I can’t tell you how many companies come in and present and inevitably, somewhere in the deck, is a list of advisors. Of course, as I dig in to understand what these advisors actually do for the company, 9 times out of 10 they are just high profile names that are thrown on a list to give a company a stamp of approval. Trust me, I am all for advisory boards. In fact, many of my portfolio companies have them. Many entrepreneurs or management team put together advisory boards to get real expertise on product direction, the market, and to expand their network to reach new customers and partners. Advisory boards can be especially great because the typical relationship is usually noncash and compensation is based on options which vest over a period of time. So the cash-hungry startup can add talent and help without breaking the bank. However, like any business relationship, it is important to figure out what you want from each advisor, what their time commitment and interest level really is, and then structure the appropriate role and responsibilities. I, like most VCs, am more impressed with companies that have advisory boards that are structured and actually do real work for the company versus seeing just another list of names.
The next generation web, scaling and data mining will matter
We are all enjoying the benefits that come with the commoditization of existing hardware and software infrastructure. It is true that it costs exponentially less to launch a business today versus five years ago. We are all smarter, broadband penetration is reaching critical mass, and open source and commodity hardware have become reliable alternatives to proprietary architectures and closed systems. As we all move forward with our web-based operations, it is clear that scaling the back-end infrastructure still remains a formidable challenge. There have been many an instance of popular services going down – remember Typepad, Salesforce.com, and del.icio.us as a few examples. With scaling the backend also comes a need to learn more about your users and their interactions. Data mining and analysis is becoming a big thing to not only help companies create better services but also to generate more revenue per user. In addition, for many web companies extreme data driven applications are the core of their services. Think about Zillow, Technorati, and services like Indeed which are dynamically driven services based on aggregating, crawling, and filtering millions of pieces of data. However, the fast growth of many a web-based operations combined with the need to mine the data leaves a big hole in the revolution of the cheap. Web-based operations need an open source way and cheaper option to scale their database needs, move to a data warehousing architecture without breaking the bank, and scale with user growth leveraging commodity infrastructure. Enter Greenplum (full disclosure-Greenplum is a portfolio company and I am on the board) which just released its GA product Bizgres MPP for data warehousing leveraging the best of the open source PostgreSQL database. We have been working on the code for the past 18 months, and I am quite proud of the team for having delivered the release. Greenplum is taking the best of the open source database PostgreSQL and rebuilding some of the core functions like the query optimization, execution, and interconnect. We are allowing anyone to build a shared nothing architecture ala Google to scale their backend to multiterabyte sized systems leveraging cheap hardware. It is free to run on a single machine but if you want to run a massively parallel option we charge a fee per CPU.
Dana Blankenhorn from ZDNet gets it:
This is a problem a lot of Web 2.0 start-ups like Technorati, Bloglines and Flickr are facing, and projects like Drupal will face soon. They were built with open source tools, but then find they need to "graduate" to something like a data warehouse. And there’s old Oracle, telling them there’s nothing from an open source supplier that can deliver what they need. Share with us, they say, you don’t have any choice.
Well, now there is a choice. Greenplum CTO Luke Lonergan said that O’Reilly Media, one of Greenplum’s early customers, graduated from mySQL to PostgreSQL with Greenplum and got a
100%100 times improvement in database access speed across a 500 Gigabyte database. Other Web 2.0 start-ups, and projects, can do the same thing."The price of conversion is where the pain is," said Yara, "but look at how fast some of these projects grow." While mySQL was smart in building on a lightweight Web base, more and more users and projects will find the need to graduate, and face proprietary FUD from major vendors saying they have to pay the "monopoly tax" in order to grow.
I truly believe the next battleground will be based on scaling the back end and more importantly mining all of that clickstream data to offer a better service to users. Those that can do it cheaply and effectively will win. The tools are getting more sophisticated, the data sizes are growing exponentially, and companies don’t want to break the bank nor wait for Godot to deliver results. Given these trends, I suggest downloading Greenplum’s Bizgres MPP and let me know what you think.
Having too much money can be a curse, not a blessing
Trust me, I love having well capitalized companies. However, having too much money can be a curse, not a blessing. More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce. To many executives, money does solve all problems. And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing. On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem. Sales are not ramping up quickly enough so let’s hire more sales people. Marketing is not generating enough leads so let’s spend more money on lead generation. Engineering keeps missing its product release date so let’s hire more engineers. And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources. In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy.
On the flip side, I have seen many an entrepreneur create successful businesses who some could argue were slightly cash-starved. I am not arguing for entrepreneurs to starve their companies of the resources they need, but what I am suggesting is that having too much money can make one lose their creativity in terms of allocating scarce resources to grow a business. This is especially quite important during the early stages of company development. An entrepreneur needs to experiment with various ways to reach his target market, generate revenue, and develop product. An entrepreneur also needs to stay focused, disciplined, and make hard decisions in terms of where to focus company resources. Too much capital can kill this need. Throwing too much money at the wrong strategy or too many different areas only adds fuel to the fire. While money can really help an entrepreneur scale a business, having too much can be a curse.
Why we invested in Sipphone, developers of Gizmo Project
Dawntreader Ventures has just led a $6mm round of financing in Sipphone, its first outside round of capital. We look forward to working with Michael Robertson and Jason Droege to fuel continued growth in the Sipphone and Gizmo Project service and to roll out new features and functionality. As you can see from Michael Robertson’s blog, the basic premise of the company is to provide SIP-based dial tone to any software or hardware device. For those of you who don’t know, SIP is a standard protocol for voice and video.
Gizmo Project voice calling and IM is booming on Macintosh, Microsoft Windows, and Linux computers because Gizmo Project works well and connects with every type of device like WiFi phones, other VOIP and IM directories like GoogleTalk and even the popular open source Asterisk PBX software. I think people are beginning to understand the difference between Skype who walls their customers in and won’t play nicely with anyone and SIPphone who connects to everyone making it possible to have just one address. Next week SIPphone will announce closing of a major venture capital deal which will help the company grow even faster.
As you can read in an earlier post, I, like Michael, am a believer in the growth of open standards. We want to provide consumers with the ability to have one address and connect to anyone on any network. We want to expose our APIs to allow anyone or any company to easily integrate our VOIP/IM service into any application or device. In addition, we want to make it extremely easy for consumers to bridge the Internet and traditional PSTN by extending the SIP functionality to non-PC devices such as routers, wifi devices, adapters, and dual mode cell phones.
While there are a number of factors that go into an investment decision, these are the key highlights for us. Sipphone has a strong team led by Michael Robertson (founder of MP3.com) and Jason Droege (founder of Scour.net, first video search engine). They know how to develop and market great consumer products and services on the web. The market is huge as only a tiny fraction of overall global voice traffic is VOIP-based on the end-consumer side. This is not a zero sum game between other VOIP/IM players but between the incumbents driving analog telephony and the new players driving digital subscriber growth. Sipphone has demonstrated it has a winning product that can grow its user base and upgrade free users into paying customers for value added services and features. The cost of sales and marketing is zero as Sipphone is a frictionless sale, especially when compared to a Vonage. Finally, I believe that consumers are smart and demand interoperability and that open standards will win.
What are the key drivers of your business?
Scott Maxwell has another excellent post on his blog. This time it is on a company’s need to measure and monitor their business. In an early stage business, I typically see two types of companies. There are those companies that do not measure and monitor much and instead drive their business by a "seat of the pants" decision making process. Other companies manage and monitor everything. The key is not to get stuck in the weeds and get paralyzed by analyzing too much data. For all of my portfolio companies, I like to know what the 4-5 key drivers of the business are. I like to know what leading indicators are most likely to show an increase or decrease in sales 1-2 quarters ahead and what the company is doing to improve those measures.
For example, when I was reviewing a financial model with a portfolio company which generated revenue through advertising it was clear that while traffic was a huge ingredient in revenue generation, RPM was an even stronger metric as each change in RPM significantly drove sales. Over the next month, we experimented with a number of changes (of course we measured and monitored each change against the benchmark) to determine how to finetune RPM. Why spend more dollars on getting more traffic to our site when we were not effectively monetizing in the first place? Finetuning our RPM is an ongoing process but now for each dollar we spend on generating traffic, I am confident that it will return much more than a dollar in revenue to the company. Metrics matter and understanding what inputs have significant leverage on your operating model is the key.
Yes, I know it is hard for early stage companies to accurately predict their revenue. But from my perspective, the financial model is not as important for accurate revenue prediction as it is for understanding how the economics of your business works. Does each new customer make money or lose money for you? In any financial model there are usually a handful of inputs that drive the overall sales and cost equation. Make sure you know what they are, how sensitive your revenue and costs are to that input (in the earlier example, traffic was a key input but RPM had a more direct impact on sales), and measure, monitor, and finetune your company based on these important pieces of data.
I was at a board meeting the other day and while we were pleased with the results for the quarter, we were struggling to understand why we were not getting more customers if we were winning a majority of our proof of concepts (POCs). As we dug through the data we discovered that while we did convert a majority of our POCs, 50% of POCs ended up in no decision. In other words, we wasted half of our sales engineering resources on sales that would never happen. The key was to go after the low hanging fruit first – only do POCs that can convert into a sale. So what have we done to correct this? We now require a more detailed checklist before a sales rep can request a POC for a customer. Even if we are able to reduce the no decision rate from 50% to 35% this means more sales. Clearly this does not mean we need to hire more sales engineering bodies as we can better utilize who we already have.
It doesn’t matter if you are an enterprise, web 2.0, or old economy company because everyone must understand the key drivers of their business, measure them, and finetune their operations to run as efficiently as possible!
Google – look at the bigger picture
As we all know, Google got whacked because it missed Wall Street’s projections. Sure, investor expectations are quite high for Google especially when they are paying 90x earnings. However, the reality is that the company is still performing quite well. From my perspective, when investors pay such high multiples for these companies, the inevitable correction in market price will happen. That being said, let’s focus on the numbers that really matter, revenue and profits. Google still did deliver $372mm in earnings on $1.92b of revenue up from $204mm in earnings the year before.
Sometimes we all focus on the short-term at the expense of looking at the long term. Sure Google is overvalued now but the company is delivering some impressive results. Remember the First Law of Technology:
"A consistent pattern in our response is to new technologies is we simultaneously overestimate the short-term impact and underestimate the long-term impact."
Well, we did that starting in 1995 when Netscape went public and are doing it again today. And remember Scott McNealy touting "the network is the computer" years ago. Somewhere lost in the translation was this comment from Eric Schmidt when asked about Google’s entry into consumer electronics (thanks to David Jackson who runs the Internet Stock Blog and has been posting transcripts of investor calls):
There’s an awful lot of speculation about Google playing in those markets. The Google PC, those kinds of things. To me, most of those are people projecting the last one, not the next opportunity on us. And from my perspective, those are not very interesting business opportunities; they’re well covered in the market, we partner with many of the players and we would much prefer to deepen our partnership with them than to go into competition with them.
We are relentlessly focused on this new end-user experience, which is multi-platform and based on the internet and that’s where our future is. That’s where the growth is, that’s where the revenue and monetization is. And, as I mentioned earlier, it’s so large, it makes no sense to divert our resources to these other and somewhat smaller opportunities.
Sound familiar? The network is the computer, the web is a platform, the browser is the OS, services will live in the cloud, and we will access information from anywhere, anytime, and any place. Once again, sometimes we overestimate the short-term impact of new technologies and underestimate the long-term impact. This is why I am so excited to be investing now because if you believe services will live in the cloud and anything that can be digitized will be digitized (media, voice, etc.)then I am sure you will agree with me that we are just in the second inning. And this is not just a consumer-driven change, this will affect enterprises as well. So Google missing its incredibly high expectations is not all that bad because when looking at the bigger picture, Google is still delivering some spectacular results and causing the old guard to get with it and respond to the changing times.
BTW, it doesn’t mean I would buy the stock at these valuation numbers and nor do I own it now but the point is that there is still plenty of significant opportunities for startups to create value in the years ahead, especially since Google will not and cannot do everything.
Successful offshore practices – let them work on your crown jewels!
The buzz around offshoring has certainly died down over the last year. For a period of time, you could not pick up a magazine or read a newspaper without a lead article on the dangers of offshoring. I had dinner tonight with a portfolio company CEO who has managed to shift most of his resources to India. Today the company has almost 100 employees in India, over 30 of whom have been with the company for 5+ years. Even more impressive is that the employee churn has been pretty low. When I asked him about the secret of success, he said it was quite easy.
"Let them work on your crown jewels."
In other words, most software development opportunities are with consulting firms where employees work on a project basis. So these jobs are usually fleeting and never last very long. Other software jobs are body-for-hire which, once again, is not that interesting and does not provide real upside for the developer. Many of the better opportunities have developers maintaining existing code, fixing bugs, and doing low-level programming. By making a strategic decision early to let the developers in India work on the core technology this company has been able to thrive and prosper and turn its offshore team into a real strength. All of the main architecture and design is still done in the US, but all of the development is done offshore. The other reason why this has worked so well is because the company also made a conscious decision to send over our existing VP Engineering and a few other key developers to seed and build the team in India. It is a wholly owned subsidiary and the employees all work for the company. The startup costs are obviously higher to do this but if you are looking to do offshore development and do it successfully I seriously urge you to consider building your own team if you can find the right lead project/eng. development manager. I have seen way too many companies fail in offshore development trying to just work with consulting firms as inevitably the churn and training costs end up being quite high. In addition, to make it really work, let your team build real product, work on new technology, and not just maintain old code.
Favorite Quotes
Today is Wayne Gretzky’s birthday, the greatest hockey player of all time. Anyway, as I was looking at Today’s Highlights from Answers.com, I was reminded of a couple of my favorite quotes from him:
"You miss 100% of the shots you don’t take."
"A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."
If you have read my blog in the past, I am sure you can understand why I love them so much. They are apropos for not only sports but business and life in general. Read them one more time, think about them, and figure out how it might apply to what you have not done or what you want to do!
Google Talk Federation – open vs. closed
As you are probably well aware, Google just announced open federation with other IM services via XMPP (jabber). It’s about time that someone did this. Sure, the Trillians of the world are great to have as aggregators of networks but what I really want is ONE identity that is cross network, cross platform, and cross communications (voice, IM, email). I remember in 1998 when David Wetherall was talking about the future he thought we would all have one identity and that it would be our email address. Well, 8 years later it is clear that email will not be the one identity with massive spam issues but potentially with federation of networks it may be our IM/VOIM identity, one day. To date, we have all been on our own IM island where only AOL users could talk to AOL users and MSN to MSN. While early, Google is taking a step in the right direction as it makes no sense for consumers to have to choose which network to join. It should just work. Now Google and others are taking the first step to letting us have one identity and by leveraging open standards and integrating with other services like Michael Robertson’s Gizmo Project and Earthlink. It will be interesting to see if this forces others to open up their networks to play the open standards trump card or simply remain closed and proprietary.
The other interesting part of this announcement is that later this year Google will also support SIP allowing for true interoperability between different VOIP networks that use the open standards SIP protocol. Cisco uses SIP (proprietary version called SKINNY), MSFT uses a form of SIP in Live Communication Server, and open source telephony software like Asterisk and Pingtel (Sipfoundry) either leverage this protocol for VOIP communications or can connect to SIP-based networks (Asterisk). In other words, many in the business world who have VOIP services have knowingly or unknowingly jumped behind the SIP bandwagon. While true interoperability with these services does not completely exist since some hardware vendors have created their own versions of SIP-based technology, this does provide an opportunity for the SIP-based players to potentially end-around Skype by combining networks. While Skype has been doing incredibly well and has a tremendous network advantage, will the fact that Google is getting behind SIP and open standards neutralize the proprietary Skype advantage over time? Does open standards win out over time versus closed proprietary systems? Skype has no reason today to be SIP compliant since it wants to protect its most valuable asset, the network, but will it over time look to offer a SIP gateway? Whatever happens it will be interesting to see if true open standards will triumph over closed and proprietary and how long that will take. At the end of the day consumers don’t care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications. What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity? Keep an eye out over the next year for innovative services that will move closer to this reality-dual ringing computer and cell phones, seamless transferring of a conversation between networks, and more control over who connects with us and when.
The Arms Race for Talent
Sure, the next-generation web is cheap. It is about cheaper bandwidth, cheaper hardware, free software, and better tools. In other words, you get much more done with much less than in years past. I have written about this in a prior post, Web as Platform. Anyway, has anyone noticed the arms race for talent out there? Sure it is cheap to get a product up and running but to scale any business you need talented employees in engineering and product. I have heard numerous stories over the last few months about smaller, innovative startups having a hard time bringing on qualified engineers as Google and Yahoo are offering 3 year packages of a $1mm or more in salary, restricted stock, and signing bonus. I must admit, this is a pretty tough environment to compete against. In fact, as you look at the landscape, everything that Google and Yahoo is doing is about stockpiling talent. Let’s not forget that all of those tiny acquisitions of small startups is about bringing on the best talent possible.
So then the next question you may have, is how do I compete for this talent? It goes back to selling the vision of your company, the ability to make a huge impact in a small and thriving organization, and outlining the equity opportunity. Those seeking the comfort of a nice paycheck at an established company need not apply. All that being said, despite the next generation web about being cheap, the costs are rising quickly as the big dogs with hordes of cash are not afraid to spend it to stockpile their talent. As you look at the bulk of your costs over the next couple of years, it is clear that your budget will reflect a huge percentage of cost in bringing the right people on board. No matter how you slice it, despite this mantra of cheap, it is not as cheap as we all want because personnel costs are rising, not decreasing. This next phase of ramping up companies is not about how much you spend on marketing as most services today are spread word-of-mouth. It is not about technology spend as it is way cheaper than years past. It is about finding and hiring the key people who know how to scale a back end infrastructure, who can create and deliver innovative product, and who know how to leverage word-of-mouth to create a huge opportunity. And you must do this when Google and Yahoo are not afraid to be the George Steinbrenners of the web. The good news is that just because you spend the most on your payroll, you don’t always win. Just remember Billy Beane and his Oakland A’s.