InfrastructureSaaS

The Googlization of IT

Posted on by Ed Sim

Today I took a sales team from a portfolio company to meet with a couple of senior IT executives at a major retail company.  Towards the end of the meeting, it started to become quite clear to me the effect that Google and the web has had on IT to date and where it was going. In an oversimplified way, it seems that there have been 3 distinct phases to how the web and Google have impacted the enterprise, first starting at the app layer and increasingly diving deeper into the core infrastructure.

Phase 1 – Consumerization of IT – all internal corporate users are consumers first and then employees second.  we have all seen how consumers have gotten used to using browsers and SAAS-based applications and how successful startups have been able to provide web-based applications that users can pull into the enterprise environment starting at a department level rather than having to go out and sell and push technology into enterprises.

Phase 2 – Rise of open source – I would call Phase 2 the rise of open source software over the last 10 years – most of which is hardcore infrastructure type software such as databases, virtualization software, and the like.  IT folks leveraged the web and Google not just for applications but also to download core software to help run their internal operations.

Phase 3 – Googlization of IT – have as much of your infrastructure as you can run like Google's – distributed, commodity-based, and in the cloud on a private basis.

Phase 1 and 2 are ongoing and Phase 3 is where I see a few of the more forward-thinking IT departments I have met with over the last few months going.  I am not just talking about Google Apps (like email, etc) but about how companies can run their infrastructure internally like Google.  If Google can deliver a number of highly scalable web-based apps by clustering commodity servers, then how can enterprises do the same for themselves.  This is not about getting sucked into buzzwords on the cloud but really understanding the cost savings and performance benefits a company can get from transitioning some of their infrastructure to a Google-like model. 

One company in my portfolio that is leading the charge in the data warehousing space is Greenplum.  A customer can buy our data warehouse, cluster commodity servers like Google, and get petabyte scale and much better performance for less than the cost of maintenance of many existing solutions on the market today.  In addition, large global companies can have these nodes accessible to anyone anywhere in what we call the Enterprise Data Cloud.  One of our large customers said that data was a strategic weapon and that he wanted to make the cost of a running a new query zero.  In today's world and without the enterprise data cloud initiative I can tell you that running new queries in a global organization is an expensive and time consuming task of replicating data, creating data marts, running the processes, etc that can take months to get going and days to run reports.  Another company in which I am an angel investor is called Eucalyptus Systems whose tagline is your hardware, your data, your cloud. Eucalyptus is an open-source system for implementing on-premise private and hybrid clouds using the hardware and software infrastructure that is in place, without modification.  Eucalyptus adds capabilities such as end-user customization, self-service provisioning, and legacy application support to data center virtualization features, making IT customer service easier, more fully featured, and less expensive.  Yes there are public clouds like Amazon EC2 which is now also offering virtualized private clouds.  But the reality is that many large IT organizations want to control their own data, find ways to make it more easily accessible to everyone, significantly reduce infrastructure costs, and be able to launch new apps or services quickly and cheaply.  This is where I believe many IT organizations will be headed in the next 5 to 10 years creating private and hybrid clouds for existing and new applications, a phase which I call the Googlization of IT.

Entrepreneurship

Washers, dryers and secret sauce – why naming your technology is important

Posted on by Ed Sim

Our washer and dryer was on the fritz today, and as I started to do some research on large capacity stackable units I started to get overwhelmed with all of the new terminology and features.  After all, isn’t a washer a washer and a dryer a dryer.  How many different combinations and features could there be?  As I dug deeper I found myself thinking about these appliances less from a consumer’s viewpoint and more from a marketing one and appreciating how these various companies could make a commodity product sound so exciting and differentiated.  Sure, all of the competing products had to check off performance, speed, and low energy but what really struck me was the marketing terminology they used to differentiate themselves.  Rather than just sell a steam washer or dryer LG had TrueSteam technology while Electrolux offered PerfectSteam on their site.  These appliances didn’t just balance well but LG used TrueBalance AntiVibration System versus the Perfect Balance System from Electrolux.  Other features included the Direct Drive motor from LG for better performance while the Electrolux offered WaveTouch Controls.  What this really helped me think about was how these various companies prioritized the features for their given market and how they differentiated themselves through their proprietary technology or secret sauce.  And yes, I immediately began to think about how looking at marketing in the washer and dryer world would apply to startups.

Researching washers and dryers reminded me of several meetings I had years ago with a marketing expert named Richard Currier.  His big thing was to take a basic technology, break it out into a few parts, and to give them sexy names.  For example when Sybase the database company was on the market it was fighting with Oracle and others and ended up capturing a big chunk of the financial services market because it leveraged an innovation it called Two-Phase commit.  Every sales person would lead in with the benefits of Two-phase commit and while other competitors may have had something like it, if it wasn't Two-Phase commit it wasn't good enough.  What Sybase did was take one of its secret sauce technologies (innovative at the time, standard now), named it, and leveraged the crap out of it with its sales force.  While the technology performed as advertised, naming it definitely gave it some cache.  

Coming back full circle, I had a conversation this morning with an entrepreneur who was going after an interesting segment in the online video and marketing world.  The company had some nice revenue for a bootstrapped operation.  However I mentioned to the CEO that it seemed more like a one-off consulting or agency shop versus a scalable VC-backable market opportunity.  As we dug into his technology deeper and as I started to understand some of the magic behind his platform, I recommended to him that he think long and hard about figuring out what the secret sauce in the backend was and how to name it so he could better market his services and compete against others.  While naming it won't in and of itself help him land more customers, I can guarantee that it will help his company sound more exciting and innovative versus companies that do not.  And in the end whether the deal is closed the sales prospect will certainly remember and question how important TrueBalance Antivibration and WaveTouch controls are to his purchasing decision.

Digital Media

Future of television advertising (continued again!)

Posted on by Ed Sim

My first post about portfolio company Visible World and the future of television advertising was in October 2004 (see here).  In the post, I wrote about how television advertising needed to change and how the advertisers and those with inventory had to adapt to the rising online threat and offer new technology to make their ads more targeted and measurable.  Visible World has been pushing this vision for quite awhile and over the years it has built momentum through investments and relationships with Time Warner and Comcast. And just recently the company announced a deal with Google TV Ads to bring this to Google's automated auction system.

Google Inc. is teaming up with Visible World Inc., a well-known New York technology company that uses software to create multiple versions of a given ad, in its push to offer TV advertisers more targeting options.

Google will combine the technology with its Google TV Ads, an automated auction-based system for buying TV ads by choosing which shows best fit the advertised product or service. The idea of such "addressable advertising" is to send a TV ad promoting a sale on minivans to a household with children, for example, and the same basic ad with a promo for a sports sedan to a childless household.

Pioneering a new way of doing things is expensive and tough, but I am glad to see Visible World's efforts starting to pay off.  A lot of companies are starting to look at the hundreds of billions spent on television advertising, and I can bet that we will see as much innovation in the next couple of years as we have seen in the last ten years in this market.

Entrepreneurship

Lessons from Joost

Posted on by Ed Sim

I am not going to rehash Om Malik's excellent summary of "What went wrong with Joost" but I did want to dive deeper into a few points.  As I have always said, raising too much money can be a curse and not a blessing.  Here is an excerpt from my post in 2006

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.

This to me can kill a company before it even gets off of the ground.  Expectations are too high too early, companies will ramp up too quickly, and any misstep is seen as a failure.  Secondly, companies that have too much capital usually try to do too many things and lack focus.  It sounds like Joost was building a client, negotiating with media partners, and building out its own ad serving technology and had its own ad sales staff.  It sure sounds like a big operation. 

Another point to add is that companies founded and led by rockstar entrepreneurs are not enough to drive success.  Rock star founders and CEOs will definitely open a ton of doors and drive lots of media attention, but the company still has to execute.  In addition you want your rock star driving much of the execution rather than hiring a huge staff with layers of bureaucracy.  Many of these famous entrepreneurs will typically have their hands in a number of different projects at once.  Finally, having been successful before, you really need to assess how hungry these rock stars are for success.  Hunger and passion do play a huge role in driving company DNA and creating a winner.  I have had just as much success funding entrepreneurs who have had modest wins but were still seeking the big exit.  Bottom line is that Joost had a ton of promise but may have been better served by raising much less money at the start and staying highly focused on the task at hand with a much leaner operation.

EntrepreneurshipSaaS

I want it NOW, I want it REAL TIME

Posted on by Ed Sim

I was recently asked by a friend if he should get his son the new Nintendo DSi.  This would be an upgrade from the current DS and also add the photo capability.  As I thought about my own son's usage of the device, I said no.  Once my son got an IPod Touch for music and now games, he never looked back.  While he loves the music, the real reason is because of the App Store and ability to instantly download any game for free instantaneously.  While the DSi does have a Wi-Fi connection, the IPod Touch is just so easy and frictionless.  And as evidenced by the rise of the Internet and the ability to download movies, music, and games instantaneously, it got me thinking more and more about the fact that we live in the "Now" or "Real Time" Generation.  Yes, it has been happening for awhile but we finally have the broadband speeds and ubiquitous connectivity that we craved for the last 10 years.  We also have better pricing and better products to be able to download those movies and games anywhere and on any device.  In addition, you can just see the rise of Twitter as another example of this new culture of real time.  People no longer want to wait for anything any more – if you have something to say, say it on Twitter or Facebook.  Products and friends are just a click away.

Sure, we can clearly see the impact of the Now Generation on consumers and new web applications.  A substitue product or application is just a click away.  If you don't like the user interface, if the product loads too slowly, or if the registration process is too burdensome, you can do another Google search and instantly find a substitute.  But what does it mean for the enterprise, for the corporate IT professional and startups selling into these companies.  I have always believed that the old way of selling enterprise software products with expensive sales forces and complicated installations is dying.  Buyers no longer want you to push software that they may or may not need.  They are empowered and can easily do their own Google search and download open source software or fill out a short registration form to trial a web-based app.  They, like my own son and his friends, are increasingly seeking instant gratification.  They are not just consumers but prosumers who are pulling new products into their departments and potentially into their enterprise.  I wrote about this instant gratification in 2006 and it is happening faster than ever.  The kids who were in college 5 years ago are the very same ones in the IT department tasked with coding new products.  They are used to doing more for themselves, doing their own research, and being able to trial new applications in real time.  If you are an entrepreneur selling into an enterprise and don't see this trend now, you will be toast in the future.

EntrepreneurshipVenture Capital

Occam's Razor and the current state of venture

Posted on by Ed Sim

I have made many posts in the past about focus and doing more with less, and as I continued on this path it reminded me of Occam's Razor, the idea that the simplest explanation to any problem is the best explanation.  Of course Occam's Razor can get more complex but over the years it has been associated with the idea that "less is more."  And when I apply this philosophy to the current state of venture, I can see many applications of this theory.

From a VC fund perspective, there has been much discussion about how venture funds have become too large to deliver outsized returns.  First with the lack of an IPO market it is much harder to generate $1.5b for investors on a $500mm fund then it is to deliver $300mm on a $100mm fund.  Secondly having too large a pool forces VCs to invest much larger amounts of capital into companies pushing up valuations and also exit hurdles for success.  Finally, as I have written in the past, I have learned firsthand the problem of giving companies too much money too early.  It can lead to a growth at all costs mentality, a lack of focus which means chasing too many opportunities at once, and a lax attitude on how to generate revenue. Enter Occam's Razor as it seems that the new trend is for smaller groups of GPs to form smaller funds to be able to invest in earlier stage companies.  With the new operating model of capital efficiency, a little amount of money can go a long way and help VCs generate excellent returns at much lower valuations.  Having a smaller fund allows VCs to write smaller checks and take advantage of the current market.

From an entrepreneur's perspective, Occam's Razor can be applied to many different avenues. As we all know, a great entrepreneur must be able to effectively allocate his scarce resources of time and money to fulfill a market need.  The longer it takes to develop a product that the market wants means that it will cost more money and that it also opens the door for a competitor to step in before you.  If you look at the current Internet and SAAS market, the idea of "release early and release often" certainly fulfills the Occam vision.  Rather than spend cycles creating the perfect product with every bell and whistle, many nimble startups have focused on a more reductionist theory of releasing an often simpler product quickly with the idea of getting market feedback for the next iteration. 

Occam's Razor also applies to how an entrepreneur should operate his business.  Don't pursue too many markets at once, focus on what is delivering the most return for the dollars invested, and hire people and scale your business when you absolutely have a repeatable revenue model.  I have been burned like many others by aggressively building out a sales team too early without a repeatable sales model.  In addition, from a sales and marketing perspective, we have seen a movement to more of a frictionless sales model where there is less hands-on interaction with customers selling and delivering a product.  This would include customers being able to go online and sign up for free trials or download software versus having an expensive direct sales force sell million dollar licenses and one month of professional services to install a product.  Finally and most importantly, the idea of less is more certainly applies to raising capital. With the rise of open source software and cloud computing, companies can now get started with less dollars and scale more cheaply and efficiently than before.  As all entrepreneurs know, raising less capital means retaining more ownership.

In summary, it is becoming increasingly clear that Occam's Razor and the idea of less is more will continue to spread as the cost of technology continues to decrease, as entrepreneurs get even more efficient in building businesses, and as a non-existent IPO market and the factors above lead more VCs to create smaller more nimble funds to capitalize on the new market realities.

Entrepreneurship

Inspirational video for entrepreneurs

Posted on by Ed Sim

Jonathan Kay from Grasshopper sent me a great video on entrepreneurship.  First I love the inspirational message.  Secondly, I like the use of a viral video to cleverly promote his virtual PBX numbers for entrepreneurs.  Take a look and hopefully it will brighten up your day.

What I love about the message is that entrepreneurship is not about making money but about pursuing a passion and doing your part to make great products to make the world a better place.  OK-it may sound a little hokey but I remember during the bubble how entrepreneurs would come in talking about how much money they would make for everyone but have no passion for their product.  And guess what, many of these monetary focused entrepreneurs were the first ones to quit when the world got tough.  Without a bigger sense of purpose, it is hard to be an entrepreneur and stick through the inevitable tough times that will come your way.

EntrepreneurshipSaaS

Pioneers get arrows in their backs

Posted on by Ed Sim

Pioneers get arrows in their backs – I have experienced it firsthand from an active investor's viewpoint and written about it in the past.  Being early in a market is great but being too early can be deadly.  Just like the settlers in the westward migration, entrepreneurs who are too early will get arrows in their back.  It doesn't matter if you have a rock star CEO (Bill Coleman who founded BEA) and $100mm of funding from some great investors.  If you are too early and have to spend lots of money educating a market and get engaged in long protracted sales cycles and pilots, you are not going to be able to spend your way to success.

That is what it seems like is happening to Cassat Software. Forbes has an article about Cassat nearing the end.  On the surface it seems like the company was built for the right place at the right time helping enterprises save tons of money and run their internal data center like a cloud.  However the first funding went in 6 years ago and has totaled around $100mm since then.  Here is a quote from their founder and CEO:

For many years, Coleman acted as something of a prophet for cheap computing via the cloud, but he also thought it would mean a sharp drop in pricing with which the big companies would not be able to compete.

"The big guys copied my story," says Coleman. Cassatt, he adds, was upended by a slowing economy and by customers skittish about closing big orders or changing existing ways.

"What frustrates me is my own naivete," Coleman told Forbes. "I thought I could give companies something radical that had a proven return on investment, and they would be willing to change all their companies' computer policies and procedures to get that. Right now, it's hard to get people to get beyond proof-of-concept tests or a data center energy analysis."

He will be right eventually but will not have a lot to show for it.  A couple points to make – raising too much money too early can be harmful as it puts huge expectations on a company before it has proven itself and selling million dollar plus licenses into enterprises has gone the way of the dinosaur as only the biggest companies can afford to do this and it is extremely expensive to do.  Remember some of my old posts about frictionless sales and leveraging the web for sales/marketing and inside sales?  Having just participated as an angel in the recent Eucalyptus funding led by Benchmark, we are hoping to avoid this fate leveraging free download model which has generated over 14 thousand users, many of whom are corporate customers.  In addition, we have signed partnerships and are bundled in the Sun cloud computing initiative and the new Ubuntu enterprise Linux release.  Got to love leveraging partners and downloads to drive sales leads and sales.
Entrepreneurship

Growing your business in a recession

Posted on by Ed Sim

I read a great article by James Surowiecki in the New Yorker the other day titled "Hanging Tough."  In the piece, James gives a historical perspective on companies that thrived and grew during previous recessions by increasing spending on on advertising and R&D.  While I am not advocating that companies go out and blow their cash on ads and spending on far-out development projects, I do want my readers to understand that it is possible to gain market share during difficult times.

One way to read these studies is simply that recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less. When everyone is advertising, for instance, it’s hard to separate yourself from the pack; when ads are scarcer, the returns on investment seem to rise. That may be why during the 1990-91 recession, according to a Bain & Company study, twice as many companies leaped from the bottom of their industries to the top as did so in the years before and after.

A personal example that sticks with me is of former portfolio company GoToMyPC which is now Citrix Online.  We had our huge exponential growth years from 2000-2004 during a difficult time in the technology markets.  And yes, we did increase our spending on ads and at one point in time became one of the largest advertisers on the web.  However, what we did was negotiate for pay for performance contracts where we would only pay if we signed up new customers.  While not a novel idea today, it was quite novel back in the day.  Subsequently we were able to turn a fixed cost that could have been a huge cash drain on the business into a variable cost.  In addition, our ads had tremendous impact because every other competitor was not advertising and our brand became quite recognizable.  Were it not for our creative and aggressive approach to acquiring customers, I would argue that while we would have been ultimately successful it certainly would have taken a lot longer.  So reread the article and think about ways that you can creatively grow your business by turning a fixed cost into a variable cost based on revenue growth and you may find a way to efficiently grow while managing your precious cash.  Remember in times like these, everyone is willing to negotiate and what may have been a hard deal to come by 2 months ago may be possible today.

EntrepreneurshipVenture Capital

Cover the basics before you raise capital

Posted on by Ed Sim

No matter how many times I told my friend that he needed to get a deck together for a potential capital raise and model out some thoughts on market sizing and financials, I ran into resistance.  It was not because he didn't think it was important or that it mattered.  It was because he was understaffed and going 60 miles per hour trying to get a product released.  I can understand that pain but at the same time, if you want to raise capital from anyone, you need to have the basics covered.

Fast forward 6 weeks from that last conversation, and we ended up having a meeting with a "friendly" VC to receive some market feedback on where his company stood and what needed to get done to raise capital.  And sure enough, it didn't take long for my friend to be questioned on the revenue model, potential market size and opportunity, and how long the cash would last.  Of course, he did have some strong answers but they were not what the VC was looking for – it was not quantitative enough.  We all know that coming up with market sizing and revenue forecasts for a startup is as accurate as the weatherman predicting the weather.  That being said, VCs want to understand the logic behind the numbers as much as the numbers themselves. 

Overall the meeting went as I suspected it would – a VC who was very interested in the product but also highlighting the fact that the revenue model was not clear.  The kiss of death for me on the revenue side was when the entrepreneur said that he would monetize the company like Facebook and Twitter.  Hmmm?  We all know that Facebook and Twitter are unbelievable web phenomenons and suck up incredible user attention.  And yes I am sure that Twitter will find a way to monetize the stream of data flowing through the system and I am sure that Facebook has tremendous value.  That being said accumulating users and worrying about revenue years from now is yesterday's news.  Unless you have tremendous scale when you show up at a VC's door, then don't bank on ad revenue as your only revenue source.  We have seen the market numbers-overall online ad revenue declining but search revenue increasing.  In addition we all know that social apps on the consumer side have incredibly low CPMs and that you need massive numbers to turn into a business.  So if you want to get funded, you better have a clear answer on how you will make money and either be implementing that model today or in the short-term.  What VCs are looking for is a revenue model today that makes sense – this can include premium subscription revenue, analytic revenue, and even lead generation revenue, but don't ptich massive scale and advertising as your go-to revenue souce 24 months from funding.  You will be shown the door quite quickly.