BeyondVC

Everyone is talking about the slowdown of growth in the enterprise software sector as one of the main reasons driving consolidation talks at companies like Oracle/Peoplesoft and Microsoft/SAP. We all know that the enterprise software business characterized by large licenses and 20% annual maintenance revenue is lucrative but also hard as the big get bigger and the little guys disappear. Given the number of negative preannouncements this week from enterprise software companies, this Forrester graph from a CNET article summarizes the market quite well.

Looking at this graph, it is no surprise that companies are looking to consolidate. Given that maintenance revenue is such a large percentage of overall revenue and growing and given that it is also highly profitable, why shouldn’t some larger players in the market consolidate the industry, keep the maintenance revenue and cash flow, and stop everything else? With that backdrop, I find it quite interesting to learn that CA’s ex-CEO, Sanjay Kumar (the master of these deals), advised Oracle on their Peoplesoft acquisition. According to a New York Newsday article, here is what Sanjay had to say on Oracle’s strategy of buying Peoplesoft and gutting it:

At the same time, Phillips said Kumar advised “he would have the same plan post acquisition but just would not have said so up front. Everyone knows but you can’t say it and freak out the customers up front.”

As for which employees to keep and which to discard, Kumar, whose CA acquisitions were notorious for scuttling thousands of workers, offered clear advice.

“Don’t get rid of the presales folks; only the sales,” Phillips quoted him as saying. “The presales guys know the products and customers and they will get you easy add-on sales . . . and it would be crazy to forgo that revenue and those relationships . . . You don’t need the sales guy — those are for new account hunting.”

What does this mean for me from a venture perspective? Well, what I have believed for a long time is that it is hard for early stage companies to build direct sales models predicated on “elephant hunting” and going after huge deals. Each sale is incredibly long and expensive. In addition, as you can see from a number of large public software companies, revenue is lumpy and therefore less predictable as customers wait until the last day of the quarter to squeeze you for a larger discount. Despite this, we are still bullish on software companies selling to enterprises. In our mind it just requires a rethinking of what business models will work and why. Think seed and harvest – lower price points, more volume, lots of upsell over time. Think of software models with leverage – hosted software and modular software which can be resold, OEMed, and/or appliancized (if that is a word). So please read an earlier post for more detail.

Like any active, early stage venture investor, I have spent a fair amount of time helping my portfolio companies build a management team. And like any venture investor, I wish I could boil hiring down to a more scientific method to make sure that each person we bring on to a company is better than the next. However, that does not always happen. The one constant in hiring, however, is the “A-Player Domino Effect” which basically says that when you hire an A-Player, they bring lots of other A-Players to the table. Think about it this way. Why do so many people want to play for the Yankees? Sure, it is the cash, but it is also the opportunity to work with other A-Players to win a pennant that lures A-talent to New York. Same with the Lakers-Gary Payton and Karl Malone took pay cuts to join the Lakers and Shaq and Kobe to win a championship. I am not saying that in order to have a successful company you have to have a lineup of proven all stars since team chemistry plays a huge role. In fact, every company may have a different definition of what an A-Player looks like. Look at the Detroit Pistons, full of chemistry and a solid bunch of hungry players, who took out the all-star laden Lakers in the NBA Finals.

However, in many of my successful companies, the first couple of VP hires made all of the difference in the world in terms of attracting strong talent and positioning the respective companies for success. For example, one of my companies just brought in an experienced VP Sales from a competitor in the market. Once he signed, he brought on 2 of his top sales performers from his prior company along with the former head of sales engineering. This was great as it helped us fill out the team below the VP-level and brought the company known quantities who had worked with the VP Sales successfully at other companies. Another portfolio company brought on a great VP Engineering who brought 3 of his top guys with him. In each case, both VPs had a few people willing to follow them to the next opportunity. It is obviously a great sign when this happens. It shows me that someone can build a team, engender loyalty, and perform at a high and successful level. Every company or investor may have a different definition of an A-Player but one thing I can say for sure is that hiring an A-Player does not necessarily mean you have to hire the “big name” or “proven all star” in the industry. Many times, I have found A-talent from up and comers who are stepping up into a bigger role, have something to prove to themselves and the world, and just have incredible will and drive to make things happen. Of course, they have to possess the prerequisite industry experience, proven track record, etc. but the intangibles often make a big difference. In the end, great people like to work with other great people.

I met with Dave Panos and Andrew Busey of Pluck yesterday to learn more about their product and their company. Rather than go into the software (which I really like btw, combination RSS reader, bookmark manager, and simple collaboration tool), I wanted to share some of our thoughts about consumer-based web businesses circa 2004. We had a nice discussion about why it was different to launch a web-based business in today’s world versus the bubble period. It was even more interesting considering that Dave and Andrew were on their third or fourth startups, depending on how you count. Our conclusion was that it is so much easier and cheaper to build a web-based business today than in the early days of the Internet. OK, I am being master of the obvious, but I am interested to see what else you can add to the list below.

1. Critical Mass
During the bubble period, the promise and potential of the Internet was all around us. However, the critical mass was not there. Today, we have critical mass, a number of users that are experienced with the web. We have real broadband penetration (although not as high as Korea, for example). This obviously allows any new company to actually build a real business with real users that can throw off cash flow.

2. Technology/Experience
In the early years, people did not have off-the-shelf components and open standards like XML/SOAP to build web-based applications. If you wanted to build a chat program, you had to build the whole thing from scratch. In today’s world, you can pull an off-the-shelf component from an ISV or from the open source community, Jabber for example, and have chat instantly integrated in your product. Additionally, the developers 8 years ago were pioneering new applications and a new language. If you combine that same developer who is now seasoned with better technology, you get a great headstart in building new products. What used to take months now takes weeks to build. What used to cost millions now now costs a fraction of that. We have more capability built into the browser. Pluck and Onfolio, for example, are built and integrated into IE instead of being a separate application. We have toolbars galore built into IE. It works.

3. Business models
Andrew stressed the other main point which is that we know what business models work today versus yesterday. Paid search didn’t exist years ago. Today it is a multi-billion market. Portals were nowhere close to profitable and today they are. Companies like Yahoo, Google, Amazon, and EBay have become big enough to build a business around-they have an ecosystem-they are the gorillas of the web and entrepreneurs can launch products around them. Additionally, we know how to reach users better and measure success. We are not throwing money away on stupid advertising campaigns. The smart and seasoned entrepreneurs now have more outlets for guerilla marketing (blogger community is a new and great one).

Remember the old adage that pioneers get arrows in their backs? Well, many early entrepreneurs did fail. Luckily, today’s entrepreneurs have the hindsight and ability to soak in all of the expensive lessons learned from the past. Now that is a tremendous advantage, one that will only get better with time.

Jerry Colonna has an insightful post on what it’s like to be a CEO of a venture-backed company. Having worked with Jerry on a board before, I find his advice quite practical and thoughtful. One takeaway from his post is about being overcommunicative with your board meaning that VCs do not like surprises. I totally agree as I’ve written about this before.

It is on the newswire today-Cometa Networks, the wi-fi service provider backed by IBM, AT&T, and Intel, is shutting down. There is much analysis out there discussing the merits of the business and what went wrong. In a recent News.com piece, analysts discuss how Cometa did not build critical mass quickly enough to make the economics work. Rather than focus on what went wrong, what strikes me about Cometa Networks is not the business or market it was going after, but the hype and attention it drew to itself way before its service was even in operation. It was all over the news (well done, by the way), but the problem is that it promised too much and never delivered. At the very least, if you are going to hype yourself, make sure you can deliver relatively quickly to capitalize on the buzz. When you have a grandiose launch you set high expectations for your company. As my colleague, Ben Tanen, put it, “they would have to be the next generation phone company” to deem their execution worthy of their launch. Anything short of that and they would be deemed a failure. Of course, this puts a ton of pressure on the team to deliver and exceed expectations. Along those lines, it even seems that the company was quite aggressive in its dealings with business partners, acting like a market leader even without a network (see Sky Dayton’s comments on wifinetnews). Call me understated, but I prefer my companies to “underhype and overdeliver” rather than “overhype and underdeliver.” So whether Cometa was a victim of the market or not, the way it was launched, one could claim it was a victim of its overambitious start. Even if they succeeded bit by bit they would have been seen as an underperfomer as it would have taken them years and a ton of capital to meet the hype that they generated from the initial launch.