EntrepreneurshipWeb/Tech

Facebook and product development

Posted on by Ed Sim

While reading the Wall Street Journal this morning, the Facebook story caught my eye.  Facebook has clearly built a huge community and is one of the leading social networks on the web.  However, I was mystified about the backlash the company received about its new service allowing users to better keep track of their friends and what they are doing.  On the surface it seems like the company was trying to make it easier for their users to keep track of their friends’ whereabouts and online activities.  However, it seems that there is a huge privacy backlash online (according to USA Today already 500k of 9.5mm members are against this) – I guess part of the lure of the Facebook that it was more of a closed network than MySpace.  All that being said, I am mystified because I wonder what level of customer feedback the company solicited in rolling out its new service.  Sure, the larger your audience is, the harder it is to make everyone happy.  In addition, there are many factors that go into the release of a new product that includes fixing bugs, soliciting customer feedback, responding to competition, and adding new features that will maintain a company’s technological lead in the market.  According to the Wall Street Journal article today:

Ms. Deitch said Facebook’s feedback from users comes in the form of emails to its customer-service email address, which the company’s product-development team reviews weekly. But the company typically doesn’t solicit feedback by showing features to users before launching them.

Facebook held an emergency meeting yesterday to plan its response to the backlash. Ms. Deitch said that the new features are "here to stay" but that staffers are discussing possible tweaks to appease users. She wouldn’t say what those changes might be.

While you cannot solely develop based on what existing customers want because you may miss the next big opportunity, I thought the benefit of web-based software was that you could test and tweak very easily.  If what Facebook’s spokesperson says is true ("But the company typically doesn’t solicit feedback by showing features to users before launching them"), I would suggest that they build some new release practices to maybe roll out a new feature to a subset of the population and gather feedback before having to deal with this maelstrom of negative publicity.  Isn’t that what a lot of the best web-based businesses already do?  To be fair, Mark Zuckerberg has responded admirably and promptly to his community.  However, he could have avoided this all in the first place if he tested the implementation of the new features with a small subset of his community and I am sure that he would have learned that balancing privacy may have been more important for his users than raw functionality.  My advice to many startups (particularly web-based ones) – after internal QA, try testing new features with a small sample set to further refine and tweak before GA. 

Entrepreneurship

Hiring great talent (continued)

Posted on by Ed Sim

As you know, talent is the lifeblood of any company.  Given that, I have written a number of posts on hiring (see here and here).  I recently saw Joel Sposky’s (Joel on Software) post on hiring great developers and thought that I would share it with you.  He makes a number of great points and I have extracted a few pearls of wisdom for you:

  1. "The great software developers, indeed, the best people in every field, are quite simply never on the market."
  2. "Numerically, great people are pretty rare, and they’re never on the job market, while incompetent people, even though they are just as rare, apply to thousands of jobs throughout their career."

Like any important process, hiring great people means that you and your company need to make it a priority and stay incredibly focused.  In fact, hiring great people reminds me alot of finding great deals as a VC.  At the end of the day, being proactive is key and leveraging your network to generate targeted and filtered deals or resumes will always create a higher yield than sitting back and waiting for the masses to come to you.

SaaS

Google and enterprise SAAS

Posted on by Ed Sim

There has been lots of discussion about Google going after Microsoft with a focus on collaborative office tools vs. siloed, desktop-oriented ones.  I can definitely see a need for some of what Google has to offer particularly with the ease of use of unlocking data and analysis and sharing it with others.  All that being said, I have a hard time viewing their offering as a replacement for Microsoft office.  What I have always thought, however, is what Charlie Wood mentioned in his blog – that a partnership between Google and Salesforce.com could make sense .  For more background, I suggest reading a recent Red Herring article and one of my posts from Oct 2004 about goffice and specifically about a Google/Salesforce partnership.  My thinking has evolved over the last two years and while there may or may not be a partnership, I certainly envision a time in the future where Google offers an even lower end offering -think free, ad-supported hosted CRM and other simple ERP related apps for the SMB market.  This would allow Google to leverage its strength – online distribution and a huge user community.  Of course, customers and users will have to get over the data privacy issue but free and easy can be quite compelling.  In addition as more users sign up, I could see Google offering APIs so that its own users could build custom templates for certain verticals ala Salesforce’s community approach.  As the widgetization of the web happens, think how easy it could be for a SMB to have a hosted web portal that is password protected and a number of widgets like a sales pipeline, presence and one click communication for the employees, and certain financials embedded in the page with a few simple clicks.  All of the enterprise portal infrastructure like Epicentric that used to cost boatloads of money and take months to integrate can now be used by many a SMB as we move towards a one-click world.  I am not saying that free and ad-supported SAAS apps will take over the world but Google will eventually do it and it will be interesting to see how the market reacts to it.  Ok-enough said on that.

SaaS

Citrix Online – a SAAS powerhouse

Posted on by Ed Sim

Everyone knows that hindsight is 20/20.  Back in 2003 when we were deciding whether or not to sell Expertcity (GoToMyPC and GoToMeeting) to Citrix or continue fighting the fight and attempt to take the company public 1 year later, it was quite a gut-wrenching decision.  Ultimately we decided that the risk/reward ratio to sell at that time was better than going for the public offering.  As it turns out, we all did quite well and it is great to see that a few years later that Expertcity (now known as Citrix Online) is continuing to drive the numbers that we believed we could do.  When most people think of the poster children of SAAS, they think of Salesforce.com, WebX, and RIghtNow.  As Phil Wainewright of ZDNet mentions in his blog, let’s not forget about the powerhouse that is now Citrix Online.  According to Phil Wainewright:

Acquired as Expertcity in February 2004, the Citrix Online division is an on-demand giant in its own right, with trailing twelve month (TTM) revenues of $121.6 million to June 30th this year. That makes it even bigger than the number 2 on-demand CRM vendor RightNow Technologies, which reported a TTM of $99.3 million for the same period, and more than a third the size of web conferencing leader WebEx, with a TTM of $343.7 million (for comparison, on-demand poster child salesforce.com posted $396.6 million TTM with its latest results).

Even more impressive is the fact that the company grew from $35mm in revenue from the end of 2003 to around $121mm in revenue 3 years later – not too shabby for an on-demand play going after the SMB market.  In addition, at the time of the sale, the company had raised around $30mm in financing but still had $16mm on the balance sheet when the transaction was completed.  So it is hard to argue that the SAAS model if done right can be capital efficient and offer tremendous growth opportunities.  In my mind, there are two ways to look at SAAS offerings – vertical market applications or horizontal plays.  Of course the challenge is that many vertical market app plays may not be big enough and the horizontal plays have probably been done already and are quite competitive.  All that being said, I am still quite interested in looking at companies offering a SAAS platform for Prosumers and SMBs.  If you have any of these types of companies that you want to show me, I am all ears.  I love the model and numbers like this show that the SMB market is really ready for these types of offerings.  As Brett Caine, head of Citrix Online says:

"Companies such as Citrix Online and salesforce.com and lots of others are starting to demonstrate in a very real way that companies of all sizes are able to use services to meet their needs in a cost-effective manner," Caine told me. "I think SMB has fully embraced the services model. There’s no doubt about that. Companies of all sizes have started to seriously embrace the software-as-a-service model."

I know I am preaching to the choir as none of this is new, but I must admit that the growth is pretty impressive.  As you know, SAAS will only get stronger as broadband penetration increases, as our wireless devices gain more processing power and better connectivity, and as the tools to access, share, and deliver timely data get even more powerful and easier to implement (think AJAX, enterprise mashups, lightweight integration with other apps, RSS for simple data delivery).

Going back to the earlier point on deciding to hold and go public or to sell at that time, with perfect information it is easy to conclude that we should have held on to the company and continued building it up.  However the decision is not that easy as there was lots of uncertainy at the time – we were only a two trick pony at the time and had not launched GoToMeeting and did not know how successful it would be, we did not have a sales channel to leverage like a Citrix, the IPO window was virtually shut for 2 years and we did not know when and how big you had to be for it to open (Google was one of the few Internet companies to go out in 2004), our growth rate was slowing while our subscriber churn was slowly increasing from just the remote access product, and the price was quite attractive.  Once again you can always question your decisions looking back with perfect knowledge but I can honestly say that everyone still feels that we chose the right path given what we knew in 2003.

EntrepreneurshipInvesting/Markets

Why cash is king

Posted on by Ed Sim

Oftentimes I am asked what my plan for exit is when I invest in a company.  Sure I have a plan when I invest, but it is impossible to predict the future.  The best plan in my mind is to make sure that any company we invest in has a tremendous market opportunity with a real business model and high operating margins that can eventually generate real cash flow.  As an entrepreneur, it is important to invest for the long term and not make short term decisions because you think you will be acquired (see an earlier post – Companies are bought and not sold).  Ultimately what will give you the best chance for success is focusing on the things that you can control – building a real business with a real economic model that can generate cash from internal operations vs. through external financing.  Yes, this is easier said than done, but when this happens you can do things like Bob Parsons, CEO of GoDaddy, recently did (via Techmeme)- pull his IPO.  As he discusses in his blog post:

Why I decided to pull our IPO filing.
You might ask, why, if Go Daddy’s situation has never been better, did I decide to pull our IPO filing? There are three reasons for doing so:

1. Market conditions
2. The Quiet Period
3. We don’t have to go public

Market Conditions.
The state of the stock market for an IPO is as uncertain as it could be. In fact, the USA Today published an article that IPO stands for “Investor Pain Overload.”   This is due, in large part, to the overall "bearishness" in the market.

Consider the situation from a global perspective and follow it all the way to Wall Street.
We have war and escalating hostilities throughout the Middle East, with no end in sight. Oil prices are skyrocketing. Tech stocks, in particular, are once again taking a beating on Wall Street, due in part to some investment banks cutting their ratings on the U.S. technology sector. Rising interest rates have played a key factor. Their steady rise over recent months has put adverse pressure on stocks overall.

In a bit of irony, last week when the SEC informed us our filing was accepted as being ready-to-go, market conditions were a terrible mess. In fact, inflation worries, say analysts, are bleeding into the tech sector. For all these reasons, I liken the timing of us getting the ‘green light’ to a person being told his car is in perfect condition just before it’s about to be driven into a wall.

I don’t expect market conditions to correct themselves for sometime.
I feel we owe it to ourselves to withdraw our filing until better and more stable times arrive

What if you were a cash cow and nobody noticed?
This seems like an excellent time to address an issue that has bugged me since the moment we filed our S-1.

After we did our filing, I was surprised that not one journalist took the time to look at our cash flow statement to report our actual results. Instead, each and every one of them hastily reported that Go Daddy filed to do an IPO and that we had never turned a profit. Not one of them took the time to look at our cash flow statements to see that we generated significant operating cash flow during each reporting period.

The accounting method we are required to use.
Because GoDaddy.com sells domain name registrations, we are required to use an accounting method that is ultra conservative.

So one of the principal reasons that Bob lists for pulling is that he doesn’t have to go public because his company is a cash cow.  When you print cash like GoDaddy, you can control your own destiny.  While the company doesn’t look profitable on an income statement perspective because GAAP requires GoDaddy to recognize a domain name registration over the effective period of registration, GoDaddy is in a wonderful cash position because it collects the cash upfront when someone buys the domain.  This is quite similar to a lot of SAAS oriented businesses that may sign up customers for one year contracts and collect the cash today but recognize the revenue over the life of the contract.  When these types of companies grow quickly GAAP numbers may not tell the full story.  And as I am sure many entrepreneurs know, you can’t spend GAAP Net Income but you can spend cash.  As Bob Parson summarizes:

To date, Go Daddy has been completely self-funded –we have been cash flow positive since October 2001, and – whether anyone has noticed or not — continue to generate healthy cash flow from operations. We’ll manage just fine without the IPO money — thank you.

When in doubt, remember cash is king.

Entrepreneurship

The myth of the Rock Star CEO

Posted on by Ed Sim

Attraction to fame is part of our culture.  There are dozens of magazines, tv shows, and websites devoted too all things celebrity.  This attraction to fame also extends to the business and tech world as well – bringing a household name to your company can instantly elevate the perceived status of your business.  All that being said, I personally have a serious problem when anything related to fame creeps into personnel decisions for an early stage company.  Too often, when doing a search for a CEO, I have heard the term "rock star" thrown about from many a venture capitalist and entrepreneur.  I need a "rock star" CEO that can take us to the next level and bring instant credibility to my company.  Trust me, I am all for bringing in a "rock star" executive to run a business but in my mind it all comes down to what one’s definition of a "rock star" is.  Is your "rock star" a big name and cover boy on a magazine, key note speaker at many a conference, and a person who happened to catch the Internet wave at the right time and translated that into tremendous financial success?  Or is your "rock star" someone that is appropriate for your business, meets all of the job specs in your CEO target profile, possesses leadership skills and experience working at large and small companies helping launch new products into new markets successfully, and has the hunger and passion to work at your company.? If that candidate happens to meet both definitions of "rock star", then you are in great shape.  However, if you are making a decision more because of the candidate’s big name than you better think twice.  I am not going to go into a full dialogue on the hiring process but I suggest seeing an earlier post where I discuss that coming up with the job specification or target profile is one of the most important things to do before emabarking on any search.  Once again, the point I am making here is to not make a hiring decision just on the name of a person but to do it for all of the right reasons.  A friend in LA once told me that one of the keys to success in his business was to not get starfu**ed. I suggest the same when it comes to hiring your next CEO or key executive.  You are probably better off hiring the CEO who has lots to prove and who is going to be the next "rock star" than one who already is.

Web/Tech

How long is the Long Tail?

Posted on by Ed Sim

We all know about the groundbreaking work from Chris Anderson from Wired about the Long Tail. In theory it makes a ton of sense – on the web, companies have no inventory costs and can stock as many titles or products as possible and that over time the one-offs or misses can generate as much or more sales than the hits.  As you can imagine, this Long Tail meme gets mentioned by many an entrepreneur that I meet and saying "we are going after the long tail of X" is almost as popular as saying "I’m a Web 2.0 company."  I have not read the book or the data, but as I said, in theory it sounds great.  You could even extend this long tail concept to user generated content.  For example, YouTube could be like the long tail of video – people get to see new content which would never sell at any traditional bricks and mortars store and YouTube has the opportunity to make money off all of this Long Tail content.

As for the Long Tail, the only question one can ask is when will it happen vs. if it makes sense or not.  In today’s Wall Street Journal, Lee Gomes (see his article here – sorry, requires login) challenges the timing of the Long Tail and comes up with some interesting data.

"By Mr. Anderson’s calculation, 25% of Amazon’s sales are from it’s tail, as they involve books you can’t find at a traditional retailer.  But using another analysis of those numbers – an analysis that Mr. Anderson argues isn’t meaningful – you can show that 2.7% of Amazon’s titles produce a whopping 75% of its revenues.  Not quite as impressive.

Another theme of the book is that "hits are starting to rule less."  But when I looked online, I was surprised to see what seemed like the opposite.  Ecast says 10% of its songs account for roughly 90% of its streams; monthly data from Rhapsody showed the top 10% songs getting 86% of streams."

Lee has a few other examples and one of the most interesting ones is when he states that when Chris looked at the data 2 years ago for eCast that 2% of songs did not play every quarter and now with a much larger inventory that number has risen to 12%.  Maybe eCast just had the hits up in the first place?  In short, Lee Gomes concludes that the Long Tail may be true but it will also take a long time before it happens.

From my perspective, I do believe we still live in a hits driven world but that it is definitely changing.  In addition, if you apply the concept of the Long Tail more broadly to concepts ike YouTube, etc. then it is happening today. Regardless of what you think, Lee’s article is one of the few that I have seen challenging the Long Tail meme that we all want to believe.

UPDATE: Since I posted from the train this morning and have been in meetings for most of the day, I did not get to see Chris Anderson’s thoughtful response to Lee Gomes. Here is an excerpt from Chris’ post:

What it does say is that the current data at Rhapsody, Netflix and Amazon show that the tail amounts to between 21% and 40% of the market, with the head accounting for the rest. Although I don’t discuss this in detail in the book, in the case of Rhapsody, the trend data suggests that the tail (as defined above) actually will equal the head within five years. Which is why the language Gomes cites from the book jacket is actually all phrased in the future conditional tense ("What happens when the combined value of all the millions of items that may sell only a few copies equals or exceeds the value of a few items that sell millions each?"). I asked him to quote the jacket copy in full context, but it apparently wasn’t convenient to his thesis to do so, so he didn’t.

From this post, it seems that Lee misquoted Chris and that Chris agrees that it will take some time for the Long Tail to outsell the hits.

UPDATE 2 – Please read Lee Gomes’ comment to my blog post below where he clarifies his thinking on the article and stands firm on his position especially in relation to Chris Anderson’s rebuttal and my commentary where I suggest that he may have misquoted Chris about the impact of the Long Tail. 

Ed, I usually don’t respond to blogs, not because I don’t value them enormously — I do — but simply because I write for a pretty big outlet myself, and think that once I have my say about something, I should shut up and let others have theirs. I need to comment, though, on your suggestion that I might have misquoted Chris. As I hope you appreciate, that is one of the worst things a journalist can do, even (or especially) when writing about a person whose views are being subject to scrutiny.

Here is how I described the book’s premise about this matter: "In the book’s main sections, Mr. Anderson writes that as things move online, sales of misses will increase — so much so that they can equal or exceed the sales of hits." Note that it is written in the future conditional tense, exactly like Chris says own his sentence is. I never said that Chris said that misses were currently outselling hits; my point was simply that considering all the to-do he makes about this in the book, I was a little surprised that he didn’t have any current examples. Had I had more space than I do for my column, which recall runs in the print paper and thus is limited to around 850 words, I would have happily quoted Chris’ entire sentence, as well as this other one from the jacket. "Using the worlds of movies, books, and music, he showed how the Internet has made possible a new world in which the combined value of modest sellers and quirky titles equals the sales of top hits."

As for the suggestion, not yours, that I misunderstood Chris’ methodology: I know perfectly well how he made the calculations he did, and explained them (I hope) very clearly in my piece. I added, though, that there was another way of looking at those same number, making it clear to my readers that Chris did not think that second method was meaningful. At least I gave readers a choice between two methods; the book didn’t even acknowledge that some other method existed.

Thanks for letting me have my say, Ed.
Lee Gomes
Wall Street Journal

Ok-this is done and I thank Lee for questioning the Long Tail meme and stirring the pot as I believe this healthy debate will only improve our thinking and analysis around this concept.  Of course, I am curious to see the how the data around the Long Tail evolves as time passes as this transparency will help all of us get a better understanding of the timing and true impact of the tail in certain markets.

Web/Tech

I hate shitty software – webroot spysweeper v5

Posted on by Ed Sim

Having invested in a couple of security companies, I am pretty adamant about security when it comes to my personal computers.  Until now, I have been using Norton Antivirus, ZoneLabs ZoneAlarm Security Suite, and Webroot’s SpySweeper.  Things were going great until a few days ago when I upgraded my Webroot Spysweeper from v4.5.9 to v5 and then all hell broke loose.  My computer kept freezing on the simplest task such as opening a browser and after several diagnostics I realized it was Spysweeper.  After uninstalling it, I still had problems so I am now in the process of rebuilding my machine.  After doing a Google search, I recognize that I am not the only one with a problem as you can see here.

For the life of me, I don’t understand how a great product went to shit with just one release.  Maybe it was the fact that they raised $100mm or so of venture capital and feel the heat to grow and expand quickly.  As you might notice, every security player that locks down the home PC has evolved into a suite-based approach.  In addition, I see that Webroot also expanded to the enterprise as well.  All I can say, is that any company looking to expand and grow should not forget what got them there – in Webroot’s case it is great antispyware software for the individual consumer. Webroot may also want to do a better job of QA before releasing its product to the market.  Given all of these issues, I am done with Webroot and moving on to another anti-spyware program.

Entrepreneurship

Reliving the bubble

Posted on by Ed Sim

Fred Wilson has a great post on remembering the old wounds from the last bubble in 2000.  In particular, he highlights the question that many of us have asked at board meetings – are we being too conservative or is it time to step on the gas a little.  This is a vibrant area for discusssion – we never know the real answer as hindsight is 20/20 but it reminds me of a post I wrote back in March 2004 called Thoughts from PC Forum – going into attack mode.  Here is a little excerpt:

The companies that survived this downturn were excellent at cutting costs, repositioning their products for new markets, and being resourceful and creative to survive. While these are some of the business principles I want my companies to continue to adhere to, I also want to caution that there is a danger in being too cheap. Some of these companies were so shellshocked from what happened during the past couple of years that they have become too cautious. For anyone that has been through the tough years, the only thing I can say is congratulations for surviving but now it is time to take some calculated risks. It is time to get out of the bunker and go into attack mode. Go after your competition, take some calculated risks, and focus on creating some revenue growth. What is different now than before is that most companies that survived the nuclear winter know who their customer is, how much they will pay, and what features and functionalities they may want in future versions. While it may sound like idle VC talk, I encourage you to spend that extra $$$ now as long as you can see the real ROI behind a targeted marketing program, the hiring of a new engineer to finish a product faster, or a new sales person to manage more qualified leads. Once again, take it with a grain of salt, as some entrepreneurs may think this is another VC swinging for the fences, but the point is don’t be too cautious because the opportunity may just pass you by.

Trust me, having lived through the bubble has changed my mentality a ton but I always have to remember that there is that lingering fear in my mind (fear can be good), and that I also have to temper my psychological mindframe with the data we have at hand and the opportunity in front of us. In other words, have a strategy and stick to it and if anything remember that old wounds can haunt you and use the data at hand to help make your decision.  If the ROI and return is there, test it out and try it as you never know until you take that step. There is a huge difference in building your company because your competitors are doing it versus building because it is the right thing for your company and the data suggests it.  Underinvesting in your company is just as much a sin as overinvesting in it.  So find the balance and continue building.

VOIP

Free phone calls!

Posted on by Ed Sim

Sipphone (full disclosure-my fund is an investor and I am on the board), developers of Gizmo Project, made a bold move yesterday offering users free calls to mobile and landlines in over 60 countries.  It is akin to the old MCI Friends and Family plan where customers could call other MCI customers for free.  This is viral marketing at its best.  Similarly, in order to take advantage of our offer, any Gizmo Project user can call any other registered Gizmo Project friend on any phone line in the 60 countries offered.  As Jim Courtney from Skype Journal says in his post:

The genius in this program is the attempt to drive market awareness virally by getting all your (PC- and headset-equipped) friends and family to sign up for GizmoProject and experiment with it. You then have the option of calling them at no charge; they can receive the call on either the GizmoProject softphone or their legacy PSTN phones.

There is lots of buzz in the blogosphere about this plan – some calling it great and others calling it a marketing gimmick.  Yes the free calls require both users to be registered to Gizmo Project but whether you call it a gimmick or not, I can already see some dramatic user signups in the last few days.  Michael Arrington from TechCrunch gets it when he says:

If calls continue moving towards free, then it’s going to be all about the value-added features. Video, better conferencing support, SMS – I can only imagine what sorts of features VOIP providers will be able to find substantial profit in. Perhaps these consumer VOIP services will have to make consumer VOIP a loss leader in exchange for building the strength of enterprise VOIP offerings. Ad supported free calls could be acceptable if the ads appear on the web interface. It’s hard to say what could take the place of burning through VOIP-out minutes, but interesting things will likely emerge.

As I have always thought, the price of phone calls has nowhere to do but down (and it has been dropping substantially over the last 5 years) and Gizmo Project is making a big move with its "free" offering.  As you might assume, the key to making our business model successful is the upsell of value added services and to continue to make sure we acquire new subscribers at the lowest cost possible.  From my perspective it all goes in the marketing bucket – would you rather spend money on silly television ads or pass on the low cost of telephony to your customers?   As Jason Droege, President of Sipphone told Om Malik,

“Wholesale PSTN rates are sooo cheap these days that it’s not much different than the cost of bandwidth back when I started Scour.net,” says Jason Droege, chief executive of SIPphone, the company behind Gizmo Project. “In the last 12 months I’ve seen wholesale PSTN costs drop dramatically and I expect this to continue. ”

While Mark Evans has a point that the problem with our service is that at least one user has to remain tethered to the computer to make calls, all I can say is to watch for an upcoming product announcement in the next month or so which will change all of that.  In the meantime, enjoy your free phone calls!

For other perspectives see Silicon Beat, Andy Abramson’s VOIP Watch, and Engadget.