Scalent

IT professionals face the dichotomy between server sprawl and low asset utilization.

Between production, failover, disaster recovery, test, and development, many enterprises face 100% year over year server growth. For every server in production, another four or more are in place to support the deployment and development of a given application.

At the same time, server utilization remains anemic, often less than 15%. What drives such waste and inefficiency? Why the continued sprawl if existing resources remain available for consumption?

The problem lies in the inability to easily repurpose servers from one application to another. Repurposing is shackled by three constraints: 1) software constraints, 2) LAN constraints, and 3) SAN constraints.

Operating systems and applications are hard to change independent of powering down the server, servers are bound by their LAN IP addresses and require reconfiguring and often recabling to be available to other network resources, and servers, via HBAs, are hard-bound to certain LUN segments on the storage network.

Accordingly, it is often quicker, easier, and cheaper to simply add a net new server in the data center then it is to repurpose a server from one application use case to another.

Thankfully, Scalent, a Hummer Winblad portfolio company, provides a solution that frees servers from the three shackles noted above and allows IT to instantly repurpose existing assets - servers, LAN connectivity, and storage access - for alternate use.

Scalent virtualizes all the assets required to deploy a business system and by providing a virtualized abstraction eliminates the physical constraints to changing server A from running application B to application A on the fly.

Repurposing servers eliminates the driver behind server sprawl and allows IT organizations to dramatically increase utilization, and hence return on assets.

Scalent recently received an outstanding and in depth review from InfoWorld's Paul Venezia. The report outlines a set of detailed deployment use cases and provides strong validation of the approach and implementation.

Paul writes," Not many products truly deliver what they promise. Scalent, however, comes as close to keeping its pledge as anything I've seen. Scalent is attempting - and succeeding - at reaching the pinnacle of datacenter management: a truly adaptive infrastructure."

Well said.

How Pure is Your Model

Rightnow Technologies is a leading provider of customer experience management solutions. Based in Bozeman, MT, the company boasts a $500m market cap, $100m in run-rate revenue, and a price to sales ratio of roughly 5x. The company provides software to its customers via multiple delivery models - on premise, on-demand single-tenant, and on-demand multi-tenant.

Salesforce, on the other hand, is a pure, read on-demand multi-tenant, SaaS play and enjoys a $4BN market cap, $472m in run rate revenue, and a 8.5x price/sales ratio.

As entrepreneurs architect start-up software companies, it is worth asking the following question: how much of Salesforce's 70% multiple premium is a function of the purity of their software delivery and pricing model?

When questioned why he supports so many delivery options, Rightnow's CEO, Greg Gianforte, answers that he sells the customers what they want. If they want on premise, fine. If they want their own instance of the application on-demand, fine. If the want multi-tenant on demand, fine.

While there is no question that being customer driven is a sound business trait, the complication arises when saying "yes" to customer demands introduces systematic weaknesses into your operating model. These weaknesses tend to frustrate the ability to realize economies in development, pricing, development, and sales force training.

Many of the bootstrapped start-ups that I meet with face this exact challenge - how can you say no to a customer when you need to make payroll? Why not agree to sell customer B what they want, even if it is inconsistent with what we sold customer A?

Where is the fine line between being customer driven and being a custom development shop building one-off products?

The economics of multi-tenant software are well understood:

• lower research and development costs (eliminate the need to support multiple code bases, custom patches and the need to port the software across multiple hardware and O/S stacks)
• lower support costs (eliminate on-premise one-off configuration complexities that complicate root cause analysis, eliminate need to support old versions of the product)
• lower sales costs (standard pricing and delivery options vs complex pricing lists)

Complexity is hard to manage and impure models, while responsive to near-term customer demand, may in fact jeopardize long-term operating leverage. Dual tract models raise concerns about R&D, operations, support, and sales costs, with the model potentially increasing costs across the board relative to a pure play model. Dual tract models are also much harder for investors to understand and complexity and lack of transparency often lead to valuation dings.

At Hummer Winblad we are sympathetic to companies who perform "unnatural acts," ie deviations from their model, to win business. Teams, however, must be very careful that in pleasing customers they don't alienate investors who question the wisdom and sustainability of impure operating models.

All revenue is not created equally, and I posit that "good" revenue that reinforces efficiencies and the scalability trumps absolutely higher revenue. For start-ups, purity is a virtue worth aspiring to.

Widgetbox Launches

UPDATE: Click here to watch their very successful pitch at DEMO.

Widgetbox, on on-line directory of web widgets for blogs and other webpages, launches this week at Demo.

As an open web widget marketplace, Widgetbox serves the needs of both web widget developers and web personal publishers, including bloggers, web site and profile developers, participants in web auctions and others.

Widget developers using Widgetbox include the very small, independent developers and the very large such as Yahoo!, AOL, and eBay. At launch, Widgetbox is proud to announce partnerships with 38 of the web's leading companies, including Typepad, Meebo, and AOL Pictures. At launch, the directory includes over 290 widgets, a number that grows by the day due to a very popular developers' program.

Central to the power and simplicity of Widgetbox is the Widget Syndication Platform. This technology enables:

• Live Widgets: Widgets are always live within blogs and web pages; they can be re-configured instantly and without touching HTML code.
• Smart Blogs: Widgets can be “tag aware”, meaning a web publisher can make widgets react to the content of their web site. For example, an image widget might display images related to the content of the most recent blog post.
• Widget Panels: Drag and drop placement makes it easy to install and manage widgets within Widgetbox. See the Technorati widget on my blog as an example.

I believe that web widgets represent the lowest common denominator for the adoption and usage of web services. Widgets leverage the millions of dollars invested in web services, the power of syndication - ie the consumption of functionality "off domain," and the ease of use of Flickr.

Like AdSense, it is critical that web companies allow users to consume web services at locations of the consumers' choosing. Widgetbox is a powerful innovation in making that consumption easy and powerful - a rare combination.

For those of you who blog or maintain a web page, I encourage you to sign up and begin to enrich your users’ experience with relevant widgets that add to the mission of your site.

Thoughts on Venture 2.0

Peter Rip posted an interesting analysis of an emerging alternative asset model – the platform strategy, whereby a single firm offers LPs exposure to a full range of public and private equity asset classes – early, mid, late, PIPE, LBO, public, etc.

While it is an undeniable fact that platform strategies are on the rise – Carlyle, Pequot Capital, Farallon, etc – I am not a believer in the approach.

Why?
1) conglomerates are a discredited concept
a. history suggests that conglomerates do not in fact allocate capital more efficiently than capital markets
b. platform strategies leverage the very same arguments that conglomerates once did to justify their existence
c. investors perform better when they create return/risk appropriate portfolios than when they outsource portfolio construction to a conglomerate
2) platform strategies create an adverse selection problem
a. the best LPs will want pure play exposure to asset class segments and risk profiles
b. LPs who see value in abdicating portfolio selection are probably not the best nor brightest
3) Platform strategies create GP/LP alignment problems
a. While the accumulation of assets and the leverage of LP relationships across strategies clearly lines the pockets of the firm’s principals, it is unclear that larger, diversified funds lead to better risk/adjusted returns
b. Strategy drift in chase of larger platforms may negate the value in sustained focus and pure play execution in an area of one’s true competence
4) Incentives and management
a. How do you pay people for collaboration across strategies – how do you create systematic flow of information?
b. How do investors, typically not by nature great managers, manage the complexity of multiple markets, geographies, risk profiles, competencies…
5) Who has a bigger d*ck problems
a. Some strategies scale more than others
b. How do you avoid smaller strategies partners being marginalized by the larger strategy partners – see Apax early stage experience
6) Focus and decision making
a. Sourcing deals, syndication partners, service provider partners, terms, competition, etc all change as you move along the risk spectrum
b. The lack of common ground makes investing in ecosystem partners, deciding where and why to invest, and having your “partners” add value to your decision making process a real challenge

My own view is that the best LPs will prefer boutiques and will seek to build return maximizing portfolios across pure-play exposures to risk - this clearly is inverse to investors building platform companies predicated on LPs outsourcing their risk allocation to groups that will build that basket for them.

Baynote

This year marketers will spend $5 bn on search marketing. Companies are waking up to the power of search engine optimization and paid search marketing as an effective mechanism for customer acquisition and driving traffic.

Optimizing click through rate is a critical goal and the end result is traffic that lands at your domain. Then what?

How many of you have searched on a company site for the main product, a product data sheet, an officer of the company, contact information and been able to find nothing? Let's take an example, sorry to pick on Cisco...Go to their web site and type in "wifi access point" into the search box. Hit enter and you will find this is the number one result.

Now Cisco spent $500m acquiring Linksys and I am fairly sure they would rather have customers get to a page about wifi products!!

Luckily, Baynote has an answer for you. Baynote recently received Inc 500's 2006 "Best of the Web for Smarter Searching" award.

Baynote was selected based on its on-demand Content Guidance offering and the company'’s success rate in helping website visitors reach their objectives by distilling visitor search and navigational behaviors into the Wisdom of Community. Using this Wisdom, Baynote dynamically adapts website search and website navigation for each user, vastly improving the conversion potential and usefulness of any business website.

Baynote customers on average realize more than a 20x increase in search-driven conversions of web visitors, turning viable prospects into leads on their websites. In addition, site navigation is streamlined significantly, with a reduction from 6 to 1 in the average number of clicks needed to find information and complete transactions.

Now, if the market is going to spend $5bn driving traffic to their domains, why not spend incremental dollars to ensure that customers find what they are looking for!!

Congratulations to Jack Jia and the Baynote team and John Hummer for a great launch to date and for the award.

Widgetbox Competition

While you may never win the US Open or American Idol...Widgetbox's Widget Contest may be your ticket to glory:)

Widgetbox, a Hummer Winblad portfolio company, is the leader in creating a Web widget marketplace that provides widgets for use with blogs, social networks, auctions and web pages. Om Malik wrote a wonderful article on the web widget phenomenon and the company, which can be read on CNN here.

The company recently announced a widget contest, with the goal of identifying the most creative and useful web widgets. The prizes and ground rules follow:

Grand Prize

The winning widget will be shown in the Widgetbox presentation at the DEMOfall conference the week of September 25. This presentation will be seen by journalists, VCs and many of the movers and shakers of the blogosphere.

The Four Runners Up

Each of the four runners up gets a week as the top Featured Widget on the Widgetbox front door, a Lego Mindstorms NXT kit, and a 100% genuine Widgetbox T-shirt. If you win, we'll ask you for your shipping address.

Deadline

• All entries must be received by the end of the day on Wednesday, Sept. 20.
• You can continue to make changes to your widgets after you submit them.
• The winners will be privately notified via email on Friday, Sept 22. A public announcement will be made at DEMO.

Judging Criteria

Things that will influence the judges:

• Innovativeness. What we'd really love to see is a "we didn't know that was possible!" moment.
• Web 2.0-ness. Mashiness, thick clientosity, usability, beauty.
• Usefulness. For example, a screensaver widget probably won't make the cut.
• Widgetboxiness. Whether it shows off Widgetbox features such as Tag Awareness.

Eligibility

• Contestants must be 18 years or older.
• It is open internationally. Contestants do NOT have to be a US citizen.
• It is open to all widgets, even those that have already been registered on Widgetbox.
• Contestants may submit multiple widgets.

How To Enter

Send an email to support@widgetbox.com with the name of your widget. If you'd like to point out features of your widget in the email, go ahead.

We'll email you a confirmation that your submission has been received.

Who Are The Judges?

Every member of the Widgetbox staff will weigh in. We're going to have a big Judgment Day party, with pizza and veggie samosas, and stay as long as it takes.

Consumer Health and Prospects for VC

Do you ever feel a disconnect between the images on TV from Iraq and the daily reality of life here in the Valley, of the price of crude and the latest funding announcement, of the energy and optimism of the time with the stories of unfunded pensions and skyrocketing household debt?

With out sounding alarmist, what does the possibility of a real estate/consumer-debt driven recession mean for the sustainability of that disconnect? I recently sat down with a smart hedge fund investor who reeled off a series of disquieting statistics that suggested that the end of a debt-driven asset bubble was nigh.

He argued that consumer spending is the engine driving America's economic engine and that the engine is beginning to sputter. For example, economists believe that consumer spending accounts for two-thirds of current economic growth. The market hangs on the monthly consumer confidence index as a predictor of future economic activity.

The VC industry is also banking on the consumer with Internet, device, and semiconductor investment theses predicated on robust consumer spending activity. In my four years in the VC business, I watched the industry move completely away and then back towards the consumer. The question this post addresses is what are the implications of early warning signs of a slowdown in consumer spending activity, a fall in housing prices, and a growing crisis in consumer confidence? Also, if a slowdown does happen, it may pay to ask if the technology in one's portfolio is pro versus counter cyclical.

Market experts are beginning to question the sustainability of economic growth dependent on a consumer facing record high gas prices, household debt, and rising interest rates. The CCI fell from 107 to 99.6 from July to August, or by 7%. The market is beginning to punish companies exposed to consumer confidence and spending ability - Toll Brothers, a home builder, is down 46% from its 52 week high, Downey Financial, a mortgage lender, is down 15%, and Tiffany and Co is down 28%.

What is driving the stock market's concern about consumer-facing businesses. In a nutshell...consumer fatigue.

• From 2001-2004 median household debt grew 34%
  
• the household debt service ratio hit a record high in Q106 of 18% (ie. $18 of every $100 after-tax dollars goes to service debt), up 15% from Q199
  
• In 2005, real disposable incomes of private households in the United States increased $93.8 billion, or 1.2%, while their debts grew $1,208.6 billion, or 11.7%.
  
• Total consumer spending on goods, services and new housing accounted for 92% of real GDP growth
  
• average household debt grew to $90,000
• a large portion of consumer debt is set to reset in the coming few years
  
• 22% of the $8.7 trillion US mortgages are ARM based, with 40% of all new mortgages in 2005 being ARM based
• home sales are falling, inventories are rising, and prices are falling below appraised value
  

As confidence falls and debt service rises, discretionary income suffers and the ability, yet alone the volition, of consumers to spend will be challenged. The price of gold, an indication of long-term investor sentiment and fear of inflation, meanwhile has risen from $300 per ounce in 2000 to $633 an ounce today.

The truth of the matter is that I am not at all sure how to think about the data above. It seems clear that a cyclical shift in the economy is underway with consumer spending no longer a dependable engine of economic growth. Counter-cyclical stocks, Costco and WMT, will probably benefit from a shift in spending away from high-end stores.

Similarly, in IT and on the web it is conceivable that technologies that drive efficiency, reduce costs, and deliver WMT-type benefits to consumers (be they enterprise or consumer) will do well. Companies that target discretionary spending (ie vacation travel, consumer electronics, consumer finance) will most likely suffer.

On the web, we all are benefiting from an allocation of spend from offline to online. Will a recession accelerate that allocation - ie even if the total pie of dollars shrinks, will the hard ROI of internet marketing lead to an increase in absolute dollars spent on-line?

Will a recession accelerate the adoption of open source IT solutions, lower TCO and deployment technologies such as SaaS, and virtualization technologies that increase asset utilization?

Ie, will the recent sector bets of our industry, largely shaped by the last downturn in spending, prove to be prescient and counter-cyclical in that economic distress increases the value proposition of solutions that drive out excess margin and increase productivity?

Or will a slowdown not only reduce the total pie of available dollars but also retrench spending towards incumbent vendors and established business processes (think more not less of newspaper advertising and IBM).

If VC returns and start-up prospects are truly uncorrelated to the equity markets then these questions may be moot? However, if our companies and our exits are a function of the health of the US economy then it is worth thinking how prospective investments as well as portfolio companies will fare if the consumer spigot shuts down and the 2/3 engine of our economy feels the pinch of debt loads that crowd out discretionary spending.

To use two public examples...my personal opinion is that GOOG and VMWare (proxies for start-up related activity) will prove to be counter-cyclical. GOOG delivers auditable value and makes marketing a more scientific lever to create value and ROI. VMWare delivers more flexible IT environments, whereby utilization rises, cap ex is reduced, op ex is reduced, and return on assets goes up.

Despite the ominous storm clouds on the horizon, I believe that the best lessons of the last downturn were to focus on companies that deliver value for lower costs.

It will be interesting to watch how counter-cyclical these technologies prove to be and if an economic slowdown accelerates the rate of deployment and allocation of dollars. If we are wrong, it may be a rough couple of years.

Rich Price

My brother, Rich Price, is a very gifted singer-song writer. Tonight, he is playing in SF at Cafe du Nord. For those of you in the city who are fans of David Gray, the Counting Crows, or Martin Sexton...please come out and enjoy the show.

Also, his new record, All These Roads, is now available.

Enjoy and hopefully see you tonight. If you cannot make it, check out his myspace page and/or the new record.

Stanford Technology Ventures Program

Stanford's Technology Ventures Program (STVP) released a collection of online entrepreneurship education resources, which can be found here.

The Stanford Technology Ventures Program (STVP) is the entrepreneurship center at Stanford University within the School of Engineering. STVP is dedicated to accelerating high-technology entrepreneurship research and education for engineers and scientists worldwide.

The site offers free videos and other resources for aspiring entrepreneurs.

Carbon Footprint

Update:
Andrew Fife sent me a link to TerraPass, a cool service that allows you to offset your car's carbon emissions for less than $80 a year. Very cool idea.

The VC industry recently added a new sector of investment: clean energy. New funds are being raised and new opportunities explored in generating clean energy. As individuals, moreover, Americans are beginning to explore their contributions to carbon dioxide emissions.

I expect that within a few years one's carbon footprint will become common knowledge and carbon diets, attempts to lower carbon emissions, will become sources of pride and conversation.

This month's Sierra Club magazine features a great article, My Low-Carbon Diet, that explores carbon footprints and the ways in which modern lifestyles generate carbon. The site also features a link to a carbon-calculator, hosted at on the web site for Al Gore's movie - An Inconvenient Truth.


The article includes a carbon index with the following statistics:

• Average daily US carbon dioxide emissions per person: 122 pounds
• Average worldwide: 24 pounds
• Amount that could be emitted without raising carbon dioxide levels in the atmosphere: 9 pounds
• Average pounds of carbon dioxide emitted each day by:
• driving in the US, per person: 2.2 pounds
• flying in the US, per person: 3.3 pounds
• cooling the 76 % of US households with AC: 3.9 pounds
• a typical refrigerator: 3.6 pounds
• the best current 21-cubic foot fridge: 1.6 pounds
• an electric clothes dryer: 3.9 pounds
• average per kilotwatthour: 1.5 pounds
• coal-fired kwh: 2.0 pounds
• hydro kwh: 0.5 pounds

When I worked in the energy field in the early 1990s, gas-fired plants cost $.03/kwh while sustainable energy plants ran $.14/kwh. In the absence of market forces or regulation capturing the externalities of the ultimate costs of coal-fired energy, technology and entrepreneurs will need to innovate to close the cost-competitiveness gap. While I expect future governments will add a carbon-tax to dirtier energy, I also believe that a growing number of consumers will become more aware of their carbon footprints and seek to buy greener sources of fuel and energy.

Take the carbon calculator test. Thanks to the Sierra Club for a great article.

The High Cost of Optimism

The Standish Group, which analyzes IT projects, reported that in 2004 only 29% of IT projects succeeded, down from 34% in 2002. Cost over-runs from original budgets averaged 56%, and projects on average took 84% more time than originally anticipated.

Put another way, 71% of projects did not succeed, 44% came in on budget, and only 16% came in on time. Wow!

Another study examined 210 rail and road projects and found that traffic estimates used to justify the projects (i.e. passenger or car traffic) were overly aggressive by an average of 106%.

Today's papers are rife with horror stories of projects failing - from the FBI's abandoned $170m internal IT project, to EDS' failing Navy contract, to incredible cost overruns and delays in the Pentagon's weapons development programs.

What does all this mean for venture capital and for executive teams?

Venture capitalists fund companies to value creating milestones. The theory is that if objective value milestones are met, the company and insiders will be able to raise a new round of funding at a stepped-up valuation. All too often, however, the cost, time, and effort associated with such milestones is underestimated. Instead of hitting plan, the company runs out of money a quarter or two prior to realizing its objectives. The insiders and management are then faced with the dreaded prospect of a down round or a bridge financing to tide the company through to meeting its original plan.

Why do such smart people, across so many industries, fail to adequately account for two crucial variables in planning - cost and time?

Max Bazerman, an HBS professor and former professor of mine at Kellogg, blames "self-serving bias," overly optimistic projects that help win the business and advance careers and agendas.

Think about the LBO business. Most deals are auctions, and the winning bid is often simply the highest bid. In some sense, the only way to win is to forecast the rosiest outlook and forecasts.

Along those lines, I once sat through a McKinsey pitch on private equity firm performance in which McKinsey found that the winning bidder/firm overestimated the target company's first year EBITDA 66% of the time. By overestimating profit performance, the winner bidder justified a very aggressive bid.

This is not good for investors, nor for companies who set overly aggressive goal, fail to realize them, and then have to retrench, rationalize, and regroup.

Project management gurus think of five key stages of project management: initiation, planning, execution, control, and closure.

If we think of start-ups as projects (a popular VC description of young companies) and if start-ups suffer the statistics of the IT industry at large, then 71% will go under, 84% will take longer than anyone thought, and 56% will run out of money before they get to value creating events.

Another cliche in venture is that execution separates great start-ups from losers. These numbers illustrate why that is the case. If you are great at the initiation phase - idea articulation and business plan creation - and suffer the ability to execute and control the project...then not good.

These numbers suggest that VC firms that help their portfolio companies optimize execution - operating plan development, sales forecasting and management, engineering project planning, marketing plans, etc - will add tremendous value.

Helping young companies develop the best practices associated not just with coming up with great ideas or products, but also on executing on a budgeted plan that ensures the company comes in on time and on budget with the deliverables in hand will be of immense value.

Start-ups should look for VCs who add value in this very concrete manner. Ask VCs how they provide the tools, systems, and practices that contribute to project success and avoid the long history of project disasters.

Company Culture and Politics

Business school alums often come back to campus and tell students that Organizational behavior proved to be the most valuable course(s) they took. When I studied at Kellogg, I never understood why.

I often meet with people who ruefully state, "my company is too political;" "there is no transparency where I work, things happen, people come and go, and no one knows why;" "I don't understand how decisions get made, things seem so random."

Politics, as we all know, is not something that just happens in Washington DC. All companies, be they start-ups or GM, are political. Politics are informal, unofficial, and sometimes behind-the-scenes efforts to sell ideas, influence an organization, increase power, and achieve other targeted objectives. Politics have a truly pejorative connotation and being accused of being a political animal is most often meant to be an insult.

Since I left business school in 1999, however, I have come to appreciate the fact that to ignore the realities of organizational life and decision making is certain to reduce your effectiveness and influence at work. I believe people often join start-ups to escape the crushing politics of large companies. The reality is that organizational polictics are a constant, while start-ups may be lower on the political spectrum/continuum than larger companies, they remain organizations populated by people. I recently read a book that provided a model with respect to understanding the organizational political continuum. The book argues there are two contrasting styles and hence models of people and companies.

The first model is idea-centric. Idea-centric people and companies are driven by the power of an idea. They view power as residing in facts, logic, analysis, and innovation. These companies are often flat, meritocracies where the best ideas win and the way to win is to make the most cogent, objectively correct arguments. These people believe in substance, in doing the right (logically speaking) thing, open agendas and transparency, and the belief that ideas speak for themselves. Ie, if the ideas are well stated, why wouldn't someone agree? I fall into this camp and often believe that if I make a logically consistent argument (ie axiomatic) then it should be clear what to do.

The second model is person-centric. Person-centric people and companies are driven by the power of hierarchy. The merit of an idea is not driven by the cogency of the logic but by the power, position, and political support for the speaker. In this world, ideas definitely do not speak for themselves, but rather image and the perception of support (who supports this, what does the VP/CEO, etc think about it). In these companies, people often don't do what's right but rather what works. Decisions, given they are not based on logic, are far from transparent and meetings are fait accomplis rather than opportunities for genuine discussion and feedback. Relationships drive support, not ideas and merit appears to lose out to coalitions and sponsorship. Loyalty, alliances, and working the system outweigh doing whats right and trusting the system to pick the "best" outcome.

In my experience, companies land somewhere along a continuum of the two models. The challenge for all of us is to understand the type of company we work in and what style we will need to adopt to be successful, or rather to quit and leave. Often the most frustrated people are idea-centric people working in people-centric companies who simply don't realize it and cannot understand why their brilliant ideas find no support or traction.

We owe it to ourselves to be self-aware. I believe this is the message the alums were bringing to students - don't be naive, calibrate your company's culture and style, and recognize that merit alone, unfortunately, is often not enough to get things done. The key is to always maintain integrity, avoid ugly ethical compromises, while working within the political constraints of your employer.

Pat Your Head and Rub Your Tummy

Young start-ups need two things to survive: customer orders and funding.

The challenge, however, is that customers and venture investors often decide to "buy" based on very different messages.

To succeed with customers, start-ups need to articulate clear, focused value propositions. Often the nature of early stage product development is such that the product is of limited functionality and can best be sold by "narrowing the focus to broaden the appeal;" clear use cases, incremental value wrt products already in production, easy to install, and quick to show value.

Focus is often the key to early sales traction.

Investors on the other hand can often have a pejorative view of focus - VCs question nichey looking business plans ("is this a feature or a company?") and the proverbial "what is the TAM" and "can this thing scale" are often orthogonal to the product marketing challenges of selling version 1.0 products to skeptical customers.

In my experience as a VC and ex-startup CEO, young companies need to remember to develop and tell two stories. The first targets customers and explains specific, tangible, and focused value made possible via the currently available product. The second story targets the VCs and addresses the real concern with respect to scale, TAM, and a road map that supports the emergence of the company from a niche-product to a real company.

This challenge of orthogonal messages and the need to develop them simultaneously is similar to the age-old, "pat your head and rub your tummy" trick.

Some companies tell great customer stories and never get funding. Others are great at raising money, yet never seem to be able to sell the customer. It is the rare, and significant, early-stage company that can tell a story of relevancy that resonates with the buyer, while also painting a longer-term vision to VCs wrt how to build a large company that will make VCs a healthy return.

Happy Birthday Disk Drive

Today's WSJ's Technology section ran a fascinating overview of the disk drive. The disk drive was invented fifty years ago by IBM. The first drive, called the RAMAC (random access method of accounting and control) weighed in at one ton, the disks were 24 inches in diameter, and had 5 megabytes of storage capacity.

According to the article, the capacity limit related more to the marketing department's view that no one could use more than 5 MBs than to a purely technical limit. In the last 50 years, the capacity, measured by bits per square inch, has gone from 2,000 to 135 million bits. This improvement represents an incredible 70 million times improvement.

Annual capacity increases run at 30-40% per year and the expert interviewed, Currie Mance (VP with HDS), expects storage to move from 10 GBs/one-inch drive to 100 GBs/one-inch drive over the next seven years.

While much is made of Moore's law, the related improvement in disk drive capacity is simply amazing and a true enabler of the explosion of digital media and content that is fueling the current web phenomena.

Employease Sold to ADP

In November 2005, JMP Securities released a great report titled Flipping the Switch about the benefits and power of Software-as-a-Service.

The report detailed the customer benefits - independence from IT, more timely software upgrades, financial risk mitigation, lower IT costs, high service levels, and funding from operating rather than capital budgets; as well as the vendor benefits - lower R&D costs, lower support costs, visibility into customer activities, and inherent piracy controls.

While Salesforce.com is a well-deserved pioneer of the model, seven years ago Hummer Winblad invested in Employease, a SaaS provider of human resource management software. Last week, ADP acquired the company and the event serves as real validation of the management's teams foresight in building a true multi-tenant application based on a recurring revenue model. At the time of exit, the company had over 1,500 customers and tremendous visibility into future growth and revenue. ADP, a major reseller and partner, lived with the company for some time as a partner and acquired the business as part of the company's Employer Services Division.

Congratulations to Phil Fauver (CEO), the management team, and to John Hummer for the foresight to help pioneer a new business and delivery model seven years before the analyst report was published!

Fit versus Proven Performance

Update: Brad Feld sent me a link to Will Herman's blog that provides great detail and insight to the thoughts below.

Today, I sat through a classic early stage start-up discussion. The company, an unannounced early stage software company, is in the process of bringing on the first key hires post-funding.

Work is piling up, the opportunity awaits, time is of the essence...but, there remains an underlying tension with respect to the profile and capabilities of the first key hires.

Two profiles emerged in the discussion
- a proven performer with deep domain expertise and a track record of achievement in the given function versus
-a high-caliber athlete with incredible drive and passion that can be shaped into a high-achiever but without the defacto track record and resume.

Whom to hire - the proven performer or the eager, malleable beaver?

During the debate, one of the Hummer Winblad partners reminded the group of a mental framework Jack Welch employed at GE to help structure and clarify the issues.

He used a two-by-two diagram that plots cultural fit on the x-axis and proven performance on the y-axis. There then fall out four types of people:

• proven performers who are lousy fits = type A
• unproven performers who are lousy fits = type B
• proven performers who are great fits = type C
• unproven performers who are great fits = type D

Ideally, we all want to hire type C's. Type B's need to be flushed immediately. The question comes down to, given the choice, do you take Type A or Type D?

Jack Welch concluded that type D trumps type A all day long. Type A hires are disruptive, wreck culture, and the short-term productivity gains do not justify the long term damage to the company's psyche. Type D hires, with the correct investment in mentoring, training, and coaching become, over time, the jewels of the company.

The risk for a start-up is do you have the time, competence, and resources to develop talent?

We will look for Type C employees all day long, however, reality and time pressures often dictate a choice between fit/potential and performance. Management wisdom suggests that fit and culture can become competitive weapons in building great companies.

Do the CEO and board of early stage companies benefit from hiring unbridled passion/malleable natures over mercenaries who get sh*t done but queer culture?

I certainly know whom I would rather work with.

Hubpages Launches

Hubpages, Hummer Winblad's latest portfolio company, launched today. I profiled the company in a prior post and TechCrunch kindly wrote on the company and service today.

Enjoy the site and good luck beating my Hubscore.

Feedburner

Feedburner is beta testing Feedburner Networks. A Feedburner Network is a collection of blogs clustered around a particular topic.

Brad Feld details the new service on his blog and he has set up a Feedburner Network on the Venture Capital industry that you can subscribe to by clicking here.

I am pleased to be a member of the Network and congratulate Feedburner on creating a useful new service around "channels" of content.

PostApp's WidgetBox Service

Rafe Needleman of Cnet wrote a wonderful overview of PostApp's WidgetBox service. The public beta will start in a few weeks and I encourage all of you to sign up.

Read Rafe's blog post to learn why PostApp will play a key role in the future of web publishing.

WSJ Article: Era of Diminishing VC Returns

Today's Wall Street Journal carries an article by Rebecca Buckman titled Silicon Valley's Backers Grapple with Era of Diminished Returns. The article catalogs a series of previously well documented and systematic challenges facing the industry:

• too many firms (860 US VC firms)
• too much money ($25bn of 2005 LP commitments)
• anemic returns relative to S&P 500 (YTD 3/31/06 returns of 11.7%)
• lack of home run deals (4 of 31 Q2 exits saw 10x+ ROI)
• endowments cutting back VC allocation
• industry leaders, like Paul Ferri, commenting, "I thought by now investors would have figured out that our industry is not an economically viable business model."

To add to the woes, I met yesterday with a very prominent late stage fund who commented that in 70%-80% of their deals, hedge fund money is competing and, more often than not, winning deals at extraordinary valuations.

As with all systemic shocks, the VC industry is adapting and learning to live within the new systemic, rather than cylical, realities of the industry. Clearly, the move to international markets (India and China), new sectors (clean energy), and niche based funds (very early), reflect an implicit realization that the battlefield of opportunity is changing and change will be required for firms to continue to justify their existence and create value.

Brad Feld's blog introduced me to an article by Howard Anderson called Good-bye to Venture Capital. The article, written by a founder of Battery Ventures, makes a familiar, yet powerful argument that the venture industry is over-funded, structurally transformed, and doomed to generate returns far lower than what limited partners expect from the asset class and the associated risk profile. As you will read, the article indicts the industry for suffering from too many investors, too much money, and paints a dire picture of the future.

As a recent entrant to the industry, I found the article is powerful food for thought. Is the industry doomed to low double-digit returns? Are there too many of us chasing too few deals funding too many companies selling to customers with finite budgets, abundance of choice, and limited differentiation between vendors? If so, Howard is spot on, returns will fall, capital will leave the industry, and the fees will be significantly lower thereby reducing the number of professional investors in the space.

As an aside, I don't believe that the VC industry is alone is suffering from too much money. The hedge fund industry is simply exploding wrt funds under management, the number of firms, and the number of people entering the space. Capital, itself, appears to be in abundance across the alternative asset management space.

Howard makes one powerful point that resonates with any reader of Fooled by Randomness. Funds invested in the 1994-19998 time frame did extremely well. The cliche rising tides float all boats comes to mind. At a recent offsite, Eric Schoenberg (HBS prof) reminded us that returns are driven by two key components, systematic returns and idiosyncratic returns (see CAPM model). Systematic returns are market returns. Idiosyncratic returns, however, are where professional investors earn their stripes - they are returns in excess of the market.

To be a decent investor, one must at least deliver systematic returns. To be a great investor, one must deliver idiosyncractic returns. In the bubble, random investments looked genius. The systematic returns (returns for the asset category at large) were simply amazing, thereby creating great weath and perhaps reputations for genius that were more due to circumstance and timing than investing prowess.

The questions for us to ponder is what will be the future systemic returns to the venture capital asset class, and has the inflow of money and people into the venture capital industry made it impossible to generate idiosynctratic returns. Are funds' returns systematic (an index of the market) or extroardinary? Will there be a Vanguard-like vc fund that is a low-fee provider of index funds for the private markets!? What is the basis for extraordinary performance over the market index? Is the succes of vc investors and funds due to serendipity or to process?

These are key questions for investors (both general and limited partners). Can one deliver quality returns in an industry full of capital and people chasing "good" ideas?

One key difference between the public equity markets and the venture capital markets is the degree to which information is transparent. The public markets are by regulation open and transparent with data available to all.

The private markets are marked by imperfect information, proprietary insights, and information asymetries. Certain private investors simply enjoy access to information, ideas, and talent that are not generally available to others. For exmaple, certain leading firms leverage the footprint of their portfolio (talent, ideas, reach) to drive insights that lead to investments that others are not in a position to make. An obvious example, is Sequoia Capital's investment in Yahoo! and Google. With a BOD seat at YHOO, Mike Moritz enjoyed acccess to information relative to GOOG's search technology simply not available to others weighing the decision to invest in GOOG, presuming they even had the chance.

The question for venture capitalists may be as simple as, "what do I know that others don't?" With the corallary, yet vital question begging, "will I be smart enough and sufficiently certain of myself to act on such information?" For as Keynes famously once said, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

If one knows nothing proprietary, has no unique relationships, access to ideas, and information, then life may be very challenging.

Hubpages

The San Francisco Chronicle ran a great story in Sunday's paper on start-ups that live together in order to maximize productivity, cost savings, and culture building. The article profiles our most recent investment, Hubpages. Hubpages plans to open their site up for public beta in the coming week. Please check it out.

In short, Hubpages helps experts bring their knowledge online to share it with people searching the internet for information. HubPages offers a platform that combines easy-to-use tools for creating rich webpages, integrated affiliate programs to make it easier than ever before for publishers to earn money and auto editorial technology for promoting the best and most relevant content on the HubPages network.

All published content on the HubPages platform is made available at http://hubpages.com, optimized for search engines, and made available for syndication.

Open Source - What is the Model?

I flew to Portland really looking forward to learning more about open source business model and execution best practices. OSCON’s Executive Briefing included panelists from Red Hat, MySQL, Digium, and other leading open source companies. I looked forward to discussing optimal open source licenses, download to sale conversion ratios, best practices with respect to support, community development, and sales models… Unfortunately, the day largely centered on very high-level discussions about the relevance of Web 2.0 to open source and failed to satisfy the widespread interest in diving into meatier issues.

Like many conferences, the highlights were not panel-based conversations but rather the opportunity to meet and speak with the leaders in the field – CEOs and executives from a broad cross section of open source companies. At lunch, over coffee, and at dinner, we were able to get into the nuts and bolts of open source business models and compare notes with various teams with respect to license strategies, how to build support organizations, what download to sales conversion ratios one can expect, and how/if to bifurcate the product between free and commercial.

Despite conventional wisdom that open source models allow for pull-based selling, where telesales teams reach out to pre-qualified customers who have downloaded and tested the product and ping the company to inquire about orders, leveraged development, where community developers do the lions share of the work, support processes where developers should do both development and support etc, I left struck by the lack of consensus on the optimal operating model. Conversations with various teams certainly begged the question if download driven models are more fiction than fact.

It appeared that conversion ratios on downloads were very low (1 in 10,000), that many teams were discovering the need to hire direct sales forces that made outbound calls rather than simply taking ordersJ, and that providing scalable 24x7 support that met enterprise customer scrutiny would demand more than asking developers to code 50% of the time and then get on the phone to fix a customer bug or deployment issue.

Some executives observed that they expect that at scale open source companies may look not too different from traditional software companies with respect to sales and marketing and development expenses. The argument was made that rather than a permanent shift in models (with respect to expense ratios –marketing and sales/revenue), open source really served as an on-ramp strategy that greatly reduced the capital required to reach customers and material revenue rate rates. Capital efficiency is still a great benefit but I sensed a lack of confidence that a permanent shift in operating leverage would be possible.

Another common view was that dual-license models are the optimal approach. The dual-license model – like MySQL – is premised on a single product that is common independent of license (GPL or commercial). Other approaches involve offering two products – a stripped down open source version and a commercial version with full bells and whistles. Many executives I spoke with view the latter as inconsistent with the open source value proposition and prefer a reciprocal relationship whereby users either pay with contributions back into the project (GPL) or with money (enterprise).

While the conference in many ways failed to address core business model issues it did provide a common forum for start-ups to discuss the evolving state of the open source industry and operational best practices.

Finally, despite the evolving nature of open source models one thing is clear – incumbent vendors are failing their customers with extremely expensive, difficult to deploy, and often legacy technologies. The pricing umbrella available to companies in sector after sector – system management, integration, database, app server, business intelligence – remains truly amazing. Customers are seeing 80-90% cost savings, plus access to great technology. The benefits to the enterprise of moving to open source are legion and while on the margin some questions of strategy remain unanswered, one leaves OSCON more convinced than ever that the alignment of customer interest and value/cost ratio that open source allows will continue to roil the software markets for years to come.

Tim O'Reilly's Big Ideas

Tim O'Reilly opened OSCON 2006 with a list of big ideas. A core theme of the conference is how to think through the future meaning of open source and how the concepts of open source apply to web applications.

While many of Tim's ideas are well understood, they are interesting to think through and apply to the changing nature of opensource - which as a concept is moving away from solely source code to also include hosted applications and/or user-driven phenomena such as Flickr, Youtube, etc. that involve invoking publicly defined APIs independent of access to source.

The core ideas follow.

• architecture of participation
• design systems that are designed for user contribution
• well-defined APIs
• asymmetric competition whereby community contributions leverage the company/project
• for example, craigslist, internet rank = 7, employees = 22
• versus yahoo internet rank = 1, employees 9,000
• youtube is another great example of massive page view growth uncorrelated to headcount growth
• change in meaning of openness
• as applications are increasingly delivered as a service versus installed applications some of the licensing issues become moot
• with internet applications the concept of openness moves away from GPL-like licenses to discussions regarding the openness of APIs and degree to which data is portable
• what should developers expect wrt apis, api support for certain versions, etc
• should there be a GPL-like licenses for APIs?
• operations as advantage
• as applications move to the network, competitive advantage will be increasingly center on APIs, SLAs, and datacenter operations
• Amazon's S3 is an example of the rise of services as a product offering
• Craigslist, for example, manages to a key metric which is page views per kilowatt hour
• open data
• is data portable?
• who owns data stored in flickr, Amazon, etc?
• will the industry support microformats to standardize data representation and make data portable
• Tim highlighted movemydata.org - which is making the case to ensure access to user data
• Tim sees data as the Intel-inside equivalent of Internet applications. Given the tremendous value of data, issues relating to user access, ability of users to move data from one service to another, etc will become important to think through

As I mentioned in a prior post, Innovation Happens Elsewhere, the axiom of distributed innovation is premised on the fact that one can never employ, pay, or manage all the smart people in the world. Nor can one monopolize innovative ideas. Accordingly, companies need to be architected to leverage the innovation of others and find means of allowing third parties to see benefit and value in using your APIs, content, data centers, etc to add mutually beneficial value.

OSCON

I will be at OSCON in Portland starting tonight through Wednesday.

Matt Asay is leading a great day tomorrow, and I look forward to a good discussion regarding business models, licensing strategies, and best practices for building open source companies. Some of Matt's thoughts on secrets of successful open source companies can be found here.

If you will be at the show, please ping me. I will write more on the conference later this week.

Krillion

In a prior post, I wrote about the rise of vertical search engines and business models. The search engine market continues to grow with query volumes up 29% y-o-y, from 4.967 bn queries to day to 6.407bn queries. Google, Yahoo, and MSN own 86% of the search market, with Google at 44.7%, Yahoo at 28.5%, and MSN at 12.8%, respectively.

The search engine business model is also well understood: Revenue = Users * Queries/User * Ads/Query * Clicks/Ads * Revenue/Click

The race is on to aggregate queries, increase ad/query coverage, increase relevancy and hence clicks, and drive revenue per click opportunities. The focus on vertical search allows for greater query volumes and new opportunities for monetization. For example, local search will create a broader universe of possible searches (Palo Alto Best Buy) and local ads (coupon or pay per call) will allow for incremental revenue opportunities. Hummer Winblad is excited to have recently led an investment in Krillion.

Krillion will be launching a brand new service that makes it easy to find key products in the best stores in your local neighborhood. Krillion brings together millions of unbiased and comprehensive listings sources in one easy-to-use website. More details will be announced when the company launches. The company boasts a great team, with senior leadership coming from Yahoo!, AOL, Ariba and other leading companies.

The opportunity to increase the revenue/query ratio is driving innovation and opportunity. Krillion offers retailers, advertisers, and search engines a great vehicle for leveraging the continued growth and verticalization of search.

Age and Entrepreneurship

A Silicon Valley axiom equates entrepreneurship with youth - think of Jobs, Dell, Gates, Yang, and many other founders who built industry-changing companies in their twenties. I once heard a Valley veteran remark that if you were either A) over thirty or B) had children the odds of you starting a company were close to nill.

While working 24x7, living on Red Bull, and a low personal burn rate may all be traits of young founders, is it true that entrepreneurship is inversely proportional to age?

I once asked a 30 year veteran of entrepreneurship at GSB, Chuck Holloway, that very question. He answered unequivocally no. He maintained that there are two natural age peaks correlated to entrepreneurship - late twenties and mid-forties.

Today, I read in Wired magazine an article that argued that creativity comes in two distinct types - quick and dramatic and careful and quiet. David Galenson, an economist at the University of Chicago, analyzed the creative output of leading artists. He plotted the relationship between an artist's age and the value of their paintings. He quickly realized the artists clustered into two distinct groups - conceptualists, who did their breakthrough work early in life and then declined and experimentalists - who developed slowly, experimented and iterated, and peaked later in life. In the former camp are artists such as Mozart (age 30), Andy Warhol (33), Picasso (26), F. Scott Fitzgerald (29), and in the latter camp are figures such as Twain (50), Cezzanne (64), and Beethoven (54).

Conceputalists rewrite the rule book and in their extreme creativity revolutionize their area of focus and specialty. Experimentalists innovate more incrementally and while not as radical do infact generate great creativity over much longer periods of time. It is fascinating to apply the two mental constructs to the high-tech industry.

I look forward to reading more of Galenson's work and perhaps he will turn his analytical attentions away from artists and to business entrepreneurs. For those of you with kids and over thirty, it may not be too late after all!

Board Meeting Management

Start-up boards typically meet once a month. The market, product, competition, customers, team, etc are moving and changing quickly and frequent board meetings to discuss resource allocation, trade-offs, strategy, financial position, etc are critical.

Too often, however, I find board meetings are a status update. The frenetic pace of start-up life often leaves a CEO incapable of doing more than simply report state - cash position, sales pipeline, product development, customers.... The cliche about the forest and trees is apt to describe the board meeting where problems are simply listed independent of an incremental layer of analysis and insight that provides pro forma scenario analysis with respect to the tradeoffs at hand and a declarative management team strawman.

Great board meetings not only provide a succint update on the condition of the business but lay out in clear detail the challenges at hand and the optimal remedies. Scenario analysis help the board understand the trade-offs being considered (ie hiring more reps to serve demand or other decisions that involve accelerating/delaying spending given current opportunities) and their impact on pro forma cash, revenue, and expenses. Importantly, by demonstrating to the board the CEO and team are aware of the challenges, modeled various remedies, and have a strawman on the table for the best path forward the board is left with a sense of the thoughtful, competent process the team has in place for choosing the best path forward. Confidence soars.

Independent of a strawman and answers to the financial implications of the decisions that need to be made, the board may lose confidence in the team's ability to thoughtfully manage the company and, I have seen too often, the board feels it needs to micro-manage and fill the vacuum left by managers who fail to see the forest for the trees and put forward trailing facts rather than prospective strategy for consideration.

Venture Capital Performance

The NVCA and Thomson Financial recently released private equity performance data.

The chart provides a twenty year comparison between the returns to specific private equity strategies, as well as to the NASDAQ and S&P 500.

The private equity returns are net of management fees and carry. 71% of the private equity gains reflect realized returns, while the balance of the total return is calculated by taking the current net asset values of the funds as reported to limited partners.

In the last ten years, limited partners have received distributions totaling $202bn, or an average of $20.3 bn per year, while over the same period limiteds made $829bn in commitments, or an average of $83bn per year.

While the 20 year early stage vs S&P 500 risk premium is only 9.4%, over a 20 year period this represents a 6x difference in total dollars returned.

I am banking on the fact that the ability of top firms to maintain access to non-public information, ideas, entrepreneurs, and information asymmetries will support the continued historical investment performance of early stage venture capital despite the 2x increase in number of VC firms, 1.9x increase in number of VC professionals, 2.5x increase in the amount of VC raised, and 3.2x increase in the average capital under management over the last ten years.

Early stage VC is a tough, tough business. I believe that the best firms demonstrate that a commitment to supporting the entrepreneur, while working to create an unfair advantage with respect to information and access to opportunity supports extraordinary performance relative to the industry at large. It will fascinating to watch if the rolling 20 year returns to early stage venture remain in the 20+% range.

Top Ten VC Blog List

Thanks to Andrew Fife for putting together his list of favorite VC blogs. Importantly, I appreciate his kind words about my blog and posts.

All the authors listed offer great insights and perspectives on the start-up and vc worlds. A hallmark of our era is the wonderful transparency and direct access that blogs afford to the ideas and experiences of members of our industry. Great to read and fun to learn from.

Omniture

Congratulations to Josh James, John Pestana, and the Omniture management team on yesterday's IPO.

Also, congratulations to Hummer Winblad's Mark Gorenberg, who led Hummer Winblad's investment in Omniture.

PostApp

This week, Hummer Winblad portfolio company PostApp announced funding and the private beta of its WidgetBox service at SuperNova 2006. The press release can be found here.

TechCrunch wrote an excellent overview, as did Silicon Beat.

The funds will be used to pioneer a new type of marketplace for web-based widgets, called Widgetbox™, that enables the placement of many types of applications, functionality and content into blogs, personal homepages, social networking sites, and auction pages.

A web widget is a piece of web service-based interactive content that can be dynamically embedded into a web page. For example, a web widget can be a auction listing, contextual search box, a game, a score box displaying a set of statistics, a weather box, an advertising box or any other functionality to be embedded on a web page such as a blog, personal homepage, social networking profile, or auction page.

Web widgets, sometimes called gadgets or modules, are increasingly used by web publishers to enhance their web pages, and web service developers are now frequently making their technologies available as web widgets. Many different technologies can be used to develop widgets: HTML, JavaScript, AJAX, Flash, Java Applets, and any web application platform: J2EE, LAMP, Perl, Ruby, etc.

PostApp is creating a marketplace that connects web widget developers with bloggers and other personal publishers. Widget developers include online services seeking widespread widget distribution such as Yahoo! and eBay, as well as small independent widget developers.

PostApp offers innovative technology to ease the pain of widget management including the Widgetizer Engine™, a powerful but simple tool that lets you turn anything on the web into a widget, as well as tools that make it easier for bloggers to control their widgets quickly and intuitively.

Interested developers and users can sign up for the private beta here.

Akimbi

Congratulations to the board, management team, and employees of Akimbi on their successful sale to EMC. Mitchell Kertzman and Hummer Winblad co-led the Series A investment in Akimbi and the acquisition is a testament to the vision and hard work of the entrepreneurs - James Philips and Wilson Huang - and the team.

Akimbi extends the virtualization metaphor into the test and development marketplace.

Akimbi's Virtual Lab Automation System provides development and test infrastructure that automates and virtualizes the rapid setup and teardown of complex multi-machine software configurations, shaving man-months off of software development projects and saving development orgs from having to physically provision test configurations.

Congratulations to all.

Morgan Stanley 2006 CTO Summit

Last night, I attended Morgan Stanley’s Sixth CTO Summit. As I described in a prior post, Morgan Stanley’s CTO conference is a very well run and managed event that brings the firm’s top 40 technologists to the valley to meet and interact with venture capitalists and start-ups.

Since the first summit six years ago, Morgan Stanley spent $12.5bn on IT. Importantly for attendees at the CTO Summit, that spend includes millions with 30 start-ups, or 11% of the total companies that were sourced by Morgan Stanley at the summit. Morgan Stanley is expert at deploying technology from both ends of the bar bell – large vendors and the best and brightest innovators. Morgan Stanley first met, at the CTO Summit, and later bought technology from VMWare, Transitive, iRise, Avamar, and others.

I enjoy attending the summit and am often struck by Morgan Stanley’s ability to concurrently scale the technology environment with very little increase in total spending. For example, since 2001:
• Trade volumes are up 7.5x
• Bandwidth is up 20x
• Business data is up 4.75x
• Servers/computers are up 3.5x
• Business connections are up 8x
• The IT group now manages 68,000 desktops, 16,000 servers, 4.5 PB of storage, 10,000 mobile devices…

And yet, the CAGR of IT spend is ~2%. Remarkable. The IT department is allowing Morgan Stanley’s core business to grow and scale without a related increase in IT costs that would reduce the marginal profitability of such growth. In some sense, IT is a fundamental source of operating leverage. A core element of this accomplishment is the use of innovative new technologies.

Key, well-known, sources of savings are:
• the move from SMP to blade servers,
• RISC to x86,
• Unix to Linux,
• virtualization,
• automation,
• 1 GigE to 10 GigE,
• and an increase in the ratio of severs/switch port.

Part of the summit involves Morgan Stanley delineating sources of ongoing cost and a request for technologies to blow out bottlenecks.

Transitive and iRise were recognized as two companies that help meet that mission. Transitive, which allows any software application binary to run on any processor and operating system, helps Morgan Stanley move applications off of expensive legacy hardware. iRise, which is a visual requirements gathering and prototyping solution, helps reduce the cost of failing to deliver applications that meet customer expectations.

With respect to SaaS, Morgan Stanley (Jeff Birnbaum) made several interesting comments. They segment SaaS into three models: web based delivery of applications, Citrix-like terminal emulation with server-side processing, and Softricity-enabled and client-side processing and delivery of rich client applications that require no client installs.

Morgan Stanley views web-based SaaS as, pejoratively, the 3270 equivalent, which demands large back-end server farms and limited user experience. They see a continuing demand for rich client applications, beyond what AJAX delivers, and see Microsoft’s acquisition of Softricity as the most significant new technology of the last 12 months. Softricity streams applications for client-side processing without requiring the .exe to be installed and managed on the desktop. Softricity allows Morgan Stanley to avoid the need to deploy and manage .exes on 60k desktops, while providing traditional rich client application user-experience. It will be interesting to follow what MSFT does with the technology – perhaps Softricity will provide MSFT an articulate, user centric response to the rise of web-based SaaS.

eBay Devcon 2006

This Saturday and Sunday, I plan to attend eBay Devcon 2006. I will be representing Hummer Winblad on two SDForum-managed panels.

The first centers on raising venture capital and the second on building a great team. If you plan to be in Vegas, please let me know.

Funding and Pitching Your Business (Track 101)
Speakers: Laura Merling, Executive Director, SDForum

Jim Lussier, General Partner, Norwest Venture Partners

Will Price, Principal, Hummer Winblad Venture Partners

Jim Slavet, General Partner, Greylock

Nick Sturiale, General Partner, Sevin Rosen Funds

Formulating your business plan and developing a compelling presentation for potential investors are two of the most important things you will ever do for your company. In this session, you get to be a fly on the wall as real start-ups make real pitches to a panel of real VCs. Following three 5-minute presentations, an open Q&A session gives you the invaluable opportunity to ask the panel questions about the fundamentals of funding a startup, including developing a winning elevator pitch, what VCs are specifically looking for, and how to avoid red flags that can overshadow even the most impressive business plan.

Building a Top-Tier Team in the Early Stages (Track 106)

Speakers: Laura Merling, Executive Director, SDForum

Jim Lussier, General Partner, Norwest Venture Partners

Will Price, Principal, Hummer Winblad Venture Partners

Nick Sturiale, General Partner, Sevin Rosen Funds

One of the most effective ways for venture capital partners to add value to their portfolio companies is to introduce them to talented executives. This panel will give you insight into the recruiting process within a venture capital firm, including how they identify and hire CEOs and then work with them to develop top-tier management teams. You'll also learn how potential candidates can best network with venture capitalists to gain the upper hand in a competitive job market.