Wednesday, November 29, 2006


Guy Kawasaki's latest post - The Venture Capital Aptitude Test (VCAT) - is, as usual, thought provoking and worth reading.

The post, stimulated by repeated emails from MBAs to Guy seeking advice on how to get into the VC industry, makes the argument that great VCs require entrepreneurial experience and that a VC position should be the capstone, not the start of a business career.

When you're young, Guy argues, work 80 hours a week building, marketing, and selling products not sitting in meetings deciding whether or not to make an investment.

As a relatively young VC (35), the post hit a nerve. The post also forced me to revisit a set of questions that I struggled with when I first joined the industry: 1) is VC a vocation, in its own right, with discrete skill sets and capabilities or 2) is VC something people do after they have been successful doing something else?

Even if there is no clear answer to the question, is one path more closely correlated with investing success than another? Are great VCs graying entrepreneurs or are they experts in the VC domain with several decades of pattern recognition, tens of deals, and hundreds of diligence sessions behind them?

In 2001, following the sale of the start-up where I was CEO, I made the rounds of Sand Hill Road asking those very questions and worked hard to find a common answer. The jokes about the "dark side" aside, I remember feeling serious disquiet when I decided to join Pequot Ventures. In doing so, I felt that I was somehow selling out and walking away too early from the managerial and entrepreneurial track.

While the itch to build and sell a product has never left, I have grown more comfortable with the notion that there is no stock answer to the questions above. Examples of successful investors can be found from both tracks and as the old saying goes, "there are many roads to Rome."

I know great entrepreneurs who, while perhaps empathetic and experienced in managing start-up growth, are not very value-added in the board room. And I know of people who got into the business right out of business school who suffer from the arrogance and vapidity that Guy describes in his post.

One observation is that the VC industry, by its nature, is one where it takes many years to find out if one is any good. In fact, Guy himself refers to his personal challenge in this regard. If deals take 5 years to get liquid and if it takes one several years to get into the position to sponsor and lead investments, then it will be a minimum of 7 years before one can objectively comment on one's venture capital aptitude. Given the time it takes to evaluate talent, firms hire by proxy and look for leading indicators of that latent talent. These proxies lead to the stereotypes of the CS grad, start-up founder, EE. Prior success in related fields is used as a guesstimation and predictor of investment talent.

Certainly, by pursuing a start-up or large company management role, the ability to point to success and claim attribution or causality for success is much easier. From shorter cycle times to achieve one's goals and the accountability and responsibility that comes from owning a product or project, it is possible to more quickly grow in self-confidence and credibility. Start-up roles of note help provide firms comfort with evidence of the proxies and predictive variables note above. Given the seven year horizon and long gestation of venture aptitude, the VC business is an apprentice business that takes patience and that can be frustrating for people, me included, out to conquer the world.

Several years ago, while still tortured with these questions, I sat down with one of my favorite people and a very successful entrepreneur. I approached the meal with great trepidation as I was going to tell him that I loved being a VC and wanted to make it my career choice. After I got through telling him how much I loved the job, he shocked me. Rather than belittling my choice and dumping on the profession, he walked me through the following. He said, "there are too many lawyers, doctors, venture capitalists, sales people, professors - in fact almost every profession suffers from an oversupply of wannabes. The problem is that there are never enough good ones. Be a good one."

When I asked him to clarify the meaning of "good," he replied someone who works to serve the entrepreneur, to shorten the cycle time to achieving milestones, and someone who the CEO wants to call in the middle of the night with a burning question or problem. Since then, that has been my goal;to be good by working to serve rather than expecting to be served.

The reality is that firms hire in their own image - firms full of entrepreneurs will continue to look to mature business leaders to fill their ranks, while firms that are built on the back of hiring and training MBAs will continue to do so. At Hummer Winblad, we ascribe to the portfolio approach. We have both wonderful senior executives, the very model of Guy's "good VC," and career VCs - the combination of operating experience and the pattern recognition that comes from having been in the industry a long, long time helps eliminate blind spots and, I believe, makes for better collective decision making.

Finally, I think Guy is right to caution industry entrants and to ask that they join the industry for the right reasons - a love of technology, endless curiosity, a desire to serve and accelerate growth, and a passion for what you do every day.

Sunday, November 26, 2006

Milton Friedman: Free to Choose

Over Thanksgiving, I reread Free to Choose in honor of Milton Friedman. The book, first published in 1980, is a classic that lays out a systematic argument for free markets, the tyranny of controls, and the benefits of cooperation through voluntary exchange.

26 years ago, Friedman wrote of the perils of unfunded social security obligations, the sorry state of public education, and of the battle over the definition of equality; i.e, is the goal equality of opportunity or equality of outcome?

Today, his diagnoses of our societal ills remain more valid than ever. In an era marked by the growing power of the Federal government and corresponding erosion of personal freedoms, expanded benefits programs and bureaucracies, and the evergreen debates over the merits of free trade, it is instructive to read Friedman's admonition that increases in government power and control come at great cost to individual and economic freedoms.

Perhaps the most tragic insight is how often good intentions produce deplorable results when government is the middleman. He cites a Theory of Bureaucratic Displacement that helps us understand the juxtaposition between ever growing government budgets, ear marks, and appropriations and the state of public health, education, and welfare. The theory argues that, "in a bureaucratic system increases in expenditure will be matched by falls in production...Such systems will act rather like black holes in the economic universe, simultaneously sucking in resources, and shrinking in terms of emitted production." Education is an excellent example - resources and cost per student continue to go up, while the "production" of well-educated students continues to go down. Poor results lead to increased spending and a vicious cycle is spawned and capital destroyed.

There is no party today that bases its vision on Friedman's work. It is hard to get elected when one argues against the minimum wage and rent control, for school vouchers, against social security where the next generation funds the state's pension guarantees to the prior generation, for self-funded retirement programs, against welfare programs...While politicians opportunistically claim Friedman as their patron saint, it is clear that neither party is willing to follow his precepts for good government.

Laissez-faire arguments that government controls - where someone else spends someone else's money for someone else's benefit - limit freedom and prosperity appear cruel and indifferent to the suffering of hard working people. They are easily dismissed as anti-worker, pro-rich, and impractical. Perhaps more than anyone else in recent history, he helps provide the analysis and human touch that makes free market arguments tangible, while explaining the pernicious impact of government interference of voluntary exchange and collaboration.

Silicon Valley is perhaps the most clear example of the innovation, wealth, and job creation possible when individuals freely cooperate to promote their separate interests. All of us benefit by a system that encourages individuals to pursue their dreams rather than a system that prescribes what jobs we may hold, who we may hire, and what we may work on.

As you read the following, it is hard to imagine a more cogent analysis of our society's condition. Remember this was written in 1979.

Despite massive increases in public spending and the attendant bureaucracy...

"No one can dispute the two superficially contradictory phenomena: widespread dissatisfaction with the results of this explosoin in welfare activities; continued pressure for further expansion.

The objectives have all been noble; the results, disappointing. Social security expenditures have skyrocketed, and the system is in deep financial trouble...As government has paid a larger share of the nation's medical bills, both patients and physicians complain of rocketing costs and of the increasing impersonality of medicine. In education, student performance has dropped as federal intervention has expanded.

The repeated failure of well-intentioned prgrams is not an accident. It is not simply the result of mistakes of execution. The failure is deeply rooted in the use of bad means to achieve good objectives.

Despite the failure of these programs, the pressure to expand them grows. Failures are attributed to the miserliness of Congress in appropriating funds, and so are met with a cry for still bigger programs. Special interests that benefit from specific programs press for their expansion - foremost among them the massive bureaucracy spawned by the programs."

Thursday, November 16, 2006

TechNet Innovation Summit

Yesterday, I had the good fortune of attending TechNet's Innovation Summit at Stanford University. TechNet is a bi-partisan advocacy group that lobbies Federal and State governments on behalf of the technology industry.

The agenda, which included three panels hosted by PBS' Charlie Rose, focused on innovation, green energy, and the global knowledge economy. Panelists included Jerry Yang, John Doerr, Scott McNealy, Reed Hastings, Charlie Giancarlo, and Bill Gates. The day ended with a surprise cameo by Arnold Schwarzenegger.

I thoroughly enjoyed Rose's interviewing style and the thoughtful commentary from our industry's leaders. My key takeaways/observations follow:

  • innovation is like pornography - it is hard to define but easy to recognize.
  • Rose worked hard to ask the panelists how best to foster and encourage innovation. While the answers varied, a recurring theme centered on the importance of both youth and ignoring convention.
  • Irreverence, iconoclasm, idealism - three "i's" - were noted as magical ingredients, but the inability to systematically or coherently explain how to foster innovation is interesting to note. It is clear, however, that there is little obvious correlation between R&D spend and innovation. CSCO spends $4bn a year in R&D and yet the majority of new products stem from an active M&A program.
  • Two of Gates' comments struck me: 1) he compared MSFT's focus on low price high volume software (compared to the prevalent IBM model in 1980) to GOOG's focus on low price high volume advertising (compared to traditional Madison Avenue models). Both models commoditized huge industries and enabled new participants and beneficiaries to share in the now larger pie. 2) the greatest strategy sins are ones of omission, missing a market or opportunity. He believes in identifying and entering markets as early as possible as the opportunity to repeatedly play the game (v 1.0, 2.0, etc) allows for iterative innovation not possible if you are not previously commited to the market. Also, markets that take off follow s-curve growth rates and it is often impossible to catch up with the pioneers in front of you.
  • free labor markets, government funding of core science, and increased investment in math and science education are vital investments to maintain US innovation and prosperity
  • global warming is a global imperative and must be addressed to head off economic and social catastrophe
  • resources, and not capital, are they key constraints to providing energy to the 1/3 of the planet's population without ready access to energy. With energy consumption correlated with GDP growth, developing economies will drive huge increases in demand for carbon based energy sources.
  • Much like Malthus' views on running out of food supply (people grow exponentially while food supply grows arithmetically), panelists argued that while the world is awash in capital that could fund energy needs that there is a deficit of carbon matter that can power the world's future energy demands.
  • Accordingly, the argument goes, the only credible means to service energy demand will be through bio-fuels and other renewable energy sources. Malthus' thesis fell prey to non-linear innovations in agriculture science, and perhaps science will also wean our addiction to carbon fuels
  • Green energy cannot be a conscience driven purchase - ie premium-priced. Green can no longer evoke Patagonia but rather Wal-Mart - ie low-cost - if it is to meaningfully take share from carbon sources.
  • Stanford is a vital resource for Silicon Valley - many of the panelists and a good number of the innovations discussed trace their pedigree back to the school
Suggested actions, support:

Monday, November 06, 2006

Move Networks

When people read the words "Internet video," they quickly think of Youtube.

Today, Internet video is associated with short-form, relatively low quality video clips (90-200 seconds, somewhat grainy and often jittery).

Average view times, for longer content, remain below three minutes (ie people shut down their browsers well before the video ends) and despite the hype associated with Internet video very few of us are watching full episodes and long-form content on the web.

The vast major of Internet video today is Long Tail content, content of limited value to the general populace but of very high value to small clusters of viewers. CPMs are likewise challenged by the hugely distributed audiences associated with long tail content. Youtube continues to rely on AdSense to drive revenue and CPMs are a far cry from the $25 range associated with prime time television.

We are beginning to see, however, Short Tail Tail content moving across IP networks. Today, for example, one can visit and watch Fox's premium broadcast content on the web. The OC is currently being made available a week prior to broadcast on MySpace - an amazing example of how to harness the power of social networks, word of mouth marketing, and traditional media assets. Other shows being streamed include Prison Break, Standoff, Bones, Vanished, etc. Note: use IE to watch the shows. Firefox remains in beta.

Rupert Murdoch's vision of marrying 100m plus MySpace users to FoxTV programming is powerful, and I believe evidence of the future of Internet Video - long-form, high quality content that combines prime time broadcast CPMs with Internet per click, per stream analytics and tracking.

The company behind Fox's on-line video delivery? Move Networks.

Move, based in Utah, provides major content owners and network operators enabling infrastructure for the delivery of both live and archived long-form, high quality Internet video.

"Game-changing technology" is a cliched phrase, often over used and very seldom an apt description. Move, however, is a game changing company that in the months ahead will be bringing archived and live premium content (TV, movies, sporting events) to a browser near you - no buffering, no jitter, just high-quality content when and where you want to consume it.

Hummer Winblad recently joined Steamboat, Disney's venture arm, as an investor in Move - it is a company worth watching (pls pardon the pun)!!

A few readers sent me email arguing that long-tail content allows for better targeting and hence will generate more attractive CPMs relative to short-tail content. The logic here is that the content is the filter; ie that advertisers can key off our consumption of certain content as a signal of our intent and interest. The logic supposes that prime time content is too universal to allow for effective segmentation, targeting, and positioning.

The reason for broadcast's failing to deliver effective targeting lies in the nature of broadcast technology itself - a blast mechanism that is one-to-many with no visibility into consumption at the end-points - who you are, what you watch, how often you watch it, ie. your behavioral preferences.

With Move, however, one can marry the targeting that derives from Internet tracking and profiling to the widespread interest in premium content - for example, when we watch the World Cup on-line in 2010, you and I will see different ads based on our profiles and viewing histories.

With Move, we get the best of both worlds - users get on-line access to the world's best content and advertisers are enabled to provide per stream, per user targeting, tracking, and segmentation.

Jeff Richards: New Blogger

I write to point out a great new blog, written by Jeff Richards, a serial entrepreneur and currently a VP with VeriSign.

Jeff sold his last company, R4 Global Solutions, to VeriSign in March 2005 and is active blogger and commentator on start-ups, technology, and the market in general.

For new start-ups CEOs, check out his post, "Advice to a Start-up CEO."

Wednesday, November 01, 2006

New Start-up CEO Blog

In an earlier post, I wrote about the rise of vertical search.

Since then, Hummer Winblad led an investment in Krillion, a local search company founded by a great team of Internet veterans.

Joel Toledano, CEO of Krillion, is also the author of a great new blog, Toles Take, which covers the Internet space and lessons learned in building a VC-funded start-up.

The blog covers, among other things, Joel's Rules for Start-ups, with Rule 1 and Rule 2 up on the site and worth reading.

Welcome the blogosphere Joel.