Open Source

Software co-op/software reuse

Posted on by Ed Sim

Lee Gomes from the Wall Street Journal wrote an interesting piece (sorry, not a free site) in his Portals Column about Project Avalanche which is essentially a software co-op for businesses to share their applications and code. Current members include Jostens, BestBuy, and Cargill. According to Lee, the Avalanche Project was started because the founders kept asking themselves the following questions:

“Why were they writing such big checks to their software companies, but getting so little in return? Why were their in-house programming staffs writing the same sorts of custom programs written at thousands of other companies? If Detroit car makers can collaborate on research, why couldn’t U.S. technology users?”

The project is in its early stages but has grand ambitions. One of the founding members discusses what would happen if the group banded together to create their own CRM system or their own Linux-based desktop environment, saving all of the participants lots of dollars on licensing fees. While the idea of software reuse is not new, as developers have talked about this for years, the implementation via a co-op is what’s unique. In addition, most of the other companies or sites that I have seen specialize in sharing snippets of code versus full applications.

If you are interested about software reuse, I encourage you to read up on a company I met with early last year, Artifact Software. Artifact Software has a tool that allows developers to collaborate and create a code sharing community. Its initial target market will be selling to enterprises, allowing their developers to collaborate internally to become more productive. However, its business model is to seed the target market with its tools by allowing users to download its product for free and share code via an open website at www.codejack.com. The website currently lists 33k artifacts of code with over 23k users. Leveraging the open source philosophy, Codejack is not only about searching and finding code, but also about testing, rating, and reviewing code. Other companies to keep an eye on include Component Source and Logic Library which is more enterprise-focused. While developers have been talking about software reuse and its ancillary benefits for years, I have no doubt that given a tough climate for IT spending and the acceptance of open source, that the idea for software reuse and collaborative development will become a big topic again. In the long run, I am sure that the members of Project Avalanche will contribute and develop some interesting software.

Investing/Markets

Merrill Lynch launches nanotech index

Posted on by Ed Sim

It was just a matter of time before an investment bank launched a nanotech index. During the bubble years we had an index for everything ranging from Internet ad-related companies to Internet commerce companies. Now we have a nanotech index. Is this a sign of another bubble? Well, it is true that nanotech is overhyped now, but I have no doubt that it will one-day be a pervasive technology that will drive growth in alot of industries ranging from materials to semiconductors to health care. Merrill Lynch’s Nanotech Index is an equally weighted index of 25 companies that derive a significant percentage of their future profits from nanotechnology. I encourage you to visit Merrill’s site for a copy of the report. Steve Milunovich, Merrill’s technology strategist, summarized as follows:

Mr. Milunovich noted that there are two significant differences between the Internet and nanotechnology. “Unlike the Internet, significant intellectual property and patents are barriers to entry, and yet barriers to adoption are low.”

Nanotechnology is the science of fabricating things smaller than 100 nanometers. One nanometer is one-billionth of a meter. Merrill Lynch believes nanotechnology is the next logical step in miniaturization and that it is only a matter of time before the impact is felt in many industries. “Building at the nano-scale enables new interactions in materials, semiconductors, and biological agents,” said Mr. Milunovich. “The new scale allows manipulation on the cellular level, which should enable new discoveries in pharmaceuticals, biodefense, and many healthcare industries.”

I am not a nanotech guy, but IMHO, I have no doubt that nanotech will be big someday and it is really only a question of when it will happen. While I am not actively pursuing this from a VC perspective now, I am going to track this index for personal interest to get a better understanding of what companies are doing with nanotechnology and how they perform over time.

Update-Rich Skrenta suggests visiting the Topix Nanotech page for those interested in daily updates which are not heavily research oriented.

Open Source

Thoughts on the Microsoft settlement with Sun

Posted on by Ed Sim

If you are wondering about why Microsoft settled with Sun, I suggest reading David Kirkpatrick’s excellent piece on the deal. In the article, David surmises that the power of the open source movement is really the driver behind the deal.

Open source’s influence is far greater than its current market share in software might suggest. The open-source model increasingly defines what’s possible in technology. What matters now is not where a technology comes from but how it works with everything else. Open-source software can be made to play well with others more readily than any technology we’ve ever seen. Even more than its low price, that’s why companies like it so much—they can modify its guts to their specific requirements.

Right on. This is not a story of free versus paid, but a story of freedom. If you talk to CIOs, you will consistently hear that they favor open systems and architecture, and that they do not want to be a victim of proprietarty vendor lock-in. While Windows still has a larger share of the server pie, what open source is doing is giving the customer choice, which ultimately gives them power, the power to demand interoperability or turn to another non-proprietary solution. Yes, there are other drivers behind the deal but as David points out now Microsoft and Sun can focus efforts to fight a more common enemy, IBM and the open source movement, which threatens their very existence and dependence on proprietary software.

Investing/Markets

The Street Does Not Forgive

Posted on by Ed Sim

I was with a banker today talking about the influx of new IPO filings and the end result of our discussion was the following:

1. Filing does not mean anything, the companies may never go public
2. Performance is key-revenue visibility is of utmost importance because the street does not forgive

Case in point-if you miss your numbers within the first two quarters after you go public, forget about it. Take a look at Callidus Software which is a provider of Enterprise Incentive Management software systems to global companies, used to model, administer, analyze and report on incentive compensation, or pay-for-performance plans. The company went public in mid-November, hit a high of close to 21 and was recently punished for preannouncing a shortfall in revenue. The stock now trades at $8.34.

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Here is what the CEO had to say:

“Callidus Software, like many enterprise software companies, transacts a significant portion of its quarterly business at the end of each quarter,” stated Reed Taussig, president and CEO of Callidus Software. “Our quarterly license revenues are dependent on a relatively small number of large transactions involving sales of our products to customers, and any delay or failure in closing one or more of these transactions could adversely affect our results of operations. In this quarter, we failed to close several transactions due to customers’ merger and acquisition activities. In addition, a number of customers failed to conclude contracts due to their timing or budgetary considerations. We are disappointed with these results. However, we continue to be optimistic about our business, given the potential of the emerging EIM market, our product position, and our strong customer base. We will address second quarter and full year guidance on our planned April conference call.”

So if you want to go public, please make sure you have the visibility in your sales pipeline to hit your numbers the first couple of quarters out of the gate. What this also shows is the enterprise software business is a tough game. It is difficult to sell large licensed software and have real predictability. Salesforce.com will be an interesting company as their hosted, subscription model gives real strong visibility on future quarters. That being said, if you want to go public, you need strong pipeline coverage to make up for potential end of quarter jockeying by potential customers. You need good recurring maintenance revenue. Don’t overpromise on your initial quarters post-IPO, give yourself some cushion to exceed financial expectations. Because if you don’t, the street will not forgive.

Web/Tech

Personalized Search

Posted on by Ed Sim

Google just launched a new version of personal search based on user preferences. In early 2000, we seeded a Xerox PARC spin-out called Outride (formerly called Groupfire) which aimed to bring personal search to the web by learning from a surfer’s prior searches or his workgroup or community’s prior searches. For example, if you searched on the word “Java” how does the engine distinguish Java the computer language, Java the coffee, or Java the island. So based on user behavior if you were a tech geek and into computer programming, it would serve you up the Sun Java and so on and so forth. The business model was to be an “arms merchant” to all of the major search engines like AOL and Yahoo. The problem was that it was very difficult to monetize. How do you get a search engine to pay for a supposedly more personalized search result? So at the end of the day, we ended up selling the assets and patent to Google. Fast forward to now and Google is bringing this back into the market, although it is using its latest acquisition, Kaltix, as the basis for its search. This one is based on profiles rather than behavior. As Jim Pitkow, co-founder of Outride says in a San Jose Mercury News article:

“That’s good because the search engine doesn’t have to try hard to infer anything from the user’s behavior. But it can also be a disadvantage, because a person’s interests will change over time, but they may not update their Google profile to reflect that. It’s really unclear what it’s learning about me,” said Pitkow.

While the idea for Outride was interesting, we were way ahead of the market without a clear business model. It is a long story but the old adage “pioneers get arrows in their backs” certainly applies to this company. Anyway, it seems that Eurekster is doing a very similar job to Outride except that it has created a destination site. It will be interesting to see how personalization and the search wars play out over the next couple of years. I, for one, am a big fan of the original Outride model based on user behavior. Of course, that can open up a whole new issue related to privacy. If you are interested in personalization, I suggest you visit the Eurekster blog for a nice comparison of Google and Eurekster.

Investing/Markets

A tale of two IPOs

Posted on by Ed Sim

So while I was at PC Forum, my partner, Ned Carlson, sent me an email on the recent IPO filing of Seven Networks. Having talked to a number of bankers, we always thought that one needed $6-8mm of quarterly revenue, profitability for at least 1-2 quarters, and good visibility for the rest of the year in order to go public. It seems that the filing for Seven Networks goes against the grain. According to its website, “SEVEN is a leader in Out of the Office™ technologies; our mobile email software makes it simple and affordable to access corporate and personal data while on the go. SEVEN’s software provides secure, real-time access to email and PIM information via a wide variety of mobile devices.” The company has a blue chip list of customers like Cingular Wireless and Sprint PCS in the United States; Globe Telecom, KDDI Corp, NTT DoCoMo, Optus and Singtel in Asia Pacific; and mmO2 and Orange in Europe. However, we still do not understand how it can go public with the following numbers: 2002 revenue of $6mm, net loss of $19mm and 2003 revenue of $7mm and a net loss of $13mm. What bothers my partner, Ned Carlson, even more is that some of the investors are even selling in the $100mm raise. What I hear is that they are going to execute a roll-up strategy. Isn’t Visto already doing this as well? Does anyone know the story behind this IPO filing?

On another front, you have Brightmail (an anti-spam vendor) which recently filed with some nice numbers. Revenue for FY03 was $26mm up from $12mm the previous year. In addition, the company had net income of $1.2mm for FY03. These are definitely numbers in line with what we were told on the IPO front. Concerns could be the concentration of customers via Microsoft. According to the Computer Business Review in the UK, of the 305 million mailboxes they screen, 145 million are Hotmail and only 5 million are enterprise.

It is amazing how 2 companies with such different numbers can file. All I hope is that both of these companies can meet the expectations of investors and deliver on their respective stories. What we all do not need is a return of the speculative IPO. Tim Oren and Fred Wilson both comment on the action this week.

Entrepreneurship

Thoughts from PC Forum-going into attack mode

Posted on by Ed Sim

Once again, I am not going to blog the panels at PC Forum, but you can find some good commentary on the conference via other bloggers from my post yesterday. Other good posts can be found from Dan Gillmor, Jason Calacanis, or the PC Forum Eventspace.

However, what I would like to share with you is some conversations I had with some VCs and entrepreneurs over the course of the day yesterday. While the panels are interesting and the speakers can stretch your mind, what is great about PC Forum is the high-level networking that occurs during the day. So what did we talk about? There were a number of attendees who were here during the past few years and their businesses raised a fair amount of capital and somehow they managed to survive the nuclear winter during the 2001-2002 period. What allowed them to do it? What are the challenges they face now? One observation that I discussed with some others is that the very principles that made companies successful during the bubble period are the very ones that would land you in bankruptcy court during any other business period. Some of these principles included growing revenue and headcount at all costs with no focus on profitability and spending tons of money on building a larger than life image-lots of money thrown at PR firms and advertising with no idea of who your target market was or what your customer really wanted. In other words, alot of these companies were based on cool technology and not on making customers happy. On top of this, VCs threw too much money at these companies and there was no need for entrepreneurs to be resourceful and creative in order to get things done.

Let’s fast forward to now. 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.

Entrepreneurship

PC Forum 2004-Monday morning

Posted on by Ed Sim

PC Forum is off to a great start this year with an interview with Eric Schmidt from Google and a panel with the CEOs of AOL, Yahoo, and Google. I do not plan on taking detailed notes so I suggest you view Ross Mayfield’s blog and posts to stay current on the conference. I also suggest visiting David Weinberger and Brett Fausett for more notes.

With respect to the first panel, I took some interesting notes on spam. AOL and Yahoo are doing all that they can to stop spam, catching high 90% of it. The frightening aspect is that the high amount of spam that you do see is only the 4-5% that is not filtered. AOL gets 2.7 – 3 billion spam messages per day which is trying to get into their system. Not a surprise that spam is a huge issue, but these numbers are. No one claimed to have a silver bullet, but rather advocated the use of multiple ways to overcome this issue.

Bruce Schneier had some interesting comments on the security and risk panel. Specifically, Bruce said that security is social and not about technology. Yes, there are technical causes and solutions for security but it is irrelevant if the social and economic model are not fixed. For example, there are plenty of spam filters out there but we still get tons of spam. The economics work for spammers. For users, it comes down to balancing security with the cost to mitigate the risk. People will make decisions based on economic value and cost. I totally agree here.

Next up was the CIO panel (Dawn Lepore, former CIO of Schwab, Shai Agassi, SAP, and Rafael Sanchez, Burger King). Dawn Lepore said that software is one of the biggest issues for CIOs. It is complex and costs are excalating tremendously. Software vendors and customers are diametrically opposed as the software vendors want to lock-in customers and the customers want flexibility. How does seeing an architecture diagram where the vendor’s products are in 12 places in a stack solve her business problem? Given this tension between vendors and proprietary lock-in, it is no surprise that open-source and open-platform technology and new business models like the hosted or subscription sale are spreading rapidly. The more you hear the panel talk about technology and the job of the CIO as being a risk manager, you can clearly see why it is so hard for an early stage company to land a big customer. Who wants to take the risk of buying a new technology from a new vendor? Yes, it happens but it is not easy.

I guess it is not a coincidence that a number of companies floating around sell to/service consumers as the first target market-companies like Onfolio, Eurekster, and Datapod.

Globalization

The Globalization of Education

Posted on by Ed Sim

Jerry Colonna and I had an interesting dialogue on the topic of utilizing offshore resources. In the end, Jerry and I advocated that education is the key to long-term success for the US. Offshoring of jobs will continue to happen, and it makes sense economically. However, in order to maintain our lead in the US, we need to make sure to educate our children and workforce to move up the value chain so we can continue to innovate, design, create, and own our core Intellectual Property. I just had an interesting discussion with another PC Forum attendee about his daughter’s college application process. He mentioned that it is more competitive than ever and that leading universities had to turn down many applicants with great grades and scores. In his discussion with a leader at an IVY League university, he mentioned that the university could fill its entering class with students from mainland China alone without any adjustments to its admissions process. So China also clearly sees the value of Intellectual Property, and it will be interesting to see how this race to educate our societies develops. Of course, this raises larger questions about how our colleges and universities create the right geographic diversity amongst its student population. However this debate evolves, what is great about this country is that we do educate and train many foreign-born students who contribute immensely to our economy and help us maintain our competitive edge.

Globalization

Lunch with Pat Cox-thoughts on offshoring

Posted on by Ed Sim

On Wednesday, I had the pleasure of attending a small group lunch in honor of Pat Cox, President of the EU Parliament. It was quite a treat as I got to hear his viewpoint on Spain, terrorism, immigration, and offshoring amongst other things. Since I tend not to write about politics, I thought I would share Pat’s thoughts on offshoring. As you know, in the US, there is increasing political pressure on offshoring and a movement to put legislation in place to prevent and slow this down. Offshoring is certainly a key issue in the EU as well, and Pat offered an interesting and growing perspective on offshoring and how to deal with it. Pat believes strongly that it is not about protecting jobs but protecting people. The jobs will come and go but to the extent we can protect people and train them and teach new skills then we will all be better off in the long run. I certainly share this viewpoint and would like all of us to figure out how we can contribute to this line of thought.

If you want to stay on top of all things offshore, I suggest that you visit a new site called Offshoreupdate.com. The site is currently an aggregator of offshore outsourcing stories, but it will soon begin publishing news stories. This is a perfect example of what Jeff Jarvis calls “microcontent.” Throw up a blog, some links, and some Google Adsense and see where it takes you.