Globalization

The next tech powerhouse?

Posted on by Ed Sim

In a recent Barron’s article on Cisco titled "Getting the World WIred (sorry, sub required)" is an interesting comment from CEO John Chambers:

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

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

Digital Media

Google and YouTube – don’t mess with success

Posted on by Ed Sim

By now, everyone knows about the Google – YouTube deal, $1.65 billion for a leading online destination video site.   There is not much I can add, but I did find this comment interesting from Andrew Ross Sorkin’s NY Times article:

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

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

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

EntrepreneurshipWeb/Tech

Social shopping

Posted on by Ed Sim

I must admit that I have seen way too many social networking related plays that want to be the next MySpace of some niche market.  When asked about monetization the standard answer is they have a much more focused audience than MySpace with highly targeted CPMs.  Guess what, if MySpace is only monetizing a fraction of their visits, how can a tiny, little niche site scale to enough volume to make a meaningful business?  In addition, who wants to sign up for multiple social networking platforms like MySpace, Facebook, and niche sites for politics, sports, etc.  While there will always be a few dominant social networking sites, I firmly believe that we will see more and more social networking functionality get built and weaved into commerce sites and other ventures.  One of the reasons why eBay and Amazon have done so well is because of their respective communities and the ratings that are created by their customers.  Netflix does a great job as well by allowing you to sign up friends and track their recent movies and get recommendations based on your location.

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

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

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

EntrepreneurshipSaaS

Revolutionary technology with evolutionary implementation

Posted on by Ed Sim

I was riding on the train this morning and was talking to a friend about one of my fund’s portfolio companies.  She mentioned that the management team had done a great job during a recent sales presentation because instead of going for the "rip and replace" strategy, they went with the "co-exist" philosophy.  Too often, entrepreneurs can get too enamored with their own technology and forget that the customer may not need every feature that you are offering today.  In fact, while revolutionary technology and vision is great, what the customer may want is an evolutionary approach to implementation.  What I am talking about here is reducing the friction in your sales process (See an earlier post on frictionless sales).  Convincing a customer that your technology or product can coexist with an existing investment is a much lower barrier to sales than convincing them to "rip and replace" or "forklift upgrade" a significant prior investment.  The sales prospect will have a hard enough time buying a product/service from an unproven startup, let alone ripping out an existing investment from a safe choice, a much larger public vendor.  Once you land the customer, you will always have the chance to expand your footprint.  That is why I continue to be enamored with SAAS and downloadable software because I believe that it is inherently a more efficient and cost effective way of selling and delivering a product or service.  Granted, most of the initial target market opportunities will be the small/medium business market but I still firmly believe that this market is untapped and offers great upside.

EconomyGlobalization

Globalization and the world economy

Posted on by Ed Sim

I remember 2 years ago the brouhaha over globalization and how every startup needed to adapt or it would die.  I truly am a fervent believer in globalization and how offshoring some development work can make a ton of sense from a cost and time advantage (24×7).  As I look across our portfolio, what is interesting is that while the comparative advantage of developing in say, India, was once 4 to 1 it is looking like it is more 2:1 or lower as you factor in costs like management overhead, travel, etc.  In addition, the companies that actually took advantage of offshore development and were successful were the ones that opened their own wholly-owned Indian subsidiaries.  Not only did these companies have their own subsidiaries in India, but they also sent a core team of engineers from the US to open the office, train the staff, manage the team, and provide real incentives like stock options.  The portfolio companies that did not fare so well were the ones that had offshore development shops work for them and while the output was fine, it was quite disruptive as the turnover of personnel was quite high.  In the end, all I can say is that offshore development for your company is not a panacea, and that you should only do it if it makes sense for your company (read an earlier post for more).

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

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

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

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

Csu168_1 Tying into Michael Milken’s graph of the world economy in the past is this Goldman Sachs one showing who the economic leaders will be in the future – notice China as #1 and India as #3 by 2040. You can already see from Michael’s graph above that from 1973 to 2001 the US share was diminishing as India and China were growing rapidly.

The last graph is quite interesting as it relates to us technology folks.  We have always thought of India and China as places to offshore low-level development work.  Yes, alot of that has already been done but what is alarming is what may happen in the future as the comparative advantage that India and China have over us in terms  of college graduates in science and math is overwhelming.  Csu054Not every one of those graduates according to the McKinsey Global Institute is up to par with the standards that we have in the U.S. (10% in China and 25% in India) but that is clearly changing.

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

EntrepreneurshipWeb/Tech

Live homework help for your kids

Posted on by Ed Sim

Congratulations to George Cigale and his Tutor.com (full disclosure – portfolio company and my partner Dan DeWolf is on the board) team for the launch of their direct-to consumer service which offers live homework help and online tutoring.  This is the culmination of a mission that George set out to realize over 8 years ago.  What is most impressive to me is that while George’s initial focus when he launched the service in 2000 was to go after the consumer market, he quickly recognized that consumers did not have the bandwidth (5% broadband penetration vs. 45% today) and the comfort level to purchase online tutoring sessions.  So like any smart entrepreneur, George did an analysis and went to the where the money was, providing a service to state and local libraries to offer to their constituency. George’s patience and foresight helped Tutor.com weather the nuclear storm and build a real business behind the scenes.  Of course, timing is everything and George and his team have been waiting for the right time (TODAY) to offer a direct-to-consumer service which provides live homework help for students.  As George says:

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

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

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

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

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

Entrepreneurship

Getting too big too fast

Posted on by Ed Sim

I encourage you to read what Evan Williams has to say (courtesy of Gigaom) about some of the mistakes he made at Odeo.  Evan is one of the founders of Blogger which he sold to Google and is also founder and CEO of Odeo, a podcasting company.  He goes on to outline a number of mistakes that he has made as an entrepreneur such as not understanding who his customer was and wanted, starting off with too broad a market focus, and raising too much money too fast.  It takes alot of guts to publicly tell the world that you screwed up and how you screwed up.  More importantly, it seems that Evan has narrowed the company’s focus and cut down some excess management to rightsize his business.  As I have mentioned in a previous post, having too much money can be a curse and not a blessing.  If you don’t know who your customer is and what your customer wants and how you uniquely deliver that, no amount of money will help you answer those questions.  As you know, the more money you raise, the bigger the expectations are for your business.  If you raise too much too soon, you may feel extremely pressured to go big and broad too fast without really getting the basics down first.  I am sure Evan is not the only CEO to have felt this pressure to run fast, even if he didn’t ultimately know in which direction he was going.  My only advice is that in the early days as your are experimenting and understanding your market and customer base, a smaller first round of capital may be a better bet for you as it forces you and your team to be resourceful and focused while better aligning investor expectations.

Venture Capital

Podcast with Heather Green of Businessweek

Posted on by Ed Sim

I recently had the opportunity to do a podcast with Heather Green of BusinessWeek and Blogspotting.  If you have a desire to hear about some of the areas I find interesting and to learn about pitfalls to avoid for startups, I suggest that you download the show.  My only regret is that we did not get to use Gizmo Project, one of my portfolio companies, to do the podcast.  After all, isn’t important for VCs and entrepreneurs to eat their own dog food?

EntrepreneurshipVenture Capital

Add Startup Review to your blogroll

Posted on by Ed Sim

Nisan Gabbay of Sierra Ventures recently contacted me with respect to his new blog, Startup Review.  According to Nisan:

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

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

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

Entrepreneurship

Take care of the little things

Posted on by Ed Sim

As an entrepreneur, you are most likely spending most of your time building your product and getting it to market.  in other words, you are focusing on the big picture which is what you should be doing.  I do want to share with you a couple of anecdotes about not forgetting to take care of the little things – little things like keeping proper files and records.  It is quite simple to overlook this aspect of your business but taking care of your company and keeping your house in order is easy to do, especially if you start from Day 1.  Make sure your basic finances are in order and that all customer contracts, employment-related documents, financing paperwork, etc. is all stored properly and securely.  Sure we have electronic copies of many of these items but real signatures are quite important. 

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

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