There is obviously lots of innovation happening in the search space. Luckily, I have 2 portfolio companies that I respectively invested in during 1999 and 2000 which survived the nuclear winter and are having an opportunity to contribute to this innovation by helping make search better and easier for users. One is Gurunet
which delivers a better search by giving users answers instead of links via desktop tools or through its website at Answers.com
. See Fred Wilson’s post
for more information on Gurunet and Answers, as this week was a big one for the company. First, Walt Mossberg
wrote a nice review on Thursday and yesterday Search Engine Watch
announced that Google
is using Answers.com
as its definition link at the top of every results page.
Another portfolio company, Moreover Technologies
, has a real time information management platform that delivers breaking news from the web and blogs. As an early pioneer in RSS, Morever did a great job repositioning its business during the downturn and selling its information feeds into the enterprise and powering other search engines with news feeds. Recently, Microsoft announced that it was going to allow users to add RSS feeds
to its MyMSN
service powered by Moreover. You can read more about it here
. You can also get Moreover’s feeds through a number of RSS readers like Pluck
, and Newsgator
. As it relates to 3 RSS readers just mentioned, Moreover plans to monetize this distribution by delivering ads through RSS. As a blogger, I have definitely looked at a variety of business models in the space and am a believer that RSS ads is one way to go. There has been lots of conversation
about how much more valuable a subscriber is vs. a visitor in terms of relationship building, and I hope that the ads will not turn away end users from valuable content. Either way, it is great to see Moreover helping bring news and RSS to the masses via these deals.
To both companies, I want to say congratulations for sticking though the tough times. Your hard work is beginning to pay off now.
Full disclosure – I am an investor and on the boards of both companies.
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Yesterday, I had the opportunity to spend time with the CTO of a major financial services company with a $1 billion IT budget. In these meetings I like to learn about the major priorities and where the open opportunities for early stage companies exist. The good news was that the company was very open to working with entrepeneurial ventures. Priority number 1 for the organization was to standardize on a common architecture and infrastructure. When the company deploys a new app, the developers should only have to worry about coding the business rules and not about what infrastructure to deploy and how to manage the application. At the end of the day, like most large institutions, this company was focused on increasing capacity utilization and moving to an on-demand model where new applications can tap into a pool of resources, where these resources are monitored closely for performance, and where these applications can have real service-level agreements and chargebacks tied to them. The company said it was still early in the process and that alot of the big vendors still do not address the needs.
The other major initiative was security. We spent a fair amount of time talking about best-of-breed versus the single vendor approach. While the company had a bias towards single vendor for most infrastructure buys, it certainly was an advocate of best-of-breed for security. We talked about how a monoculture was not as immune to disease and attacks as a heterogenous environment. What this means is not only layering security but also deploying 2 different security products at each layer to avoid company or product-specific attacks. This is a big deal at lots of companies which is why, despite the intense roll-up activity in the security space, that new vendors will constantly have the opportunity to sell.
As always, I had the opportunity to find out where a few of my companies were in the sales process. The big takeaway for me was that "you only have one chance to make a first impression." What does that mean? Well, in today’s environment, enterprises have the upper hand. This means that most enterprise sales end up in a proof of concept (POC) or bake-off against other competitors. So the first impression you make in the POC is the installation. If it is hard to install, forget about it. The logical conclusion your sales prospect will draw is that it is a hard to use product. So while you spend time building some great features and making your product more scalable, do not forget to spend time, lots of Continue reading "You only have one chance to make a first impression"
Jonathan Schwartz from Sun has a good post
about the nature of developers, and why building a relationship with them is key to creating opportunities.
One of the smartest software execs I’ve worked with had a saying, Developers don’t buy things, they join things." That’s been a pretty focusing statement for us over the years, and as we enter the new year, you should expect 2005 to be one in which we place an ever heightening focus on our dialog with the community, and the developer community in particular. And not simply maintaining the dialog we have today, but finding new constituencies, and expanding our reach. Establishing a relationship with a developer is all about starting a conversation – one that always flowers. And often into opportunity.
I totally agree with Jonathan on this. The key, however, for any small company is to do this economically and efficiently. Let me give you an example. Let’s face it-many companies selling into enterprises end up going through some "pilot" or "beta" period where a sales prospect’s developers and technologists get to use the software and deploy it on a trial basis. When I look at a sales pipeline, I always want to know who in the organization the company is selling into and why. You see, I have more often than not seen a number of early stage companies selling into enterprises but not selling high enough to the people with budget. In other words, the vendor ends up getting excited about the number of pilots in the market, many of which are with technologists who by nature like to try things and rarely end up buying. The vendor spends an inordinate amount of time reaching out to the developer or technologist to set up a pilot and then leaves with no defined criteria on when the pilot ends and how it automatically converts into a sale. The developer uses the product, sucks up lots of our resources, and moves on to the next new technology. While it is imporant to court developers and technologists in the sales process since they typically have to give the technical buy-off and can just as easily squash an opportunity, it is not a great and economical use of time to have your most expensive direct sales resources and sales engineers doing this.
Enter the web and the open source movement. Sure, "try before you buy" works if your users can download the software for free either on a trial basis, say 90 days, or if you open source a version of your product and build a real community. One Continue reading "Developers matter in enterprise sales-just reach them economically"
Just the other day, I took a redeye back from Israel and bumped into a couple of Israeli VCs and entrepreneurs making their annual journey to CES
. I have to admit that I am a bit jealous but since I have a number of trips scheduled in the upcoming weeks, I decided to pass on the conference. That being said, I have been lamenting with fellow VC blogger Jeff Nolan
on how hard it is to get our entertainment gear to work. I have been waiting to get my home theater system with HDTV for a few years and made the leap this past holiday season. I have to admit that I am pretty proficient with computers and technology but even I got stumped with the process of installing and making it all work correctly and SIMPLY. It is no wonder why so many high-tech vendors are focused on opportunities in the digital home because the dollars are huge (I spent way more money on my entertainment systems in one purchase than I did through accumulation of lots of computer gear over the years) and the complexity is high to make it work right.
While in Israel, I also had the opportunity to discuss home networking and automation with a few bright individuals. In order to get a fully automated home (like a Crestron
) where you can control your audio visual, home network, computers, lighting, heating, air conditioning, etc., from any other room or even remotely, one can expect to shell out ridiculous amounts of money to make it happen. These vendors typically sell proprietary and closed-end systems that require custom coding to make them work right. Besides the cost and complexity, the other thing that bothers me about the digital home is that there are too many competing standards and not everyone’s product works together. For example, Sony pretty much only works with Sony and so on and so forth. DirecTV provides Tivos that do not network with other boxes while existing Tivo boxes can be networked. This drives me nuts. As the value is clearly in the software that drives many of these boxes, electronics, and HVAC equipment, the battleground and control will be driven by who can help the consumer cheaply and simply integrate and manage all of their systems. If there is an industry begging to be open sourced, standardized and commoditized, this is it. While it is in all the vendors’ interest to bring the economics down to reach a wider market, I just don’t expect to see enough cooperation from them to drop their proprietary standards to make this happen soon enough.
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As I prepare for my trip to Israel this weekend for a board meeting, one piece of equipment I am sure to bring is my Plantronics DSP 400 headset
so I can Skype
with the CEOs in my portfolio companies. I have been using Skype for the last 6 months and can honestly say that it not only saves a ton of money but more importantly allows me to end the phone-tag game with my porfolio company CEOs and easily communicate with them. Sure VOIP is great from a cost-saving perspective, but having presence is even more important in my mind. I know when someone is available to speak and when they are not-no more wasted time with voicemails or I’ll call you back later. As you know, as an active board member and investor much of the value add happens outside of the board meetings in ad-hoc in-person meetings and calls. Prior to Skype I had all of the CEOs that I worked with logged into IM, and we would frequently have long, off-the-cuff exchanges throughout the week. Well, with Skype, we can not only IM but through an extra click turn that into a high, value-add phone call. Just like in customer service, not every exchange needs to escalate to a live phone call, but having the ability to easily point and click to make it happen is a huge benefit. Wait till Skype adds live video to its platform and the value of that conversation goes up higher. Of course, the beauty of Skype is that as long as my laptop in logged into a network, I can easily make calls from anywhere in the world. Since it is the holiday season and a time of giving, one of the gifts that I sent to a new CEO hire (will be announced in New Year) was the the Plantronics DSP headset. I am now just waiting for him to get registered so we can start Skyping.
The post Skype and a headset for every CEO!
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During the boom, many VCs funded companies and created great exits within 12-24 months of funding. Before that time, the standard rule of thumb was that it took about 5-6 years for a company to reach maturity, profitability, and potentially become an IPO candidate. We did our own analysis of venture-backed software IPOs a couple of years ago (based on SEC filings, etc.) using pre-bubble data and this is what we found. Companies pre-1998 that went public received on average about $20mm of venture funding, were 6 years old, were EBITDA postive, and had a pre-IPO value of around $170mm (includes companies such as Peoplesoft, Intuit, Mercury, Documentum, Checkpoint, and Veritas). An interesting side note is that Veritas and Peoplesoft both went public in 1993 and were both acquired last week. This reminds me of a conversation I had this summer with a Veritas executive who said how difficult it was to scale beyond $1-2 billion in revenue and that size matters. There were a number of companies in that revenue band but very few above it like Microsoft, SAP, and Oracle. Getting back to the data on software IPOs, during 1998-1999, the companies that went public received around $30.0mm of VC funding, were 5 years old, were not EBITDA positive, and had an average IPO value around $375mm (includes comps like ISS, Micromuse, Art, Interwoven, Vignette, Informatica). The rule of thumb these days is that companies need to have around $50-60mm of revenue and be profitable for 1-2 quarters before going public. That is certainly a high bar and many companies will not get there.
Another way of looking at company maturity is to look at M&A data. This week’s Plugged In column from Barrons
has some great data on M&A in 2004 and how many of the companies that went public or were acquired were the very ones left for dead over the past few years. Of the 247 venture-backed companies which were acquired this year, 222 or 89.9% received its first venture funding prior to 2000 and 159 or 64.4% received its first round of funding between 1999 and 2000. Anyway, as I look at the data from Thomson Venture Economics and the NVCA
, it is further proof that we are returning to normalcy in terms of the time it takes to build value.
As you can see from the chart at the left, average valuations of M&A deals while trending upwards in 2004 to $91mm, is still way below the $231mm and $338mm numbers in 1999 and 2000. As we return to a state of normalcy, the point Continue reading "It takes time to build value"
A number of my readers alerted me to the fact that Fast Company has a survey on the best VC blogs. Considering that VCs can be quite competitive and my cohorts Brad and Jeff are already stuffing the ballot box, please take a moment and cast your vote for me
. All kidding aside, since this is not a zero-sum game and if you haven’t already, I suggest getting to know some of the other VC blogs that I enjoy reading. These include Jeff Nolan
, Fred Wilson
, Brad Feld
, Steve Hall
, Steve Brotman
, and Ventureblog
. I enjoy participating in the conversation with these guys and I expect to see many more VCs join the ranks helping make our industry more transparent and less mysterious. Educating entrepreneurs, sharing ideas, learning about the next hot technologies, and meeting other plugged-in people make this an enjoyable and rewarding pastime. Thanks for the support and keep voting.
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I was catching up on my Barron’s this week and a quote from Ajay Kapur of Citigroup caught my attention. When discussing his macro investment themes Ajay said, "The world is driven by Asian exporters and U.S. consumers. In the future, it will be Asian consumers and U.S. exporters." Given that perspective, it is no surprise that VCs have been pouring dollars into consumer technology plays over the last 18 months in addition to investing in China and India to tap into their consumer bases in the future. Many VCs seem to be down on the enterprise space. Corporations are hoarding cash and are risk averse in terms of spending on new technology. That being said, there are some major trends occurring like the move to a service-oriented architecture
and automation and virtualization of the data center. Given the amount of time VCs are spending on global and consumer investments, I believe it is the right time to continue investing in enterprise start-ups developing product 12-24 months ahead. As for the consumer globalization trend, I have been quite happy with my investment in the the Vanguard Emerging Markets Stock Index fund (VEIEX
) which has been up 19.75% YTD.
The post Consumer growth and globalization
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I was recently advising a friend of mine who wanted to expand his team and hire some senior executives, and it occured to me that others could benefit from some of my thoughts on recruiting. As you know, hiring is a critical component in the success of any company. People and their ability to execute are what separates the winners from the losers in any industry. Hiring the wrong person, particularly in an early stage company, can cost you dearly. On the contrary, hiring the right person can make a huge positive impact creating significant leverage through what I call the A-Player domino effect
. So here are some of my random thoughts on hiring new executives. I tried to make this as logical and short as possible – some of the thoughts below can clearly be expanded into longer posts.
- Build a target profile: Put together a specification of the role, responsibilities, required experience, and intangible qualities you are looking for in a senior hire. Share the specs with your board for additional feedback to make sure everyone is on the same page with respect to the person needed and the major goals and objectives. Many times, the specification itself can highlight bigger issues about company direction if everyone is not communicating and on the same page. Does a board member want to change the goals for next year? Is everyone aligned with that change? Understanding who to hire and what their goals are incredibly important – hiring a person without having a spec will result in failure nine out of ten times.
With the specification in hand, put together a target list of potential companies where you can find this executive. The ideal companies are in the bullseye and others will be in concentric circles one or two removed from the center. For example, if you have a network security startup, the obvious players will be other security companies that sell similar products at similar price points with a similar distribution channel. One concentric circle out from the bullseye could include networking companies that have a similar business model and distribution channel. From an experience perspective, the perfect candidate will be someone who has had a VP role (if you are looking for a VP) and worked at other large brand name companies as well as been successful at earlier stage entities. Like in darts, it is not easy to get a bullseye (unless you spend too much time in the local pub), so you need to think of all of the tradeoffs that must be made in terms of the Continue reading "Some thoughts on building your team"
In the past, I have written about a number of first generation NYC entrepreneurs coming out of the woodwork to launch new ideas. Sure, the market may not be great right now but in my opinion it is the best time to build a business. As an entrepreneur you have time to develop your product, refine and test it, and get it ready for when the market turns. The most recent addition to this list of second generation entrepreneurs is Andrew Erlichson, former CEO and cofounder of Flashbase
When I first met Andrew in late 1998, he had just finished his Stanford Ph.d program in EE from Stanford with other well-known classmates. My fund seed invested in his idea which was to allow anyone to build database-enabled, web-based applications through a simple GUI. Some of the applications that users built ranged from simple forms for their website to richer ones like help desk, call center, project management, and sweepstakes apps. This was 1998 and Flashbase was a true predecessor to Intuit’s Quickbase
. We were obviously way too early but after a year of blazing this trail, we ended up selling the company to Doubleclick for a nice return. After spending a few years with his golden handcuffs on at Doubleclick, Andrew is back in action with his next project, Phanfare
Like any great consumer service, the company started because Andrew wanted to solve his own problem with sharing his digital photos. For many, the first instinct with a digital camera is to make prints. However, it is clear that this will evolve and people will share more and more of their pictures online. The problem is that the print sites only want you to share with friends as a vehicle to sell more prints. They do not keep your photos up indefinitely, their branding is all over your private albums, and your friends and family get bombarded with email to buy more prints. So Andrew did what most entrepreneurs do, created his own software and service. Simply put, Phanfare allows users to share and back up their digital photos in a simple, permanent, polished, and unbranded way. You can even use your own URL to share photos.
It seems that SCO is making another attempt to hurt the open source movement by claiming that the GPL is unconstitutional and violates federal patent and copyright laws. While many are not concerned and call this a publicity stunt by SCO, the discussion of open source software licenses does remind me of a panel that I recently saw at the Goldman Sachs Software Retreat 2 weeks ago.
On the panel you had representatives of RedHat, MySQl, and JBoss combined with the perspective of a large IT buyer, the CTO of Goldman Sachs. While I will not fill you in on all of the gory details, one thread did stand out in my mind. It goes like this:
It seems that many of the bigger open source players are building out their own stacks ala Microsoft and others in the pursuit of growth and profits like traditional closed-sourced software companies. Isn’t this the antithesis of what open source stands for? Rick Sherlund, Goldman’s software analyst, says that it makes sense from a financial perspective since it allows vendors to cross-sell and lock-in the customer – customer retention is a good thing after all, isn’t it? While all of the open source players did their best to dodge this question and claim that they are really open, MySQl was the only company that really seemed credible here as its goal was to be part of everyone’s stack, including the Microsoft .NET one. JBoss and RHAT clearly seemed to be building their own middleware and open source stacks while at the same time claiming an open architecture.
The interesting point was served up by Michael Dubno, CTO of Goldman Sachs. He specifically told the vendors that the danger of the open source stacks is that it does create lock-in and that open-interoperability is what is most important to him. He will go somewhere else if the open source guys end up limiting his options-he needs great service not extra features. Moving on, he points out that the biggest gaiting factor for him in terms of adopting open source is making sure the legal issues will not come back to haunt him. Goldman reviews every license agreement and makes a determination of which licenses make sense and which do not. What Michael wants is integration from a legal perspective, not a feature perspective. He claims the biggest cost to Goldman is not 2 products, but the cost in service and supporting 2 different contracts-he wants more standardization of contracts.
I found this to be an interesting point. I have seen a number of open source related software plays and it Continue reading "Open source and software licensing"
Early stage companies have to be nimble and disciplined when creating and releasing product. One of the important decisions a startup can make is how it chooses to manage its product releases. In a software company a product release affects everyone. A mistimed release can severely impact sales, cash flow, and the company. We had a thorough discussion in a board meeting this week on this very topic. I have to admit I was quite pleased with our new VP Engineering as she put forth her methodology and process, shared below.
There are a couple of different ways to manage engineering releases. One engineering release is date driven, the other is content driven. In a date driven release, the team knows when the next release is out but does not know exactly what will be in it. The release runs like a train schedule, whoever makes it to the station on time is part of the release. The other release is content driven; the team knows what is in the next release, but does not know the exact ship date. The release runs more like an airplane shuttle, it takes off only when full.
While I may be oversimplifying the issue, the one that I like my companies to subscribe to is the date driven one. Of course, just because it is date driven does not mean that there isn’t a highly focused theme. It just forces the team to clarify the absolute minimum requirements necessary to deliver the right product for the market. It also discourages feature creep and encourages highly disciplined prioritization. Most importantly, having a date driven release can get everyone at the company aligned. Everyone knows the ship date and sets their schedule accordingly to ensure that all pistons are running as GA hits. This means marketing has to have its collateral ready, upgrade program in place, and product launch schedule set. Sales knows when it can start telling prospects about the new product and time it appropriately so it can get customers lined up for the next quarter without delaying sales in the existing one. Engineering, of course, needs to deliver product and not get distracted. While all of this discussion on product releases sounds great, none of it really matters if you do not have the experienced team that can manage them and instill the discipline. So as you think about your next product release, think long and hard about whether you want the trains to run on schedule or the airplane shuttle to be full. You know where I stand on the issue.
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It has been awhile since my last post as I have been busy with a number of board meetings. It is so hard to find time. Anyway, one thought I wanted to share with you is a discussion we had in one of the meetings about the balance between closing large deals and adding new features.
More often than not, you will hear a sales person complain about their product and tell corporate that if they had these 5 features, they could sell more. Since sales people look for the path of least resistance, they typically go back to marketing and development to ask for the fixes and changes to close a new customer. Many times, management, in pursuit of meeting their numbers, will oblige and make the requisite changes to land a new customer. If you fast forward into the future and continue this behavior, you will end up with a company that has a number of customers but also a support nightmare-too many different versions of a product which makes it difficult to maintain and support from a development and customer service perspective. In addition, you end up constantly delaying the next release of your product as precious resources get sucked away. You also have lots of features that the market does not want. Finally, the profitability for each customer goes down significantly as you add new features just to close deals.
In the long run, having too many of the wrong customers can kill your business. The more experienced and disciplined team will not build a new feature for every customer but rather have a seasoned and proactive product management process for gathering data from the field and prioritizing feature requests based on market and customer need. In some cases, it may make sense to give a feature request higher priority as a number of prospects and customers have asked for it. In other cases, you will have to make a decision of whether or not to build a one-off feature to close a deal or lose it to a competitor. While every situation is unique, in general, you have to be extremely careful of going down the slippery slope of customized versions of your product for every customer as the one-off requests will suck up your resources. It is easier said than done, but the simple rule is don’t add features if the market does not need it.
In the end, I never like my portfolio companies to end up in feature/function wars. That is a losing proposition. Rather it is important to take a step back sometimes to see if you Continue reading "Bad customers can kill your business"
Adam Bosworth has an interesting post
on the evolution of software and why software delivered as a service will be the business model of the future. As you know, I have always been interested in this trend since my first post
in October 2003 and since I invested in a number of companies in 1998 and 1999 like LivePerson
and Expertcity (GoToMyPC)
that subscribed to the ASP business model. What I have learned and what Adam points out is that it comes down to the customer experience, making a product easier to use for a customer and evolving it as quickly as possible to meet the customer’s needs. Software delivered as a service enables that and packaged software does not. In the time it takes Microsoft to deliver an application (went from 1 year to 5 years), a company delivering software as a service can deliver 60 iterations of its product. As Adam points out, “things that breed rapidly more quickly adopt through natural selection to a changing environment.” I have never thought about software in evolutionary terms, but it certainly makes sense.
From an evolutionary perspective, the ASP business model is quite interesting to examine. While every piece of software should not and will not be delivered as a service, it is also quite clear that customers are tired of buying expensive software products with large upfront licenses, expensive hardware to purchase, manange, and maintain, followed by expensive professional services to get the product up and running. From this backdrop, it is easy to see why reducing complexity and simplifying technology for customers is a big driver to more rapid adoption of products. It is also easy to see why reducing complexity for the customer also helps reduce complexity for the vendor, lowering the friction to sell and deliver its product. This means a more capital efficient business model, one which would hopefully scale much quicker and cost less to build product, sell, and support customers. For the vendor, it makes it:
- Easier to sell
-shorter sales cycle-do not have to test extensively in a customer’s environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget
Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train Continue reading "Delivering software as a service"
and John Battelle
have some interesting posts on the future of television and advertising. Fred and John both seem to believe that the concept of paid search will eventually work its way into television advertising. I suggest reading their posts if you have an interest in this space and learning how it will change as PVRs, VOD, and HDTV further penetrate the market. While one can look at how the success of Internet advertising will work its way into the television especially as the two markets converge, I like to look at the $60 billion spent on cable and television advertising another way. Rather than assume it will all go away in the future, why not do something to make it more effective today? What if you could change and personalize the actual commercials to turn television and cable advertising from a mass market media to a one-to-one relationship? Recently, Businss 2.0
(sorry registration required-hey Business 2, when are you going to open yourself up for bloggers to generate traffic for you?) had a nice article about one of my portfolio companies, Visible World
, which has the technology that allows advertisers to do just that. As per the article,
Instead of making a single ad, the agency can now create its 30 second stories as a sequence of swappable components using Visible World software. The file is then sent to servers, already installed at Comcast’s cable centers, which instantly assembles hundreds or even thousands of different versions of the ad and send them to particular groups of viewers. The ads can be updated or modified automatically, just like a website. “In the winter, an airline ad could say, “It’s 52 degrees warmer in Miami today, ” Haberman tells the group, “Or an ad for a limited-editiion Volkswagen Beetle could say there are only 392 cars left, creating a sense of urgency.
I encourage you to try the demo
to customize a few ads on your own. Username is Business2 and password is visibleworld. The bet is that a more effective and more personalized advertisement will stop some viewers from hitting the fast forward button on their PVR remote. The good news is that Visible World has already worked with some blue-chip companies like Bank of America, Ford, and United Airliness. In addition, via deals with cable companies like Comcast, Visible World will be able to reach 30 million households by the end of 2004.
Comcast says it can direct ads to narrow zones of 1,000 to 20,000 homes in a growing number of cities, including Boston, Chicago, Dallas, Detroit, Miami, and Phildelphia. But to Haberman, that’s just the beginning. Within the next 2 years, he Continue reading "The future of television advertising"
The numbers are coming out, and it is clear we are moving to a low growth environment for corporate IT spending in terms of dollars spent. Companies spent too much in the 90s and are being cautious about how they spend their hard-earned cash. Total cash and savings for companies in the S&P 500 have doubled since 1999 and is equal to half a trillion dollars which means companies have added almost 300 billion dollars to their balance sheet in the last 5 years. While companies have so much more cash these days versus 5 years ago, they are spending roughly the same amount on IT. What gives? Reports cite how executives are still worried about the economy or terrorism. However, one other interesting aspect to consider is the effect of commoditization on IT spending. Here we are monitoring year over year growth on actual, nominal dollars spent on IT, hoping and waiting for an uptick in spending which will fuel more growth. After all there is a ton of cash out there and corporates have to invest the cash or give it back to shareholders. The funny thing is that the commoditization trend means that companies can do more with less. What that means is that companies can keep the same IT budget and accomplish the same amount or more without increasing their capital expenditures. In addition the competition for the customer’s dollars is fierce which means that the customer has complete control these days in terms of pricing. Both of these factors obviously work against significant increases in IT spending. In fact, customers have so much power these days (and rightly so) that companies like GM are forcing vendors like Sun and Microsoft and Cisco and Microsoft to work together, to standardize and integrate with one another.
Here is a quote from Fed Ex’s CIO in a recent New York Times article
The information technology strategy at FedEx, the package delivery service, points to that conclusion. “Technology is coming to us in much smaller bundles that cost a lot less,” said Robert B. Carter, the company’s chief information officer, whose budget is slightly more than $1 billion. “Our intent is to hold the line on I.T. spending and get more bang for the buck.”
The flat spending does not suggest any lack of enthusiasm for technology at FedEx, a sophisticated corporate user of technology. Mr. Carter reels off a series of projects for helping customers use the Web, e-mail alerts and wireless messages to track inbound and outbound packages, trim inventories and fine-tune operations.
“The global interconnectedness and technology services available are growing at an unbelievable pace,” he said. “We are at an inflection point Continue reading "What commoditization means for IT spending"
Here is an interesting article from Business Week
about why Microsoft is not so scary anymore. While I do not necessarily buy the argument that a company with billions of dollars of cash on its balance sheet is not scary, the article does raise some interesting questions about Microsoft’s growth, particularly on the enterprise side. A quote from Merrill Lynch software analyst, Jason Maynard, sums it up:
“Microsoft still has the critical mass and the franchise of Windows and Office, but there are fundamental changes going on in how we computer and how businesses get value out of IT,” says Merrill’s Maynard. He further points out that many of these trends, including the rise of on-demand computing models, and software as a service, putting more computing power into the networks, are somewhat antithetical to the Microsoft model.”
That quote definitely resonates with me. In fact, I recently had lunch with a friend who is heading up the Enterprise Architecture group for one of the largest health companies. His goal is to move the company to a service oriented architecture in the next 4-5 years. At the end of the day for him and his organization it is all about having better capacity utilization. Instead of having to roll out a new server with a new database and new storage for every new application, his company wants to deploy the app in a grid and increase the capacity utilization from 30% to 80%. During this 2 hour conversation about architecture and technology, Microsoft was never mentioned until I brought it up. When I prodded him further about this he mentioned that he recently spent time with Microsoft and was less than convinced of how Microsoft was going to help him
realize his goal. He said the products are nice, tell a good story, but it still seems disjointed. In addition they are not moving fast enough for him. Just look at the delays in getting the monolithic Longhorn out as an example. Increasingly his organization is relying more and more on an open source, commodity stack, which, by the way, is delivering product on a much more rapid pace. In his view, Microsoft cannot tell the same story that an IBM or HP can in helping his company move to a service-oriented world. While this is one data point, I do believe that there will be challenges ahead for Microsoft in the enterprise. The commoditization of technology is definitely a strong force.
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I was speaking with a friend of mine today who mentioned that his term sheet for his Series A round fell through. Things looked great for the last 6 weeks and then the deal process went into a stall regarding intellectual property rights. To make a long story short, one of the co-founders of the company built the company’s software in his spare time. However, he also had a full time job and decided ultimately to stay there rather than join the startup. Well, you can imagine that down the line the company that the co-founder worked for could potentially claim rights to the IP. Rather than leave this open to chance, the VC and the early stage company did the right thing and decided to clean up the ambiguity. Today, the IP is about to get assigned in the proper manner. However, the VC got cold feet and backed out of the deal.
So what happened? You see, deals take a life of their own. The more time it takes to close a deal, any deal, the more chance there is for it not to happen. Momentum is a powerful force but deal inertia can be more powerful. It sounds like the VC just got tired of the deal and also got cold feet as it seemed that a competitor or 2 cropped up during the deal closing process. This is not the only story of delayed deal closings. I was interviewing a CFO candidate for one of my portfolio companies yesterday and one of our discussion points was why a potentially large deal fell through. From his perspective, his side tried to overnegotiate the fine points, extending the closing out by a month. During that time the potential acquirer missed its numbers, got hammered by the street, and decided to back out.
My advice to you if you are going to raise a round is to make sure that you are prepared for all that may come at you in terms of due diligence. Have your financials clean, make sure your IP is owned by the company and not by any consultants, and have your references teed up to talk to potential investors. The more prepared you are the more impressed the VC is and the quicker the deal closes. One other point to remember, do not overnegotiate. Figure out the big picture of what you want in a VC partner and deal, negotiate those points but be willing to give up other points that the VC cares about. I have been in a few situations where an entrepreneur overnegotiates, and it certainly makes me wonder what it will be like to work with that person post-closing. Will Continue reading "Strike while the iron is hot"
Unfortunately I could not make it to the west coast for the Vortex
or Web 2.0
conferences. However, I have been following Vortex via Jeff Nolan
and Web 2.0 through a variety of bloggers
. As I read through Jeff Nolan’s notes on the enterprise and thoughts from the gorillas in the market, Cisco, Microsoft, Oracle, HP, etc., it is clear that they are all pointed in the same direction, and the vendors are aggressively pushing towards a service-oriented world where you have management software that allocates resources on the fly and componentized software consumed as services on demand. The major disruption will be how we get there. This is in line with an earlier post I made
about opportunities for enterprise software investments. As you hear from the horses’ mouths via Jeff’s notes, Cisco will try to creep in from the network (it does not want to be a dumb router) and embed intelligence on the edge and move into the enterprise (security, voip apps, etc). Microsoft is trying to move from the desktop to the edge (btw, I still think that if Microsoft wants to get security right it not only needs to fix its OS but also needs to either partner or aquire someone that can help lock down the perimeter). In the software stack itself, SAP on the enterprise app side does not want to give the plumbing away to Microsoft or BEA and has gone off and built its own platform, Netweaver. Then you have IBM wrapping services around its middleware stack. With this disruption and dislocation in the enterprise market, the great news is that all of these gorillas are aggressively out there looking to acquire companies that help push their trademarked vision of a service-oriented world. The only issue with all of this is that enterprises still don’t seem that willing to spend right now so maybe this vendor-led revolution will take a lot longer.
Despite my interest level in the enterprise, it is clear that the speed of innovation in the web world is happening at a much faster pace. There are lots of great speakers and content at the Web 2.0 conference so I encourage you to stay updated through the RSS feeds
on the news page. As I read through all of the notes from the conferences, it is clear that one of the unifying themes is the proliferation of XML and the way people are using it (RSS, common APIs, componentized software, assembly of services to create composite applications, etc). For more on XML, I suggest reading Bill Burnham’s excellent post
from the other day.
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There has been lots of discussion about the web as the new platform so none of what I am saying is new. However, I recently came across Adam Bosworth’s take
on this which is quite interesting given his experience at Microsoft, BEA, and now Google.
The platform of this decade isn’t going to be around controlling hardware resources and rich UI. Nor do I think you’re going to be able to charge for the platform per se. Instead, it is going to be around access to community, collaboration, and content. And it is going to be mass market in the way that the web is mass market, in the way that the iPod is mass market, in the way that a TV is mass market. Which means I think that it is going to be around services, not around boxes. I postulate, still, that 95% of the UI required for this world will be delivered over the browser for the same reason that we all still use a steering wheel in a car or have stayed with << < | > >> for so long. Everybody gets it. But this will, by definition, be an open platform because the main value it has is in delivering information and communication. Notice that the big players, Amazon, eBay, and Google have already opened up their information through Web API’s. It is Open Data coupled with Open Communication built on top of Open Source that will drive the future, not Longhorn.
The Microsoft/Google wars will be a great one to watch over the years. I, for one, being a big fan of the ASP and hosted software model, like the browser based-platform. It makes so much sense and will continue to do so as we get even more bandwidth and more devices from which to access web-based services. As GBrowser rolls out, I wonder how long it will be before Google, leveraging open source, rolls out GOffice and GCollaboration (web-ex like functionality) to really go after Microsoft. Maybe Salesforce.com and Google get together at some point in the distant, distant future?
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