The Mathematics of Energy: Have We Reached a Tipping Point?

The VC industry profits from secular disruptions. In IT, platform transitions – mainframe to client/server to web, etc – create massive disruptions, new companies, and fantastic returns to investors.

In a absolute sense, disruptive companies initially operate on the margin of major industries. GOOG, for example, is the leader in the online ad market, a market which represents less than 6% of the total advertising market.

It is often not the absolute levels of market share that drive market capitalization but rather the rate of relative change in new technology platform adoption. The rate of change is a function of the economics and value of the emerging technology platform.

GOOG’s market cap reflects the market consensus that the online market’s share of total advertising will grow from 6% to 10% to 20% and that GOOG will disproportionately benefit from the reallocation of spend.

Okay, online advertising is 6% of the total.

Anyone care to hazard a guess as to clean energy’s share of the US energy market?

Clean energy, a new vc darling, is 2.3% of the US electricity market.

The 2.3% breaks down the following way:
1.5% from bio-mass
0.44% from wind
0.36% for geothermal
0.01% for solar power.

The other 97.7%?
49.7% coal-fired
19.3% nuclear
19.1% natural gas
6.5% hydro
3% oil-fired

Wow. 97.7% is non-renewable, with 50% carbon spewing coal.

Now, the environmental benefits of clean energy aside, is clean energy economically competitive?

Caveat….the environmental impact/cost of traditional energy is not captured by market prices. Non-price costs are referred to as externalities and, ultimately, serve to understate the costs of traditional energy. Pricing externalities remains beyond the scope of the market – ie. What is the cost of Greenland’s melting ice sheets, who should pay for it, how should it be imputed into the market price for energy?

The DOE provides interesting answers as to price competitiveness. For a plant coming on-line in 2015, the per kilowatt hour prices, by energy source, are forecast to be:

Coal $0.0531 per kwh
Wind $0.0558 per kwh, or 1.051x coal
Natural Gas $0.0525 per kwh, or .98x coal
Nuclear $0.0593 per kwh, or 1.12x coal
Solar $0.30 per kwh, or 5.65x coal
Biomass $0.075 per kwh, or 1.41x coal
Geothermal $0.075 per kwh, or 1.41x coal

In essence, the DOE believes that, independent of subsidies, that only natural gas will be cheaper than coal. Importantly, wind, nuclear, biomass, and geo-thermal are approaching the cost of coal.

The sad fact is that in the absence of either 1) subsidies, 2) innovations in pricing models that can capture the costs of externalities, or 3) a material breakthrough in technology, that the importance of coal will be undiminished. This is reflected in TXU’s plan to build monster coal fired plants in TX – they are economic actors.

For the clean energy sector, the math does not yet work. In order for the 2.3% to become 5% then 10% then 20%, we appear to need two things

1) the analog of Black-Scholes pricing models to emerge. We need to develop a pricing model, that the market will accept, that can capture the externalities and hidden costs of non-renewable energy production.
2) A breakthrough not only in the cost of alternative energy production, but also an ability to scale. Wind today can serve 20m homes – we need massive increases in scale.

Monster companies emerge not when they own 20% of a market but when the market realizes that the economic advantages of the new platform will create massive dislocations in the market. When we see clean energy reach 5%, it will be interesting to see if a GOOG type company is leading the reallocation of capital with an economic value proposition that leaves coal, thankfully, in the dust…

See WSJ.com/reports for an excellent analysis of the topic above

Framing: Creating the Right Mental Impression

George Lakoff, a professor at Berkeley, is a renowned expert in cognitive linguistics. His particular expertise lies in applying linguistics to the study of public political debate.

His core thesis is that metaphors and concepts are the building blocks of thought and the mechanism by which we process reality. He says, "Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature."

In Lakoff's vernacular, we think in "frames." He writes," Every word, like elephant, evokes a frame, which can be an image or other kinds of knowledge. Elephants are large, have floppy ears and a trunk, and are associated with circuses, and so on. The word is defined relative to that frame." When I say "elephant," you cannot help but think of the characteristics noted above.

This is very important as it argues that every word we choose to use carries with it related associations, emotions, imagery, correlated ideas, values, etc. He argues that we can control the way people think and relate to our positions by the words we use and the frames (ie. related meta-associations) that we choose to employ.

In politics, he credits the Republicans with a mastery of framing - for example, the concept of "tax relief" implicitly suggests that taxes are a burden and any opposing position would be pro-tax and pro-burden.

Why is this important? How is it relevant to start-ups and the venture process?

VC is fundamentally a patter recognition and classification exercise. Every time you pitch a VC, they are, in real-time, classifying the company and opportunity into a master taxonomy. VC is an exercise in decision making by metaphor - this company is Salesforce.com for X, Youtube for Y. The evaluation process involves first classifying the opportunity into a conceptual bucket and then quickly associating the company with the attributes of the given bucket.

If you can indeed control the associations, both positive and negative, that are an inherently part of any frame, then it is vital that we choose our words very carefully. Entrepreneurs must carefully consider the frames and buckets they choose to use to describe their businesses recognizing that each chosen word carries with it either "positive" or "negative" connotations and baggage. It should be the goal of every CEO to ensure "positive" categorization.

In the VC lexicon, there are certain buckets that are minefields or "third rails." It is important to control the categorization exercise and preemptively "frame" the discussion in your favor.

Example "third rails" or "negative frames" can be either failed markets (ASP, P2P file sharing, egovernment), business models ($50m to break even), or team dynamics (husband and wife team, 15 founders, etc). These frames all evoke negative emotions, memories of capital loss, and a desire to quickly end the meeting.

When you describe your business, unconsciously the words you employ are raising a set of memories, emotions, inclinations...in the mind of your listener. Be mindful how best to control the reaction of your audience by anchoring off positive tailwinds, successful companies, and other anchors that ensure your name evokes a smile not a smirk.

Isolating Causality: Bad Market or Bad Company

Cervantes famously once said that, "proverbs are short sentences drawn from long experience." In venture capital, one often hears industry veterans say something like, "bad markets make for bad investments."

The importance of the growth, health, and timing of a market to a start-up's postive outcome is both vital and well-known. Cliched and yet, as with many proverbs, true.

When a company is behind plan, an investor must ask is it the market or is it the company? A frequent challenge for an investor is to isolate causality in a given investment. Isolating market (exogenous) or company (endogenous) causality is vital with respect to the appropriate remedial action. If it is the market, there is little chance that more money or new management will change the outcome. If it is the company, additional resources (both capital and human) may indeed impact the outcome and be reasonable.

I have seen some of the smartest people work the longest hours, code round the clock, make the most sales calls, and reap no reward. When the market does not care about your solution, or, worse yet, does not exist, no amount of management talent, hard work, or capital can remedy the situation.

If the market is the challenge, additional investment is a dangerous example of escalation of commitment that will result in capital loss. Often the signals as to the health of the market are ambiguous - are the data points in question indicative of the market's development and health or more random and indeterminant?

I have observed several key indicators that help identify market failure and that suggest further investment is a challenge:

1. 3 VP sales...
   
1. when the plan is missed, the favorite scape goat is the VP Sales.
   
2. A single misfire may be legitimate, but every time that I have seen multiple VP Sales fired in a short amount of time the core problem is not sales management but the fact the market does not care nor exist.
1. VP Sales turnover is a classic red herring.
2. no competitors
1. company's operating in non-existent markets are often unable to point to direct competitiors.
   
2. While competitors may exist on the margin, the names vary from account to account and no clear enemy, or set of enemies, emerges. Lack of competition is a sure sign the market does not care.
3. no RFPs
1. no customers are soliciting the company and there is a dearth of inbound requests for proposals.
4. no repeatability in customer deployments
1. while good teams can generally get 2-3 customers, an early warning sign of a bad market is that there is no consistency in customer need, no common abstraction of use case, and no way to build a repeatable marketing, sales, and product positioning against a common set of needs.
5. no partners
1. companies in dead markets cannot explain where they sit in the market ecosystem and are characterized by no legitimate partner activity
6. no energy
1. the company culture begins to calcify and visitors can feel the lack of energy and nothing appears to change month to month - ie it's like groundhog day...
   
7. no one knows what the company does
   
1. companies that suffer from the above challenges are often the ones that cannot simply and clearly explain what they do. after 45-60 seconds of buzzwords, the listener is left bereft of any sense of clarity and their eyes begin to glaze over.
   
2. when i first started in vc, i remember thinking..."wow, these guys are so smart, i have no idea what they just said." after a few years, i began to realize that if i have had no idea, then i could be damn sure the customers wouldn't either.
8. thrashing
1. the company begins to thrash, with constant changes to the positioning, core problem being solved, and the productand there is no longer a core mission or center of gravity
2. tempers fray as the lack of common mission leads to each executive articulating their own and failing to agree on a direction
   
9. companies that are in healthy markets close enough business to:
1. develop a clear value proposition
2. build repeatable marketing, sales, and delivery models around common uses cases
3. know their top 2-3 competitors cold and see them in every account
4. are solicited for business
5. have real, active partners engaged in common customer accounts
6. have highly energetic cultures where the changes month to month are signficant
   
7. can explain what they do so that almost anyone can understand
8. share a common mission that everyone in the company can articulate
   

If the market is dead, there is no hope. More money, yet another VP sales...will accomplish very little save to ensure further capital loss and wasted effort.

If the market is healthy, then there may in deed be logic in additional funding and new management. Understanding which of the two situations exists can help avoid unnecessary pain and capital loss.

All start-ups iterate their product and value proposition as they hone in on the eventual mission...the challenge is when to know if the challenges are part of the natural evolution or a symptom of operating in a market vacuum.

Krillion Launches

What do you get when you marry local search, an $18bn consumer durables market, and major off-line retailers? Krillion.

Krillion, backed by Hummer Winblad, provides a Localization Engine™ that scours the Web to find, integrate and present actionable local search results for the ready-to-buy consumer. As of this week's launch, Krillion has over 275 million pages of relevant local search results displaying local product information for major appliances in over 40,000 U.S. cities and towns.

For example, if you are looking for a white GE refrigerators within 10 miles of Mountain View, the query returns the following page. A landing page for each query result is dynamically generated, optimized for SEO, and placed into the indexes of the major search engines. By product, by location landing pages provide consumers with actionable information regarding where to buy the product in question and the price ranges across various retailers. See this page as an example result of a discrete SKU.

Why is this important?
Despite the fact that 75% of those who buy big-ticket items do all their research online and make over 90% of their purchases offline, today’s search engines typically are unable to find and deliver results pinpointing specific local stores with specific products. Krillion provides a bridge between the two worlds and helps drive big-ticket consumers into local big box stores.

Krillion delivers search results category-by-category and the first category to be covered is the $18 billion major appliance category: refrigerators, ovens, ranges, washers and dryers, and dishwashers. Moving forward, Krillion will deliver search results for additional categories such as consumer electronics, lawn and garden, seasonal appliances and others.

Congratulations to the team and please see Search Engine Watch's coverage of the Krillion launch here.

Get Feedburner's VC Network Feed as a Widget

Widgetbox, the leader in the web widget space, just released the ability to turn any RSS feed into a web widget. Widgetbox, who recently released a powerful widget syndication platform, is calling blog widgets blidgets.

As many of us read Feedburner's Venture Capital Network feed, I turned the feed into a blidget that can be easily added to your blog.

Click on the button below if you want to add the VC Network blidget to your blog.

The Economics of SaaS: We Need a Platform

Recently, I wrote a post titled “When it Goes Right, What Does It Cost to Build a Great Software Company?"

Based on a universe of 1990s client/server companies, my analysis found that:

• Median Capital Raised: $10.1m
• Median 1st-4th Year Revenue Ramp: $.1m $.8m $6.9m $21.6m
• Median revenue at profitability: $48m
  
• Median Years to Exit: 4
• Software model supports the creation of great companies on <$15m of capital

The post begged the question regarding the metrics associated with SaaS. This post, based on a review of the current public SaaS comps, is the SaaS analog. The analysis includes: WSSI, CRM, OMTR, RNOW, TLEO, and VOCS.

While the SaaS companies grew up in a different IPO market, the results suggest that SaaS companies take:

• 1.6x longer to get liquid
• 3.65x more capital
• 1.75x more revenue to hit profitability
• Salesforce, for example, raised $64.52m in equity, to Peoplesoft's $10. Websidestory raised $43m to BOBJ's $5m.

Click HERE to see data behind analysis

SaaS is here to stay – the advantages to customers and vendors are well established.

The remaining challenge, however, is how to build viable SaaS companies more cost effectively. Will the rise of AMZN S3 and EC2, Apex and AppExchange, etc eliminate the need for bespoke infrastructure investment. We will stop stop asking about MSDN subscriptions and ask instead about AMZN subscriptions?

One can only hope some form of platform infrastructure emerges to accelerate SaaS companies development. If not, the merits of SaaS will be challenged by the time, capital intensity, and delayed profitability of the model. Platform companies – Powersoft/Sybase, ORCL, MSFT – drove down the costs of building client/server application companies. The industry needs the SaaS analogs to unleash the power of the model at the cost optimal level.

A simple analysis holds that Fixed Costs/Gross Margin = breakeven revenue. While for SaaS this is a somewhat circular calculation (as in SaaS fixed costs are amortized into COGS), the rise of platforms will drive down fixed and allow SaaS companies to reduce capital required to get to scale. Fixed costs must be reduced in order to unleash the full power of the model and the rise of platforms will reduce the bespoke investments historically required to build SaaS companies.

Now, the data above is for public companies who came to prominence in very challenging times. We are active SaaS investors and are already seeing the fruits of leveraging commodity platforms and partners to build companies more cost effectively. However, the public record to date suggests that the SaaS industry remains relatively immature without the obvious parallels to the client server tools and server companies that drove the success of huge numbers of application companies in the 1990s.

The Three Most Important Letters in Open Source: CYA

Anyone who follows politics knows that one man’s given is another man’s question. In the software VC world, the merits of open source are regarded as givens- a business model innovation that brilliantly aligns customer and vendor interests.

However, outside of the software VC market, open source remains an enigma wrapped in a mystery. How does free pay? Is open source a backdoor towards communism? Is it anti-capitalist? Despite RHT’s market cap and the success of JBoss, I continue to meet many who question the wisdom and financial merits of open source.

Open source is rife with acronyms – GPL, MPL, OSS, etc. In my experience, however, the three letters in open source that matter most are CYA ("cover your ass"), not GPL…in fact, CYA best explains the economic incentives of open source customers. Simply put, customers will not deploy software into production, independent of whether developers think that they need support, that is not supported.

No IT manager worth his salt will put mission critical software infrastructure into production without a throat to choke. Telling the head of equities that trades are failing due to a software crash and that you have an email into a community forum asking for a fix will result in termination faster than you can say “dumb ass.”

In analyzing open source, I have talked to many developers who tell me they do not need support for many open source projects and that forums, list serves, and documentation provide the material they need to solve their problems. However, IT managers are focused more than ever on service levels and subscribing to open source vendor’s support subscriptions allows them to cover their asses if and when infrastructure fails and transactions are at risk.

If CYA is the key to monetization – what does that mean about the categories of software that are likely to succeed via an open source model? Fundamentally, the closer a product is to a transaction the more important CYA becomes. Applications that are not mission critical –content management, for example - run a material risk of developers using the GPL license and sourcing support from the community rather than via subscription arrangements with the vendor in question.

What other variables characterize successful open source companies:

• Established market- successful open source projects target established software markets where the incumbent vendors are over charging their customers for bloated, proprietary solutions. Famously, once RHT Linux met their enterprise expectations, Morgan Stanley’s purchases of Solaris servers fell off a cliff and the investment bank realized close to 10x cost reductions per CPU. Can you target a large market and deliver a standards-based product that allows IT organizations to grow their IT capacity at a greatly reduced cost basis?
• Evidence of organic pull most appropriately characterized by downloads, forum usage, etc.
• IP rights retained by C-corp established to commercialize project. Indemnities become challenging when it is difficult to provide documented attribution of source code ownership. Also, potential buyers will discount a company’s value if IP remains unclear.
• Active community – an active community of developers led by a project leader who is employed by the company
  

Next time someone asks you how free leads to fee…remember that IT managers and risk taking are oxymorons and that having a throat to choke while saving large amounts of money feels good!

Internet Television History: 24 is on the Web!

In a moment of television and Internet history, Season Six of 24 is available online, via MySpace and Fox.com

For many years and many CES keynotes, IPTV proved to be more hype than substance. Starting today, however, TV's hottest show is available on the web!

Major networks are putting their premium content assets on the web, and the high quality, full-episode streams suggest that the promise of IPTV is finally being realized.

The company behind 24 on-line, Move Networks, (see previous post on company).

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.

Please click on the links above to enjoy 24, Prison Break, and Fox's other prime time programming.

If you are into the CW, click here to watch Everybody Hates Chris, Beauty and the Geek, and other favorites.

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 - has arrived!

Widgetbox in New York Times

Widgetbox, the leading widget web marketplace and syndication platform, is featured in today's NYTimes article on widgets.

Ed and his team deserve credit for recognizing the value of syndicated content, commerce, and application functionality. Widgetbox seamlessly allows web service providers, developers, and end users to deploy and manage widgets. If you have yet to put a widget on your blog, please try one today!

Red Herring Article on VC Bloggers

Sean Wolfe of Red Herring published an article today on the mushrooming number of VC bloggers - VC Bloggers Aplenty?

Brad's newly launched Ask the VC blog prompted Sean to explore why VC's blog and what value exists in the practice.

Sean kindly interviewed me as well for the story. As I mention in the story, the value for me in blogging lies in 1) greater fluency of current trends and technology, 2) a forum for reaching a broad audience on a daily basis and finding new deals, and 3) a medium for demystifying the VC process and sharing best practices and didactic experiences.

Check it out.

2006 Redux

In the 1990s, Queen Elizabeth famously declared that she had suffered through an annus horribilis. In 2006, the valley, in contrast, enjoyed an annus mirabilis.

The massive shift of off-line to on-line ad spending (with newspapers still getting 4.5x on-line!!), the power of SaaS and open source models to align vendor and customer interests, the standards and tools that empower users to define how and where they consume content, and the early signals that media companies finally realize the power, not threat, of the web all combine to create powerful tailwinds for start-ups and their venture backers.

The conditions remain ripe for innovation and the “mirabilis” looks set to continue well through 2007. Investors often contrast secular trends (ex. off-line to on-line) with seasonal trends (ex. XMAS buying), and I am confident that powerful secular trends are at the heart of the renewed vigor of the start-up economy.

It comes as no surprise then that my first full year at Hummer Winblad proved to be a very eventful and productive one.

Over the course of 2006, I have been lucky enough to work with a series of great entrepreneurs, work on six new investments, and see four liquidity events.

In 2006, I worked on investments in:

• Infopia – a SaaS multi-channel e-commerce company
• Widgetbox – a web widget marketplace and syndication platform
• Hubpages – a platform for creating and monetizing web content
• Mulesource – an open source integration platform
• Move Networks - a video streaming infrastructure provider
• Replay Solutions -a very cool development tools company

With respect to liquidity, we were fortunate to see:

• Omniture go public (OMTR)
• EMC acquire Akimbi
• ADP acquire Employease
• CCNMatthews acquire Marketwire

The opportunity to work with such a large number of innovative companies/founders in an era blessed with powerful tailwinds is truly exciting.

This year we hope to add to our roster of great companies, and I encourage start-ups that share that same vision and passion to get in touch with me as we kick off our very busy Q1 season.

I look forward to hearing from you.

CES 2007

Happy New Year!

I plan to attend CES next week and welcome the opportunity to meet with promising start-ups who also are scheduled to be in Vegas.

Feel free to ping me to set up a time to meet.

Widgetbox Syndication Metrics

Widgetbox just released an analytics dashboard for widget developers. It is free and comes with every widget on Widgetbox.

The release further positions Widgetbox as the leader in the web widget space and as the backplane for syndicating, publishing, and tracking the widgetsphere. Since launch in October, the company has served 8.7m widgets to date and the widgetsphere (check home page for real-time data updates), the total number of widget instances syndicated via the service, is growing by over 40% month over month.

With these metrics, you are able to:

• Assess the popularity and effectiveness of your widgets at a fine level of detail.
• Track the spread of your widgets across the Internet.
• See who your biggest users are, as well as the most influential users (those driving the most new subscriptions to your widgets).
• You do not change your widget’s code or think about metrics in advance. Existing widgets automatically take advantage of it.
• It’s automatically available for all current and future widgets registered on Widgetbox. There is no separate sign-up necessary.
• The data is retroactive from August 2006. You can see the usage statistics of your existing widgets since the day they first appeared on Widgetbox.
• It’s free as part of the platform. There is no extra charge.

Developers can analyze widgets by these key metrics:

• Subscriptions - A “subscription” occurs when a blogger or web page owner personalizes a Widgetbox widget and gets it for their web page.
• Hits - A ‘hit’, or page view, occurs when a web surfer views a web page with the subscribed widget on it.
• Referrals - A ‘referral’ occurs when a web surfer viewing a web page containing your widget clicks the ‘Get Widget’ button underneath the widget. This takes them to the widget’s home page on Widgetbox. At this point they can themselves subscribe to the widget.
• Conversions - A ‘conversion’ occurs when a person who has been referred to a widget subscribes to that widget.

Congratulations to the Widgetbox team on providing widget developers the visibility and analysis required in serving the distributed web via a widget strategy.

Architected for Openness

Earlier this year, I wrote a post titled Innovation Happens Elsewhere.

The post, inspired by a quote from Bill Joy, argues that no company owns a monopoly on talent and innovation. As such, businesses need to be designed to leverage the innovation of others. Certainly the multiple benefits - cost, innovation, wealth - driven by standards and open-systems speak to the value of building businesses that are premised on the axiom of distributed innovation.

The atomization of the web is well underway. Standards and protocols are enabling end-users to consume services and content on their terms. Companies are realizing that "off-domain" consumption and service/content syndication leverages the optimal mix of consumer preferences and technology.

As an example, in Q306, GOOG's Q306 total ad revenues were $2.66bn, of which $1bn came via non-GOOG domains, or 39% of the total. The rise of GOOG gadgets, Windows Live gadgets, web widgets, etc reflect a creeping realization that no matter how large the brand it is impossible to keep users on a single domain. JavaScript-integration represents the lowest common denominator for the adoption and usage of a given company's services. Like AdSense, it is critical that web companies allow users to consume web services at locations and in the form of the consumers' choosing.

In many ways, DVR, RSS, personalized home pages reflect the demise of the top down architecture that requires program managers and companies to produce, edit, and package content and services on the users behalf. Whether time shifting, JavaScript-service integration, customized feed readers, users are rewriting the rule book regarding how they expect to be served. Today, companies that are architected to be open and to leverage distributed innovation and consumption are architected for success.

Standards and technologies are allowing for a free market, where users are in control. If we consider "openness" a virtue and the "right" side of history, then similarly we can point to "closed" walled garden strategies as being on the "wrong" side of history. We can easily compare and contrast the vibrancy of the PC web with the backward nature of the mobile industry. In mobile, gate keepers, lack of standards, fragmented platforms, massive porting costs, and a subscription mentally are robbing users and the market of the opportunity for innovation, new services, and wealth that are the treasured hallmarks of the PC-based web.

Command and control economies fell victim to the simple fact that central governments are incapable of making better decisions than millions of individuals exercising their personal preferences.

Today, an "iron curtain" mentality still exists in certain industries. The PC web is quickly creating a new digital divide - one between the consumer utility of an open ecosystem and the crap available from product managers at Verizon and AT&T, who are working with their OEMs on what will be "best" for us.

Eliminating friction points that frustrate the freedom to choose when, what, and where to consume represents not only a worthy goal in itself but more importantly recognizes that it is impossible and unwise to under estimate the individual's desire to define utility.

As entrepreneurs think about architecting start-ups for 2007, I suggest thinking about how to best facilitate atomization, syndication, user-defined utility, and the advancements of others.

Presenting to Win

The first material step in the fund raising process is the "VC pitch."

The VC blogosphere is full of sage advice on presentation templates and structures. Given the vital importance of clearly articulating the value and merits of a business, however, I continue to be amazed by the lack of preparation, clarity, and "aha!s" in the average pitch. As Eminem says, "you only get one shot!"

The presentation, for better or worse, is the medium via which investors evaluate the merits of a company's market, position, and attractiveness as a possible investment. Given the importance of the "pitch," it pays to spend lots of time drafting, refining, and practicing the presentation. Which brings me to the subject of this post...

Jerry Weissman's great book, Presenting to Win, is a practical how-to guide on the "art of telling your story." The book is the culmination of several decades of coaching technology companies and legends on how best to connect with audiences and effectively communicate ideas. His past clients include Sequoia, CSCO, Yahoo, MSFT, and many others.

I suggest ordering the book and include a short synopsis below:

Five Presentation Sins

1. no clear point
2. no audience benefit
3. no clear flow
4. too detailed
5. too long - what he humorously refers to as (MEGO, or mine eyes glaze over)

I like the last one, ie, "man, that guy mego'd me."

Point A and Point B
As you walk into a meeting, room, the audience is mentally at "point a," or their starting point. They have preconceived ideas, experiences, and world views that define their starting point. The goal of ALL pitches is to move them to "point b," or to your objective.

As you think about how best to move them to Point B, remember the golden rule - "WIIFY", or what is in it for you, with "you" being the audience. The WIIFY is the "so what" takeaway.

Understand your Audience
Who are they?
What is their knowledge level?

External Factors
What are the exogenous variables that will impact the audiences' reaction to your message - both positive variables (tail winds) and negative variables (head winds)?

Setting
When, where, and how will you present (av tools, internet access, room size, etc)?

Opening Gambit
Seize attention and the stage via an opening remark. Wiessman suggests using a question, factoid, anecdote - a vehicle that forces attention on you and gets the audience thinking about the subject matter in question.

Flow Structure/Metaphor
Use an organizational metaphor to structure the presentation - ie Letterman Top Ten List, compare and contrast, rhetorical questions, etc.

The above is merely a snapshot of some of the ideas. Communicating vision, ideas, value, etc is not easy, particularly in a world of information overload, too many meetings, blackberries...

If a start-up idea warrants your blood, sweat, and tears - it warrants an investment in time and practice in order to "present to win."

When it Goes Right, What Does It Cost to Build a Great Software Company?

(Click on picture to see data)

What makes software such an attractive area to invest?

Capital efficiency married to the potential for fantastic outcomes.

While the companies above are the 1990s Hall of Fame, the data is still instructive for those of us building software companies and thinking about the time, capital required, and revenue ramp profile of when it goes right.

• Median Capital Raised: $10.1m
• Median 1st-4th Year Revenue Ramp: $.1m $.8m $6.9m $21.6m
• Median Years to Exit: 4
• Market Comps: Massive variance
• Lesson:
• •Pricing discipline is critical as multiples at exit are impossible to forecast and may not be consistent with market multiples at time of funding
• •With market pricing impossible to forecast, capital efficiency is critical
• •Software model supports the creation of great companies on <$15m of capital

The VCAT

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.

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."

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:

• A removal of caps on H1Bs (see my post on this http://willprice.blogspot.com/2005/11/h1-b-aliens-and-myth-of-free-labor.html)
  
• Free trade
• Government investment in alternative fuels and green energy
• Incentives for math and science degrees
• Healthy university systems
• Entrepreneurship - a vital source of jobs, wealth, and innovation
  

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 Myspace.com/Fox 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)!!

Post-script:
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."

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.

Eating Less: The Elixir of Life

Juan Ponce de Leon traveled to the new world in search of the fountain of youth - today, the NY Times Science Section reveals the secret to extended life: caloric restriction.

In a study involving rhesus monkeys, one group of monkeys received ~50% fewer calories than another group - 445 vs 885 per day. The results are startling and "cast doubt on the long-held scientific and cultural beliefs regarding the inevitability of the body's decline."

The well-fed animals suffer from obvious signs of age, relatively more frequent incidents of diabetes and cancer, and a higher mortality rate. For humans, caloric restriction would involve reducing, on average, daily consumption of calories from 3,000 to 2,000.

Scientists are working on mechanisms other than all of us becoming ascetics to provide similar results. The story discusses an interesting experiment with earthworms whereby a mutation of the gene daf-2 led to a 6x increase in life span. The gene appears to "trick" cells into thinking that nutrients (insulin) are not available and in turn prolongs the live of each worm cell.

Increasing insulin and calorie consumption appears to accelerate cell death and reduce life span - I suppose the next time we drive by In-N-Out Burger, we will need to decide if that double-double is worth it after all!:)

Building an Open Source Business

Dave Rosenberg, CEO of Mulesource, recently published an informative article on Sandhill.com regarding his experiences in starting an open source company - from looking for funding, to legal and IP issues, to community development, and pricing, Dave's article is good food for thought.

He describes MuleSource as a second-generation open source company - that is an apt description as RHAT, JBoss, MySQL and others have paved the way with respect to business models, enterprise acceptance of open source, sales strategies, and experienced open source employees are accelerating the rise of recently funded companies.

Trial and Error

Start-ups are, if anything, exercises in iteration. Hypotheses are formed, tested, adapted, retested, and a given company's center of gravity, culture, and path are forged in the fire of trial and error.

As an early stage venture investor, it is interesting to think about the minimum number of iterations required before a company is sufficiently baked that one's capital will be used to refine, rather than to reinvent, a given business.

Refinement and course correction are fundamental to start-ups, reinvention, however, is more related to inefficient capital consumption than it is to value creation.

I often state that genius is a function of context. The best ideas and the most valuable innovations germinate from real world observations of customer need.

Said another way, projections are dangerous, while rejections are instructive.

Start-ups, without any a priori knowledge of the customer need/problem, often project need and develop solutions in isolation and without the bearing of market reality - similar to Plato's Allegory of the Cave. It is always best to ensure that inputs are a function of reality (light of the sun) rather than projection (shadows on the wall).

My personal view is that the minimum number of iterations may be hard to quantify, however, I have observed that the best time to meet a company is ~T+6months. 6 months of commitment, iteration, and market reality seems to be the optimal balance between opportunity and trial and error.

The maturity of the plan, product spec, pitch, value prop, team's commitment, etc is exponential across time - the job of the early stage VC is to work out how much time and how many iterations and if a given company presents the optimal mix of both factors.

Decision Making and Uncertainty

Investing and management are in many ways exercises in decision making.

Where to invest? Where to focus? What are the risks? What is upside, the downside, and what to do and, just as importantly, what not to do?

Thoughtful investors and managers work hard to analyze the pros and cons of a given decision, however, no matter how diligent the analysis the final decision will be a judgment call that involves a large degree of uncertainty.

If imperfect knowledge is a given and yet decisions must be make, what to do?

Bob Rubin is well known as a legendary arbitrage trader, co-CEO of Goldman Sachs, and Secretary of the Treasury. His wonderful autobiography In an Uncertain World provides important insight and lessons into how to best make decisions under uncertainty. The governing principle of his book is that nothing is provably certain.

He writes,

"In arbitrage - as in policy making - you also have to be able to pull the trigger, even when your information is imperfect and your questions cannot all be answered. You have to make a decision: Should I make this investment or not? You begin with probing questions and end having to accept that some them will be imperfectly answered - or not answered at all. And you have to have the stomach for risk."

Rubin does not believe that given the certainty of uncertainty that decision making should be from the gut or based on intuition. Rather he argues that decision making is fundamentally about calculated risks. He stresses a focus on defining a set of possible outcomes, quantifying the probabilities and payoffs associated with each outcome, and then quantifying the expected value payoffs for each outcome identified.

As an arb trader and policy maker, Rubin focused on identifying the potential upside and downside risk, the net of which is the expected value. For example, at GS he looked to take risks that would generate a return of no less than 20% on the firm's capital.

Similarly to Naseem Taleb's book Fooled by Randomness, Rubin stresses that good decisions that appropriately weighed the pros and cons can and will have bad outcomes. Also, it is clear that bad decisions can have good outcomes and that we can be fooled into believing that given the successful outcome that causality is clear - ie that we made a great decision.

Taleb's book centers on the "hidden role of chance in life and in the markets." As an investor, it is particularly apropos as one tries to identify systematic methods of creating value via investing. Investors and investees like to believe that the investment world is deterministic with clearly understood cause and effect. Understanding causal drivers of value helps to create repeatable models for investment that scale both across time and individuals in the firm. Nassim challenges us to be very careful in overascribing reason and logic to an outcome. Too often, investment outcomes are the result of randomness rather than science, ie being lucky rather than good.

He illustrates his point by comparing the world of investors to a large sample of coin-flippers. If you start with a large enough sample, someone will manage to flip heads for many months in a row. While others drop out, the surviving "flipper" will take on magical qualities and others will study his background, methods, and secrets for achieving such success. Then, of course, he will flip tails one day and "blow up."

Nassim's book instills a deep sense of humility in the reader and a recognition that time and chance are often at the root of success. I strongly recommend reading his book.

Both Rubin and Nassim provide valuable insights into how best to operate under uncertainty. There is much to learn from both books.

Successful people and firms focus on building frameworks that allow for systematic decision making and judge people ultimately on the quality of the analysis and the assumptions used to derive at a decision rather than simply on the outcome itself. We all live with uncertainty - how we make decisions day after day given that fact will separate the winners, the losers, and those simply who got lucky!

Infopia and Salesforce.com

Congratulations to Infopia, a Hummer Winblad company, for winning the inaugural Salesforce.com's Appy Award Breakthrough App of the Year!

Infopia provides multi-channel online selling solutions. Infopia's Marketplace Manager solution empowers sellers to reach all possible sources of liquidity and transactions via a single merchandising, inventory, shipping, and complete order to cash system. The integration with Salesforce extends CRM records to include a customer's transactions not only on the retail site, but importantly across all marketplaces, such as eBay. This single view of the customer is a critical extension to CRM and reflects the growing importance of marketplace transactions for retailers.

Congratulations to the team on another big win!

Poison the Well

Throughout history, retreating armies have poisoned wells, burned crops, and otherwise left the victors with barren lands. Which brings me to Sevin Rosen.

Not simply content to quietly shut down after nine funds and several decades of very succesful and significant investments, the firm announced the industry broken and incapable of creating value for its limited partners. In articles in the NYTimes and interviews on CNBC, Steve Dow is making his case for an industry in decline doomed to poor investment returns.

I must say that I find it remarkable that a set of investors whose professional existence is predicated on funding disruption and innovation are publicly advocating that an end-state in the venture capital industry has been reached; that no viable models exist, no innovations exist, no disruptions exist that will allow people to rewrite the venture rule book and add value.

There are no end-states, but rather constantly changing constraints that demand adaptation to ensure survival in the brave new world.

In June 2005, Howard Anderson, a co-founder of Battery Ventures, wrote an article titled Goodbye to Venture Capital in which he lamented how too much money and companies combined with stagnant tech spending had slayed the golden goose. It has, frankly, become cliche to discuss structural challenges and to see nothing but poor risk adjusted returns on the horizon.

Strategies, however, reflect the context facing any given business. The context today is quite clear - and commented on by me here - surplus capital, relatively poor IPO market, and too many venture firms/people.

In the face of stark constraints, the challenge is to define an intellectually credible strategy for creating value that incorporates today's realities rather than ignores them. At Hummer Winblad, we focus on capital efficient software companies priced to reflect the reality that the median IT exit is sub $100m. In the ROIC ratio, the denominator is fixed by the investor and entrepreneur. If the market is fixing the numerator (iemedian exit<$100m), then the maximum amount of money invested must take the exit as a given and be as low as possible.

Business models, use of proceeds, total capital required to reach profitability, and the weighted-average post-money valuation must all reflect the new reality. Steve Dow argues that, "Maybe we have to look only at deals that are going to take a limited amont of capital." I would argue that is logically consistent with simple math: exit/investment = return on invested capital.

Adam Smith famously stated that specialization is a function of market size. Venture capital is a massive market with significant specialization. There is no, accordingly, single model of venture investing and therefore no way to comment on the model failing. Certain firms and certain strategies that do not reflect the empirical constraints of the industry and adapt and innovate will certainly underperform.

My read is that firms will need to go earlier to avoid the ugly exit realities, or they will go abroad to leverage growth markets. Mid to late stage US investing will be a real challenge. The US will see smaller funds that are economically viable in the current market.

Life is disruptive and all business people - operators and investors - need to constantly question their strategies and demand an intellectually credible answer to how to best compete given the exogenous variables at work in any given industry.

VC is no different and it is too large and specialized an industry to extrapolate industry malaise from the hardships of a few funds. While I have great respect for Sevin Rosen's track record, I am not quite sure why going on CNBC to discuss the "broken" industry is a good idea.

Mulesource/CSFB

Jason Maynard, the lead software analyst for CSFB, published today a research brief on the significance and potential of Mulesource. His key comments follow: a powerful endorsement of the company and opportunity.

The Mule is Kicking

· Earlier this week MuleSource, a startup enterprise service bus provider, made its public launch as "the open source choice for integration and SOA." MuleSource raised over $4 million in venture capital funding from Hummer Winblad Venture Partners and Morgenthaler Ventures. MuleSource is headed by CEO Dave Rosenberg and CTO Ross Mason.

· We think this is an interesting company to watch since the ESB is the foundational layer for SOA and MuleSource has perhaps the most mature and widely adopted open source ESB. To date, Mule has more than 200k downloads, a community of over 500 developers, and is in production with over 100 organizations including several in the Fortune 50. In addition, the overall market being addressed by MuleSource is relatively big ($8.5B in software license and $132B in services according to Gartner), which should provide good opportunity for the company to grow.

· The early deployments of Mule have been for SOA and integration at the edge of the network. A few of the more advanced customers have progressed quickly and are now running the product as an enterprise backbone including a few transaction-heavy processing environments in the financial services market. The company hasn’t publicly disclosed any of its customers but we have heard good feedback about the product from many users. Mule’s business model is to offer subscription support contracts in a similar manner to other open source providers.

· Mule is designed to be open and agnostic with nearly all leading application servers, business process management tools, registry offerings, and standard security frameworks. One argument for open source SOA is that it can help solve some of the mundane and one-off architectural challenges for integrating niche applications and systems. The company has been pleased with the value-add from the community around developing new integration adapters. So far nearly 30% of the community is active in offering bug fixes and domain expertise around integration modules.

· One interesting trend to watch is the uptake of the SMuT stack (Spring, Mule, Tomcat) as an alternative to traditional application servers. Their positioning around the edge could siphon some business from the application server market and pop up as a potential alternative to other SOA offerings from JBoss (Red Hat), BEA’s Aqualogic, and TIBCO’s Matrix offerings. Mule is not positioned directly against incumbent messaging providers like TIBCO or IBM since it will take some time and proof points to validate their capabilities. Mule is still very in its lifecycle but should grow quickly given strong usage and product adoption. We don’t think this will disrupt business for the established players in the next year or so but it is an interesting seed that could alter the space in the longer term.

Mulesource

The inevitable march of open source software up the stack continues with Hummer Winblad and Morgenthaler's investment in MuleSource, reported here by Cnet's Stephen Shankland.

MuleSource develops and supports Mule, the leading open source Enterprise Service Bus (ESB) and Integration Platform. At funding, the Series A company is blessed with an active developer community (200,000 downloads), Fortune 50 enterprise deployments, and the enviable value proposition of superior, standards-based products available at a fraction of the cost of commercial source alternatives.

Mule is a Java-based platform that enables enterprise developers to perform a wide variety of integration tasks, from bringing new applications into production, to modernizing legacy applications and platforms, to enabling SOA (Service-Oriented Architecture). Mule's programming model enables faster integration results than proprietary solutions, at a fraction of the cost. And unlike proprietary approaches that frustrate users with complex, closed frameworks, specialized skill sets and architectural lock-in, Mule’s modular design enables enterprise developers to take integration into their own hands.

Enterprise IT organizations must grow IT capacity in a non-linear relationship to revenue and transaction volume growth. The move to SOA and composite applications requires that IT organizations make systems and applications available to an ever widening array of consuming systems and applications. Integration, traditionally a source of high-costs, must provide operating leverage -ie support the capacity of increased integration without a linear increase in the cost of integrating the nth system.

RDHT, MySQL, and others offer a mechanism of adding capacity at greatly reduced costs - keeping IT budgets flat to 1-2% up while adding 30-50% incremental capacity.

MuleSource is fundamentally aligned with IT's mandate to be a source of operating leverage for the business and it will be a great company to watch.

Also, the CEO Dave Rosenberg is an active blogger and co-writes InfoWorld's open source blog. Check it out.