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.

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

I am pleased to welcome Occipital in to the K9 Ventures’ portfolio. The company announced today that it is raising $7M in a Series A led by the Foundry Group. I am pleased to be joining the Board of Directors for Occipital along side Jason Mendelson and Brad Feld of Foundry Group and Gary Bradski (creator of OpenCV) of Willow Garage.

Occipital, founded by Jeffrey Powers and Vikas Reddy, is the leading company in the space of mobile computer vision. The company entered the space with The ClearCam application which used super-resolution techniques to allow the iPhone camera to take pictures that were sharper and of higher resolution than the native camera application ever permitted. Occipital really made it’s mark with the RedLaser application, which garnered millions of downloads on the AppStore and with the RedLaser SDK became the default for anyone doing barcode scanning on an iPhone.

In June 2010, The Occipital team sold RedLaser to eBay and embarked on the next phase of their journey to build the next generation of mobile computer vision applications and to build a platform that mobile developers can rely on to build new experiences. Their first new application for this is 360 Panorama – which lets you capture and interact with panoramic images directly from your mobile phone with just a swoop of your hand.

The ‘phone’ is not just a phone any more (especially the iPhone since sometimes you can’t even use it to make phone calls! ). It is a computational device in your pocket which surpasses the compute power of most super computers of yester-years and is loaded with sensors – the most important sensor being the camera. Occipital is the company that will unleash the power of your phone and its camera with a host of interesting new applications and a platform for developers to bring computer vision into their own applications.

I first met Jeff and Vikas in September 2008 when then presented at the TechStars Demo Day in Silicon Valley. These two young grads from the University of Michigan Computer Science blew me away with what they were capable of building within just a few months. I have been an active yet informal advisor to the company ever since. It has been an absolute pleasure to work with Jeff and Vikas and I would venture to state that they are the best team out there for doing mobile computer vision.

I’m very excited to formalize our relationship and welcome Occipital to the K9 Ventures portfolio. Looking forward to continuing to work with you guys and play a little tiny part in how you change the way we interact with the world.

I was first introduced to Christopher Golda at BackType in 2009 (Thanks @fbishara) as a “highly technical team” — something I look for. At the time BackType was focused on organizing comments and tweets about content. It was an interesting problem, but not one that made for an interesting business opportunity yet. I was re-introduced to the BackType team in 2010, this time by Sachin Agarwal (@a4agarwal) from Posterous. (I’ve been a fan of what Posterous has built and like Sachin’s approach. In fact, I use Posterous for a couple of personal and work related sites). The BackType team, comprised of Christopher, Mike and Nathan Marz (@nathanmarz) had already developed a reputation for being one of the smartest “big data” guys out there.

It should also be noted that BackType is yet another example of a company founded by immigrant entrepreneurs. Christopher and Mike are both Canadian and graduated from the University of Toronto. They came to the United States for Y Combinator and fortunately were smart enough to get O-1 visas to be able to stay and build their company here in the US. The BackType founders would have been perfect candidates for the Startup Visa — and are yet another testament to why we need such a program in the US.

By 2010 BackType had morphed into a company that was starting to provide “social media metrics.” BackType would receive the entire Twitter firehose, the public Facebook firehose, data from Reddit, from crawling blogs, and various other sources and then use their sophisticated big data processing techniques to perform analysis on this data. They would provide measurement and metrics around the impact of social media efforts. It was clear that social media was to be a major marketing channel. Companies and brands would be (and now are) funneling a lot of dollars into this channel. However, it was (and is) unclear to them as to what the impact that marketing spend was making. That’s where BackType stepped in. To help companies and brands to figure out the impact and the ROI of their social media marketing dollars.

There are a lot of companies that claim to do this. However, there is a big difference in what these companies can claim or profess to do, vs. what they can actually deliver. That difference comes from the core technology that is used and the amount of data they can handle. It is very simple, almost trivial to be able to track a handful of accounts, but to be able to get a reasonably comprehensive view of what is happening across the web and various social media networks requires the ability to gather and process large amounts of data — and that’s what the BackType team did well.

Few people are aware of this, but BackType had already built an interesting (and revenue generating) API business. Their API helped power features for bit.ly, Chartbeat, HubSpot, The Huffington Post, Radian6 and over 100 other partners. BackType’s BackTweets product focused on providing brands with metrics around their social media activity on Twitter.

The BackType team developed several core new technologies to help them in processing this large amount of data including Cascalog (GitHub), ElephantDB (GitHub) and Storm (link). Their contribution to the big data community in this regard is not to be under-estimated.

K9 Ventures invested in the Seed round for BackType in August 2010 along with Toni Schneider from True Ventures (lead), Josh Felser and Dave Samuel from FreeStyle Capital, Chris Sacca from lowercase capital, Dave McClure from 500 Startups, Raymond Tonsing, and others (full list).

The BackType team (currently 4 people) is a great example of a highly technical team that built core-technologies to help solve a real problem. They had multiple acquisition offers from top companies and chose to go with Twitter because of the excellent fit for the product, the technology, and the culture of the team. It’s been an absolute pleasure to work with Chris and Mike and I’m very pleased to see their talent and their product be recognized in this acquisition by Twitter.

Congrats Team BackType!

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

Here is just some of the coverage on card.io’s launch:

• TechCrunch: Card.io’s SDK Makes Entering Credit Card Information As Easy As Taking A Snapshot
• GigaOm: Card.io brings credit card visual swipe to mobile devs
• AllThingsD: Ex-AdMob Employees Make Paying for Things on the Phone a Snap – Tricia Duryee – Commerce
• Forbes: Charge It With A Snap Of A Photo Using Card.io
• Engadget: Card.io SDK takes swipe at competition with camera-enabled mobile payments (video)
• PCMag: Former Admob Execs Tackle Mobile Payments, Photograph Credit Cards
• ReadWriteWeb: Card.io Lets You Pay on Mobile by Holding a Credit Card Up to the Phone

Several folks are familiar with Square, Jack Dorsey’s (@jack) company which does credit card scans using a card reader dongle. Square works by using an add-on hardware device that connects to the audio port of your iPhone (or other iOS device) and allows you to swipe a credit card with it. It’s pretty cool. However, I always wondered what happens if I want to scan a card while still listening to music? (I’m kiddding!!) Actually, the more important question is, what happens if you don’t have the reader attachment, or, if you forgot it at home, or left it in your other pocket?

Well, what Square and others like Intuit’s GoPayment are doing is simply reading the card information from the mag stripe and then processing the payment. Well, almost all of that information also appears on the face of your credit card: it has your card number, the expiration date, and your name. So the guys at card.io wondered, “hmm, what if we could just use the camera on your phone to scan the card and read the information directly from it.” And so there you have it, card.io lets any phone with a camera now become a credit card scanner! Or as I like to say: it’s Like Square, but without the square.

Technically speaking, the problem that card.io is solving is a non-trivial problem. Even though the problem is somewhat constrained by having to look mostly for digits from 0-9, with a relatively uniform font, there is a large amount of variation between credit cards. In addition, cards have different amount of wear and tear on them, they have different colors, backgrounds, the card scanning may happen under different lighting conditions. The major benefit of using a hardware card reader like Square, or a visual card scanner like card.io is that it makes it quick and simple to get the credit card information — you don’t have to type in 16+4 digits in by hand. It is critical for any card scanner to be fast. Anyone who has worked with computer vision knows that it is a relatively compute intensive task, so doing it fast requires a bit of technical jugglery.

The card.io team has spent a lot of effort in solving these hard technical problems and has developed a product that provides both an elegant user experience, and, an API that makes it very simple to integrate card.io into mobile applications. card.io can be used in a couple of different ways — mobile app developers who want to provide users with a way of making credit card purchases through their application can integrate card.io and thereby allow their users to scan their own credit cards for purchases quickly and easily. Additionally, any mobile merchants can use card.io to process payments from their customers on the go — without needing a card reader/dongle to do it.

It’s true that using this approach at present qualifies for the “card-not-present” exchange rate from the card processors. However, card.io’s target is not retailers who are trying to optimize their card processing rate, but instead it’s trying to drive incremental sales and revenue by reducing the friction for processing a credit card payment for mobile commerce.

I’ve known Mike Mettler, the co-founder and CEO of card.io, for a while now and first met Mike when he had just left AdMob. Mike showed me a prototype of their app in October, 2010. It was one of those “duh!” moments for me, as in “Why didn’t I think of that?” After all, I was already heavily involved with CardMunch at the time. When I met Josh Bleecher Snyder, the co-founder and CTO of card.io, I was blown away by Josh’s ability to learn and code and just make things work. I remember Josh telling me that he learnt about Computer Vision by “reading the book” (Gary Bradski‘s awesome book Learning OpenCV), which just blew me away because he is by any definition an expert in computer vision. Brent, the founding engineer of card.io was previously a member of the founding team at Sifteo.

Even though folks like to argue that credit cards are “old technology,” they are ubiquitous, and not going away anytime soon. card.io’s mission is to make it easier for any mobile application developers to accept and process payments via credit card on smartphones. If you’re a mobile app developer, you can request early access to the card.io SDK on the website.

Congrats again to the card.io team — can’t wait to see all the applications that use card.io!

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

For his PhD thesis, Ren had done something that sounded completely impossible, especially to me, since I had limited knowledge about photography and imaging at the time (I’ve since learnt more by hanging out with Ren!). He had succeeded in coming up with a way of shrinking 100s of cameras into a single camera (grossly over-simplified). The Stanford Multi-Camera Array was an array of 100 cameras. It let you do all kinds of interesting things, including “see through partially occluding environments like foliage or crowds.” Ren’s breakthrough was that he figured out a way to put all that in the palm of your hand and he had already built a working prototype in a full-form factor camera. Everyone in the Graphics Lab, including the professors (Ren worked with Pat Hanrahan, Mark Horowitz and Marc Levoy for his research), always referred to it as “Ren’s Camera.”

Ren and I started brainstorming about the potential for commercializing his technology in 2005. Having just sold my second company in August, I was already chomping at the bit to get involved with another startup. Doing the PhD alone couldn’t keep my entrepreneurial bug fed. We would chat almost every day, and sometimes spend hours hidden away in one of the empty offices across the hall doing whiteboard sessions around what would be a viable plan for taking this amazing technology out to market.

At his core, Ren was an academic. He was a little apprehensive about whether it would be possible to really build a company around this. My job was to keep coaxing him on and to keep reminding him that it is doable. I would keep asking him “So did you incorporate yet!?” To add to the complexity of the situation, Ren happens to be an Australian citizen. One of the concerns we had was how do we get him to stay in the US to be able to build the company here. (Most people who read this blog already know my thoughts on, and my support for the #StartupVisa.)

On March 21st, 2006, the Stanford Computer Science department celebrated its 40th anniversary with an awesome event, with an absolutely stunning line-up of speakers — Professors, Entrepreneurs and Professors-turned-Entrepreneurs. As Ren and I sat there listening to their stories, in between the panels and talks, I asked him yet again “So did you finalize the name for the company?”. He responded with “I think I’m going with ‘Refocus Imaging.’” “Great,” I said, as I secretly reached for my checkbook.

What Ren didn’t know then was that I had made up my mind to back him a long time ago. In fact, I was so ready to back him, that I had already transferred money into my checking account for it. At the next break I slipped the check over to Ren. On the memo line for the check, I wrote: “Just do it! ” In fact, here is my copy of that check:

Starting a company with as grandiose a plan as this doesn’t happen often. We talked about several markets — security, defense, professional (DSLRs), consumer (Point-and-Shoots), mobile (cell phones), IP licensing, lens adapters, etc. It was a wide wide landscape and a rather daunting one. When we started to pitch the idea to investors, Ren and I went up and down Sand Hill Road and we met with almost all the top firms. Almost every VC firm came back with how they either don’t do hardware, or they don’t do IP licensing plays. The experience of going up and down Sand Hill to pitch Refocus with Ren is also what opened my eyes to what was happening in the venture capital space. It was the defining moment when I started thinking about doing my own venture fund. And it was also the experience that made me realized that dammit, what I *really* love is startups, and that I need to give myself a kick in the rear to finish my PhD so that I can get back to my real passion.

I’ve written before about Rajeev Motwani and how he was instrumental in so many of the Valley’s startups. Well, it was Rajeev, who met with us and then offered (and followed through, like he always did) to help us connect with a couple of venture firms. He made the introduction to Charles Chi at Greylock, who eventually led the Series A for Refocus Imaging in 2007.

The first few years of Refocus were spent operating as a very lean company with a team of four (Ren Ng, Colvin Pitts, Tim Knight and Alex Fishman) focused primarily on research and development and on learning about the market. One of the realizations was that camera companies are relatively old, stodgy companies, where it is very hard to really innovate and do something that is new and different. When was the last time you saw a camera company do something really radical? It’s always about adding one new feature for the next product cycle / Christmas season. By building our own camera, Refocus took on the challenge of being different and really creating something new — a clean slate approach to camera design.

In May 2010, Refocus Imaging closed a Series B round of funding led by NEA. I was honored to participate in the round and officially welcome Refocus into the K9 Ventures portfolio. In May 2011, the company closed its Series C round of funding with Andreessen Horowitz. The company launched today under its new moniker: Lytro, and has received a phenomenal reception in the press:

• New York Times: A Start-Up’s Camera Lets You Take Shots First and Focus Later
• Wall Street Journal: Start-Up’s Camera Allows Photos to Be Refocused
• TechCrunch TV: Lytro Launches to Transform Photography with $50M in Venture Funds
• AllThingsD: Meet the Stealthy Start-Up That Aims to Sharpen Focus of Entire Camera Industry
• Forbes: Shoot First, Focus Later With Lytro’s New Camera Tech
• CNet: Start-up Lytro tries refocusing camera industry
• Fast Company: Lytro: The $50M Tech That May Change Photography Forever
• Wired: Lytro Camera Lets You Focus Photos After You Take Them

And here is what the folks are saying:

• “The Lytro camera captures far more light data, from many angles, than is possible with a conventional camera.” New York Time, Steve Lohr
  
• “Since images are focused after the fact, users don’t have to spend time focusing before shooting. Nor do they have to worry if they wound up focusing on the wrong thing.” Wall Street Journal, Don Clark
• “Lytro’s breakthrough new camera hinges on a new kind of sensor that captures the entire light field around a picture, rather than only a single light field like current cameras capture.” VentureBeat, Sean Ludwig
• “Lytro is developing a new type of camera that dramatically changes photography for the first time since the 1800s.” TechCrunch, Sarah Lacy
• “A Mountain View start-up is promising that its camera, due later this year, will bring the biggest change to photography since the transition from film to digital. Ordinarily, I’m turned off by such hyperbole, but after having seen a demo from Lytro, that statement seems downright reasonable.” All Things Digital, Ina Fried
• “Lytro is unveiling some fascinating new camera technology that could be a major leap in photography–maybe the biggest since the shift from film to digital.” Forbes Tomio Geron
• “After seeing Lytro’s editing capabilities in action, I can tell you it’s much, much cooler than anything current cameras and image editing software will let you do. And yes, the company’s technology even has the potential to become a breakthrough innovation in the camera industry.” Fortune, Michal Lev-Ram
• “At first, Lytro will make and market its own camera. I really can’t wait. Imagine being able to pick and choose just what is in focus when you get back home, just like we can do now with white balance and — to a certain extent — exposure. If it works as well as it seems from these sample photos, this could be huge.” Wired, Charlie Sorrel
• “That click you just heard? That was the sound of photography as we know it changing.” Fast Company, Kit Eaton

While $50M may sound like a lot of money, most of the capital that the company has raised is fresh. The biggest risk for a company trying to enter the market with a new consumer electronics product is the risk of capital — because it simply takes a lot of money to do that. That was one of our biggest worries when Ren and I were first discussing different strategies in 2005. Today, the company is well capitalized, and has the backing and the support of some of the top venture firms in the Valley.

Check out the full picture gallery on the Lytro website. Here are just two samples:

Rarely does a technology come along that is so fundamental in its impact. None of the articles that you may have seen in the press about Lytro capture the full extent of what this does (yet). The impact of Ren’s technology is so fundamental that, if successful, it will completely change an entire market. Photography and imaging will never ever be the same again. I will not go into some of these details here because I believe that it is the company’s prerogative to make that information available, as and when they’re ready. But needless to say, I am a firm believer that this is technology that defines what it means to “change the world.”

I’ve been an investor in and a “Founding Advisor” to the company since literally before it started. I’ve watched Ren mature as an entrepreneur and become what is the prototypical example of a perfect founding CEO. When you talk to Ren today, he will blow you away — not only with his technical prowess, but also with his deeply analytical thinking around every aspect of the business. More than anything, I am honored to call Ren a dear dear friend (he’s second only to my wife on the Favorites on my iPhone) and someone I know I can trust implicitly.

What used to be “Ren’s Camera” is now the Lytro camera. Congratulations to Ren, and to the entire Lytro team. It’s been a phenomenal journey so far, and we’re just getting started.

You can follow me on Twitter at @ManuKumar, or, follow @K9Ventures for just the K9 Ventures related tweets. You can also follow @Lytro or like Lytro on Facebook.

The truth is that Ideas DO Matter. Founders know this at the bottom of their heart — because their idea is like their precious little baby. In fact, most founders tend to take it to the other extreme that they don’t want to share their idea (subject of another future blog post on why Stealth is Overrated). That’s when they get told and beaten into them that it’s not about the idea.

Well, it is about the idea. The idea is the seed. It is the kernel that is the start of something new. And yes, some of those seeds may be dead on arrival, some may sprout for a short period of time, some grow into saplings, and others become trees (Oaks, Sequoias, Redwoods, and some into beautiful Baobab trees). It takes a lot of nurturing, a.k.a execution, in order for the seed to grow. It must weather a lot of storms and droughts (almost running out of money) along the way and remain standing through all of them. So yes, execution matters, but starting with the right seed also matters.

Ideas are immensely powerful. As Victor Hugo very appropriately put it, “On résiste à l’invasion des armées; on ne résiste pas à l’invasion des idées.”, loosely translated as: “No army can stop an idea whose time has come.” Ideas are powerful because they invade the mind. Once you are introduced to an idea, you cannot get it out of your head. It is the power of ideas that leads to revolutions, be it the French Revolution, the Russian Revolution, the American Civil War, or what we see today in the form of the Arab Spring.

In my prior life as an HCI researcher, one of the things we used to say is that “the problem with HCI is that if you do your job right, the solution is obvious.” i.e. if you design the interaction correctly, then the reaction should be “duh, obviously that’s the right way to do it.” That’s the reaction people have to the iPad — “of course that’s how the iPad should work.” But they forget that we’ve had pen and touch screen devices for years, if not decades before. The magic of Apple and the iPad was to get the interaction just right so that it feels fluid and natural. It’s the same with startup ideas. In hindsight everyone has the same reaction, “duh, obviously people will want to stalk their friends (Facebook) and know when some random person is brushing their teeth (Twitter)” But the process of getting there the first time is the hard part. It is the iteration on the interaction design (in the case of HCI) and the iteration on the idea (in the case of startups) that takes a lot of hard work to get right.

In the context of startups, ideas are what provide that little twist of ingenuity that can make or break a company. In my own experience — my first company started on the basis of a very fundamental idea — what if people can interact with each other on the web. That little theme is what lead to the creation of iMeet for live web conferencing, iServe for live pre-sales customer service on the web. For CardMunch, one of the recent startups I co-founded, the ideas were again simple, 1) Contacts now live on the phone 2) OCR doesn’t work, so let’s use crowdsourcing. In either case these were not revolutionary ideas, but they were what got the ball rolling and without them, that wouldn’t have happened. The best ideas are often simple ones. Maybe that is what a revolutionary idea is — an idea so simple that it sparks a revolution.

For Google, it was the idea of PageRank. Did search engines exist before? Sure they did. But it was that little spark of innovation, coupled with years of execution that got Google going. In fact even Google “borrowed” its idea of search advertising from what used to be called Goto.com and then became Overture.com. (Kudos to Bill Gross here for his role in Goto.com). That is a perfect example of how the idea mattered, but it also needed the execution to make it flourish.

Ideas and Execution are Yin and Yang of the startup world. You need both in order to make magic happen. You need the right idea and the right team that is capable of executing on that right idea. One without the other will fall flat on its face eventually. You may have a brilliant idea, but if you can’t execute it, it’s not going to happen. On the contrary, and this is what people forget, that you might have an absolutely stellar team, but if the idea isn’t right, even a stellar team isn’t going to be able to pull it off.

In the investment circles there’s always this other conventional wisdom that it’s all about the team. To some extent that is true.The reason for that is that if you have a great team, they will figure out quickly that they’re working on the wrong idea and will search and persist until they find the right idea. However, that process of searching and persisting isn’t free, it comes at the cost of time and money. For big VC firms money isn’t an issue, since they use it as a tool to just increase their ownership in the company (often VCs don’t want their companies to be capital efficient — that’s another blog post in itself, which I’ll write about later). In my limited experience as a seed investor, I’ve learnt that it is important to have both a good idea and a good team.

And it is because ideas matter that founders’ equity splits should also reflect that. If one person has an idea and brings in one or two more co-founders to join in, even if nothing is built yet, it shouldn’t be an even equity split. In fact, it should almost never be an even equity split:

The idea does and should have value associated with it, and that value should be reflected in the equity structure of the company. This may wary greatly from company to company and how much work the idea-originating founder has done to develop the idea before bringing on additional co-founders, but in general, I would say that the idea is typically worth anywhere between 10%-30% of a bump in equity with 15% sounding about right. (Splitting equity amongst founders is hard. My former board member from SneakerLabs (my first startup), Frank Demmler, has a great article on this topic: Cutting Up the Founders’ Pie)

When I started writing this post, I wanted to have a cartoon of Archimedes jumping out of the bath tub — not only because that’s the image I have in my head when I think of an idea, but also because sometimes (and more often than not for me!) good ideas do come in the shower. I didn’t know when I started searching that Eureka! is the California State Motto. So appropriate. Silicon Valley is not only about execution. It is about executing on ideas.

So the next time some one tells you that it’s not about the idea, it’s about the execution, tell them to stuff it, because you know better. It’s about both. And one without the other isn’t going to work. Ideas Matter.

Update as of Tuesday, June 21, 4:15 PM PT: In the post above I mentioned that an idea is worth anywhere from 10%-30% of an equity bump, with about 15% sounding about right. Well, turns out there is research to support that. Harvard Business School professor Noam Wasserman conducted research which suggests that the “Idea Premium” was consistently around 15%.

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