certainly don’t meet the simple definition of capital efficient without additional qualifiers. Why is that? Because when a startup starts to do well, VCs all sit up and take notice. That starts a feeding frenzy that then results in VCs calling up the company and literally offering money on a platter. The entrepreneurs look at that and appropriately think — “if I had more money, I could do X or Y.” And more importantly, “things are good now, but what if they’re not in the future? Wouldn’t it be nice to have a cushion in the bank for the rainy days?” And so the company takes on more capital. (Sometimes companies take on more capital than they should which results in indigestion for the company, or what I otherwise refer to as the curse of over-capitalization, but that’s a topic for its own blog post sometime.)

By contrast, even if you’re a company that’s doing well, if the VCs don’t take notice, you’re going to have a tough time raising the capital you need. You’re not attractive enough for the $$s. So what’s your option? You either become more attractive for the $$ or you become capital efficient!

As an investor realizing this has been a critical bit of learning for me. It has caused me to change my criteria to not look for just “Capital Efficient” companies, but instead to look for companies which are “Capital Appropriate.” i.e. the amount of capital the company needs is commensurate to the size of the opportunity or to the size of the potential exit that company can have. If you’re going to be a multi-billion dollar company, then raising $50M or more isn’t a big deal. But if the opportunity is only that of a $100M company, then raising $50M to get there would not be a good path.

Yes, it is cheaper to start a company (at least certain kinds of companies), but if your objective is to go big, then chances are you will take on more capital than you originally planned. And in some cases it won’t be because you need it, but because it’s offered to you, or because you can.

Food for thought and fodder for discussion. And of course, you still want to be the company that attracts capital!

You can follow me on Twitter at @ManuKumar or follow @K9Ventures for just the K9 Ventures related tweets.

But even SneakerLabs couldn’t satiate all of Diego’s creative energy. He loved music and this is right around the time when MP3s were becoming popular. In fact, if I remember right this was pre-Napster. So Diego did what only a hacker who loves music can do — as a side project he built a search engine for MP3s – (2look4.com) that let you find almost any song available on the web in MP3 format. Since the sites serving up MP3s were very transient (you can take an educated guess as to why!) he had to build his indexing technology to be able to update very quickly and filter out stale data very quickly. And so began Diego’s foray into search technology.

Diego was smarter than me. He knew that the right place to be for what he loved to do was in the Valley (It took me a few more years to figure that out!). I was bummed when Diego decided to leave SneakerLabs in December of ‘98 to move out west to the Bay Area and work for Inktomi. We lost touch once he moved out west and didn’t really have much contact for the next 10 years.

In March, 2010 Diego and I reconnected. He had been working on search in one form or another for the entire decade, having worked at LookSmart, XoopIT, and then starting his own search consulting business. Diego saw a problem with search. Users’ expectations of how search works is set by their interaction with Google (Yes, Bing and Yahoo still have a portion of the market too, but Google dominates). But, for any other small to medium sized company (and in some cases even large companies) adding a high quality search experience to their websites is hard. These companies don’t have search engineers on staff. Diego realized that there needs to be a platform for providing Search-as-a-Service and started to create what became IndexTank.

Having known Diego for such a long time, and having seen the depth of experience he and his team had in doing search, it was an easy decision for me to have K9 Ventures participate in the seed round for the company in September 2010. IndexTank pulled together an awesome list of investors in a round led by Michael Dearing from Harrison Metal and Steve Anderson from Baseline Ventures.

I mentioned this article in a conversation I had with the co-founder of a new startup. He tried to look for it an couldn’t find it and so emailed me to see if I still had a copy. I tried to find it on the Web and I couldn’t either. After all, this was Before Google (B.G.)  and also before the  Internet Archive and the Wayback Machine (which is a lot of fun when you’re feeling nostalgic or just want to laugh at what was cool back in the day!).

After a little bit of digging through old backups, I found a folder with drafts of a couple of my old articles/paper from 1996. At the coaxing of some folks on Twitter, I’m reproducing the article in its entirety here. Just as it was, with no edits. Before you read this, please be aware that this was written in 1996 - that is 15 years ago. I was still young, and had a full head of hair (really, I did). The Pentium / Pentium Pro was the state of the art processor. There was no WiFi, and CRTs still dominated the display market. Laptops were just beginning to appear. Floppy disks still existed. CD-ROMs were new and cool (no DVDs!).

Hope folks enjoy reading this piece of history (at least my history!) and get a few chuckles out of it…

Today’s computer a couple of years down the road….
A vision of what the next big thing in the computer industry might be.

Manu Kumar
(sneaker@cs.cmu.edu)
School of Computer Science
Carnegie Mellon University
Sunday, May 05, 1996

Introduction

I like most of my papers to be colloquial. It allows me to explain what I want to say rather than get lost in formality. So this paper is going to follow the same colloquial style.

Everybody and their dog is attempting to predict the future directions of the computer industry. Its extremely fast pace is leaving everyone guessing about what’s going to happen next. The person who puts his/her wager on the right choice is going to land up with some big bucks and others may fall from their high horses and lose their millions. It’s a gamble… a gamble with high stakes, high risks and most importantly, driven by a highly scientific and technological basis.

In my opinion, the fact that the industry is based on technology gives it a certain degree of predictability; and in this paper I chose to use what information I’ve gathered regarding the industry in order to predict the directions of the machines for tomorrow. What you have to keep in mind is I’m talking about tomorrow, i.e. the near future, although I may wander off a bit and become a bit more futuristic.

One caveat regarding this paper: it assumes that you are somewhat familiar with the current industry news and technological developments.

Today

The Web is taking (taken) over. It’s had an exponential growth. In fact, it’s growing so fast that the word exponential may very soon be an inadequate description. And now, all the big companies (Oracle, Sun, Microsoft etc.) are talking about integrating the desktop with the Internet. “Internet Appliance” and “Network Computer” are the hot buzzwords.

And I agree with them all. They are right. The Network Computer is the way to go. But, I don’t agree with everything that they propose. In the next few sections I discuss what I feel the Network Computer or Internet Appliance should be, and what I think would be some of the essential characteristics of it’s design.

Moving Down the Road

So now that I’ve laid the foundation…

The Network Computer

The network computer, is analogous to the dumb terminal of yester-years. Except that there’s one big difference. Somewhere along the way it got smart. In fact, it got intelligent enough so that you no longer need to be a whiz to use it. It just works. And how does it work? Well, that’s what’s coming up next….

Lawrence Ellisons’ description of the Network Computer (NC) with just two wires is exactly right. What makes it simple today to buy a television from a store, bring it home and use it the same evening(i.e. you don’t need an expert to set it up for you! …well, okay at least most people don’t!)? The television needs only two wires. You know exactly what they’re for. It needs juice (electricity) and it needs the antenna or cable plugged into it in order to receive the television signals. Similarly, the Network Computer, must have only two wires, the juice-wire and the net-wire.

The biggest problem with making computers as wide-spread as televisions are today, is the end user. The end user may not be competent enough to figure out the intricate details of plugging in the right wires, installing the operating system (well, most machines come with them installed now), installing the software they need…. and most of all getting it all right. Or even if the user does have the necessary level of expertise, he/she may lack the time or the inclination. The bottomline is that the end-user does not want to deal with all the complications of setting up a computer just right. (Actually, I’d be willing to argue that right now cheap and good computer support has a great market potential if it’s done right; but that’s a whole other story.) But is the user really a problem? Or is it the equipment? Why does a computer need to be more complex than a television?

The Network computer resolves all these problems. You bring it home. Plug it in to the electric socket and plug it in to the network socket Okay, so that’s being a little futuristic… but think about it, how skeptical were people when Thomas Edison, first invented the light bulb? I bet they said then, that it’s impossible to get electricity everywhere. Or when Alexander Graham Bell talked on the telephone for the first time, they must have said that it’s impossible to have a telephone in every home! But today, you can plug in 30,000 feet above the ground and you can call home from virtually anywhere. Okay, so maybe that’s an exaggeration, you can only plug in 30,000 feet above the ground if you fly first class on some airlines. But the point is electricity and even phones for that matter, at one point in time faced the same skepticism that the net faces today. It will happen.. you will have a network socket… but for now it may just be your phone line, ISDN line or eventually your Cable TV line.

So where were we? We brought the NC home, and plugged it in. There is no on-off switch.. you don’t need one. It is always supposed to be on (or maybe asleep… but never off!) So you plug it in and it come on. Now what? Before, I describe that, let’s take a little techie-diversion. I want to first describe address the technical issues as they will help in understanding what happens next.

Technical Details

So far the only thing I’ve mentioned about the NC is that it has two wires. Now depending on how futuristic you want to get, I forsee several different approaches to the NC. I classify them into Maybe Tomorrow, Maybe Next Week, Maybe Next Year and Real-Soon-Now (of course these are just to give you a relative time frame, so don’t take it literally).

Maybe Tomorrow: Tomorrow NC may look a lot like the desktops and portables of day. It’ll still have a keyboard, a mouse and all the regular parts of a conventional computer. It’ll have it’s own monitor, sound etc. The biggest difference in this Network Computer will be the Operating System and how it handles file storage (common difference to all)

Maybe Next Week: Drop the keyboard. Improve the pointing device. Add in a good Speech Recognition. Make it even more powerful, bigger in storage, but smaller in size.. small enough to move around easily (notebook size?).

Maybe Next Year: Make it even smaller. Put in some flexible high resolution display. Make it even lighter. Possibly cut one of it’s wires off completely and reduce the need for the other, i.e. the network is wireless, and the power consumption is low enough to give it a usable battery life!

RSN: Drop the monitor or whatever is being used for a display. Add in some holographic video. Drop the mouse. Add in some Intelligent Agents. …basically you could let your imagination run wild with this one. But let’s leave that for the time being and come back to realistic things.

Several of the technological advances necessary for achieving the different levels of functionality described above, are already being tested in research environments. However, it will still take a little time for them to be made usable by the masses and more importantly, commercially viable.

But the real big difference in the Network Computer I believe is in the storage model.

The Storage Model

The entire storage model of the Network Computer can be summarized in one word: cache! All the storage on your local NC is a cache. The entire local hard disk is nothing but a huge cache.

When you power on the Network Computer for the first time, it’s Flash ROM based Operating System boots up and immediately contacts it’s vendor(s) over the net connection. It then asks the user what his application for the machine is and then proceeds to “cache” the appropriate software… over the network. The user need not have any idea about how to install software, how much disk space it needs, where he must install etc. All he says is, I want to use this machine to write papers, or surf the net, or play games, or do development.. or any combination of the above. The machine is self-aware. It knows how much space it has, what the requirements for installation are where it should install etc. Of course, not all of this information is within the machine. The information is distributed… on the network.

So take for example a word-processor. I tell my NC that I want to write a paper. The NC checks it’s local cache to see if it has the word-processor software cached in it. If it does, it verifies that it’s copy in the cache is up to date. If not, the NC will automatically cache a fresh copy or apply a patch (differential updating) to update it’s own copy to the latest version. Then I can proceed to word-process to my hearts content.

The key idea is that the user has no floppies to deal with and need not know anything about the machine or about managing the software. The machine automatically updates itself and maintains itself.

The document is always saved… by continual checkpointing. And it is not only saved in the local cache, but uploaded to the secure centralized storage provided by the Network provider. Yes, your main storage is on a network file system, somewhere in cyberspace. So you can be anywhere in the world, as long as you connect to the net, you will always be able to get any of your files.

The obvious questions arise… what if you are not connected to the network? What if you want local storage so that you are not wasting time and bandwidth getting everything from the network all the time? How big should the cache-size be? And so on. Before, I address these questions I would like to explain the rationale behind this idea.

Rationale / Source of the Storage Model

The model given above is derived from the use of AFS (Andrew File System) developed at Carnegie Mellon University (principal architect: Mahadev Satyanarayanan). In AFS all files are stored on distributed file-servers. AFS clients operate by using a cache. Whenever the use needs a file, it is read into the cache. And used from the cache. If the file on the server changes, the cached copy is now invalid (depending on the version of AFS this is handled differently).

AFS relies on a connected network. If the network dies, AFS cannot function correctly. Coda, the next generation successor of AFS, is smarter. It allows for disconnected operation by allowing the disconnected user to continue using the cached copies.

The AFS and Coda is one piece of the background I needed to introduce before explaining the rationale for the model. The other piece is a more far-fetched. It may be hard for some to swallow at the time but this is where I forsee the industry heading towards. Eventually, you will not be buying software the way you do today.. in stores. Software will be sold over the network. And most probably, there will no longer be a single one time fee that you pay for a particular version of the software. There will be software subscriptions, just like magazines (in fact we can already see some of these in offers like the Visual C++ Subscription from Microsoft). The charge for software will probably be on a per-use basis. So you are no longer paying for a particular version of a particular software. You are paying for using the software each time you use it.

Let me illustrate with an example. I am writing this paper in a word processor. I use a word processor very often to write papers. However, I use a spreadsheet only once in a blue moon. Now, does that mean I should have to buy the entire spreadsheet package, even though I use it only a few times? In the pay-per-use software business model, at least in my opinion, both the consumer and the developer benefit. The price the consumer pay is proportional to the benefit he/she receives from the software. And the developer receives a proportionate payment from each user.

I spent a long time trying to come up with an appropriate analogy for this scenario. But “software” is so unique that it was hard to come up with a single example that would illustrate the point. One example, is of two people who have different appetites. The person who eats less pays less for his food. There person who eats more.. pays appropriately. Another analogy, is that of renting a car and paying by the mile. However, the main objection to these analogies, is that software unlike food and cars in non-tangible. It has nearly zero replication cost, especially if everyone is downloading it from the net; it does not get consumed or decrease in value with use. So then, why should users always keep paying the developers and software companies on a per use basis?

It’s a valid question. One I’ve been pondering over myself. Maybe the per-use price can be made so low that users don’t mind, and the software companies can still be profitable. Or maybe there can be a price ceiling imposed on the maximum payment on a per-use basis. Say, I use my word processor so often that if I use it everyday for a whole year, I would be paying the software company about two times as much as I would if I bought the package in a store today. In that case, maybe the maximum payment ceiling may say that if you have used the software n times or for n useful hours (the number of times a word processor has been used would be an inaccurate representation of amount of benefit obtained by using it… number of hours seems more suitable) and have hence paid n times x units of currency to the developer/software company, thereafter all subsequent uses will be free.

These of course are just some of the options. As an analogy, think of the different telephone/long distance plans. Each one has a different pricing structure, catered to the use of the customer (usually it’s catered to extract more money from the customer, but in most cases I think both the customer and the company benefit).

Software is never “complete”. I would be willing to argue that it is impossible for a software (or anything for that matter!) to be finished, completed, perfect. There is always room for improvement (it’s the largest room in the house!). A developer can always think of some bug which is still in the code. There is always some feature that can be improved. So in the pay-per-use Network software distribution model, the user can always be using the most up-to-date version of the software. (Of course, at times older versions are better.. in which case the user may actually tell his machine to not automatically update the software without checking first).

So with this little background given, let me tie it all in to the storage model given above. The NC’s hard disk functions as the cache in an AFS client. It caches all the software that a user need to use. Whenever the user uses a particular software the use is logged, either locally or remotely. (Privacy issues are bound to come up here. Which is where local (well, not really local… it would still be stored on the network storage, but in the user’s secure personal account) logging is better. Only the number of use-units is reported to the software vendor, for charging purposes.

Whenever the user begins to use any particular software, the version of the software is verified over the network. If the vendor has released a new version since the last time the software was used, the patch will automatically be applied, unless of course you the “advanced” user has told the machine not to automatically apply patches and check with you first.

Now the cache storage model is a little different from the regular caching models. It is an intelligent cache. The user can tell the cache that I use this file very often, so I don’t want to get it over the network each time… make sure that the most up to date copy is always in the cache(Cache Hoarding). Though initially, this decision may be made by the user, eventually, it can be made by a software agent which monitors the way the user uses the machine, and tunes the cache accordingly.

When the user is not connected to the network, the optimistic caching principle of Coda comes into play. The user can still work on whatever he has in the cache. The network copy will be updated the next time the user connects.

So this is what I consider the biggest difference, treating the entire hard disk as a cache. Now, let me discuss what I think can make this model work and make it happen really soon.

Java OS

Before I even begin this section, let me admit that I am biased. I am completely sold on Java.

In my opinion, the JavaOS that Sun has been touting for a few months now, can be made extremely useful. Think about it. All it is, is a simple OS. Which does cache handling and gets all it’s intelligence from the information on the network. It can be extremely lightweight (especially once the Java microprocessors that Sun is planning on come out) and yet have decent functionality.

The NC then just reduces to a nothing else but a Java run-time environment. Which can be manufactured very easily and extremely cheaply. (Costs are a big factor in technology!) The only “software” on the NC then is the ability for it to go on the net and find it’s vendor. Once the vendor has been located, the NC knows how to upgrade it’s OS. So it goes out gets the latest copy of the Operating System. From there on all the operations are handled by the OS. The advantage of the OS being done in Java is that it’s completely replaceable. The software that I’ve been talking about above is nothing else but Java applications which are cached on the local hard disk.

Of course the same thing is possible with Windows as well or with any existing commercial OS. But the idea is to have a very light weight operating system. A modular OS. A new OS, which is designed for such use.

Currently, performance issues seem to be the biggest hurdle for Java. But Sun Microsystems is developing Java micro processors. My hunch is that the Java micro processor or any other lightweight yet extremely powerful processor (StrongARM etc). may provide the necessary base for developing such a JavaOS.

Intelligent Agents

Let me add a small blurb on intelligent agents. Intelligent agents will become an integral part of the NC. Like the caching agent I described above which monitored usage and came up with a heuristic for the best caching policy. Or we can have browsing agents and filtering agents which prevent our puny little minds from the barrage of information coming at us. There has enough been said about Intelligent Agents, by several who I consider to be a lot smarter than I. Let’s leave it to the best, and simply acknowledge, that this NC will open new arenas (commercial arenas?) for Intelligent Agent use.

Conclusion

This paper is a real mess. It definitely needs some more reorganization. But it contains some of the points I wanted to make in some way, shape or form. The objective of the paper was to speculate on what’s happening next and possibly see if other’s agree with this speculation or not. I’d be happy to entertain your comments or suggestions or even discuss this with you in more detail.

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