Friday, December 30, 2005

Silicon Beat

Thanks to Matt over at Silicon Beat for recently profiling my blog. Silicon Beat is part of my daily routine and the site and reporting are consistenly good sources for the latest in the technology and start-up world.

Matt's reference to Hummer Winblad suggests that the firm has been quiet of late. It is worth noting that Hummer Winblad has been an active and successful software investor through three major technology cycles: PC, client/server, and the Internet era. The firm's track record of successful investments includes Arbor Software, Net Dynamics (sold to Sun), Adforce (sold to CMGI), Powersoft (merged with Sybase), Scopus (sold to SEBL), and Wind River.

In the past 18 months, the firm led investments in 14 companies including Akimbi, Palamida, Scalent Systems, Cittio, and ActiveGrid. Active portfolio companies include Omniture, Voltage Security, and Employease.

Thanks again to Matt for the post and to the entrepreneurs who read Silicon Beat, please be in touch:)

2005 Redux

According to Feedburner's Item Stats, the following posts topped this blog's most read list. Happy New Year and here's to a wonderful 2006.

Running on Empty
Search: The Rise of Specialization
The Golden Age of IT Buying and What Does it Mean for Investors
H1-B Aliens and the Myth of Free Labor Markets
Sales Forecasting
Sales Management
IBM: Standards, Customer Alignment, and Ecosystem-based Competition
The Cost of Optimism
Pat Your Head and Rub Your Tummy

Friday, December 23, 2005

Absurd Athleticism

Watch this Russian video for some incredible footage. It is sad to see such talent amidst such poverty. Hopefully, the market is efficient and Hollywood talent scouts are on their way.

Wednesday, December 21, 2005

Cap Table Hygiene

Venture capitalists are very much tabla rasa investors. One frequently hears about deals with "no hair," "plain vanilla terms," and good hygiene. Conversely, deals that come with cap table challenges (too many investors, too much prior preference, or onerous terms granted to a prior round) are often dead on arrival.

Why? My view is that company formation and growth is hard enough - one has to deal with market risk, technology risk, team risk, downstream financing risk, etc; therefore deals that layer "bad organizational/legal hygiene" as an additional risk factor into the investment evaluation tend to fail to secure investment.

In thinking of starting a company, it is worth understanding the VC industry's attraction to greenfield situations and is well worth thinking through two specific capitalization challenges that often create downstream pitfalls.

  1. Too Many Founders

A typical Series A sees the following equity ownership distribution: VC syndicate 50%, option pool 20%, founders 30%. Each subsequent financing will see founders diluted by roughly 20% per financing, such that after three rounds the founder shares represent 30%*.8^2, or 19.2% of the company. The per founder math is very simple - founder shares/# of founders. It almost seems redundant to state that too many founders can greatly impact the downstream economics of the founders, however, I have seen very smart, experienced founding teams launch with 5-6 founders and come to realize later that the per founder ownership in the entity creates real incentive problems. The VCs will rarely take less than 40-50% of a Series A and the pool is almost always 20%. Therefore it is important to think through the distribution of the remaining shares to ensure that each member of the team is truly required to get the company off the ground. Teams of 2-3 founders seem to be the norm and cap table issues, questions about equity (wrt fairness), often arise if the team gets much bigger.

2. Too Many Common Holders

All things being equal, the number of common shareholders is inversely proportional to a VC firm's interest in funding a company. The brutal reality of company formation is that often one must take capital from as many angels as necessary. While a small number of qualified angels can add needed runway and perspective, too many angels creates shareholder issues that may impact downstream financings, acquisitions, and legal liability. In raising angel money, try to limit the number of investors required to hit the financing target. When shareholder consents are required - financings, acquisitions, etc - the logistics of rapidly getting approvals can be problematic. I have seen some buyers require full shareholder consents, even if not legally necessary, in order to limit downstream problems relating to minority shareholder lawsuits.

Reality often dictates the necessity of sub-optimal strategies, however, if you can think through how many founders and how many angels to have in your next company you can limit the negative impact of "bad hygiene" on a venture financing.

Friday, December 09, 2005

Hip Hop Web

While listening to Tupac in the car today, it struck me that web 2.0 and rap music have a great deal in common.

The democratizing effect of "two tables and a microphone" allowed people without instrumental training to create wonderful music. Similarly, today's web tools are enabling thousands of web users to create content and applications without deep knowledge of programming languages and technology. Mashups are the web equivalent to rap's sampling, code jams the analog to rap's freestyle battles, beta launches the equivalent to demo tapes, shout-outs the analog to track-backs, Apple's Garageband software similar to Typepad or Jotspot. Moreover, the blogosphere and rap are perhaps the most self-referential creative mediums known to man, whereby songs and posts build off one another in a call and response manner. Mashup's are experiments that create rich blends of underlying applications, as rap tunes are created via the synthesis of jazz, funk, and soul classics. Creativity and innovation is redefined from ground-up development (100% original material) to innovations on the margin. Finally, web 2.0 and rap are both driven by young innovators, often around project-based interaction rather than long-term relationships.

The steady advance in web tools is introducing on-line creativity, rather than simply on-line consumption, to millions of people. As with rap, I think the world is richer for it.

Monday, December 05, 2005

How to respond to Nigerian Spam Mail

The ingenuity and implicit humor found in Nigerian spam mail inspired a close friend of mine, Mike Flynn, to send this incredicle response.

This could be the funniest thing I have read in a long time . Well done Mike.

Re: Next of Kin

Dear Paul,

By a most uncanny coincidence, I am also soliciting a barrister, preferably a national of your country, who worked with Shell development. By a most unfortunate series of events, I was being held hostage in the trunk of the car that claimed the lives of your client. Fortunately I was blown clear of the wreckage and was able to make my way through the jungles of Nigeria to the Plains of Arjuna dragging a dozen large boxes that I was informed by the sister of the mailman who claimed to be the ilegitimate heir to the throne of Uganda, Mr. Yanindada N'Golo Botticelli Vespa, manservant to your client, contained bars of gold bullion!

When I made it to the Baltic sea I was able to obtain safe passage (after many months of hardship as a fish monger's wife) in a freighter to northern Llapland where I met a Nordic Shaman named Odin who told me you would be contacting me after 23 full moons to fulfill my economic desires.

Paul, I feel I can trust and confide in you and feel from your words that you are a man of God and the people who will help me in my time of need. If you can help me with my immediate need of exporting 300,000,000 pink plastic monkeys to Jakarta I will then be in a better position to provide assistance in routing US$106M to my accounts in Lichtenstein.

be the ball Danny,

Dear Sir/madam

I am Barrister paul debayo Solicitor. I am the Personal Attorney to Mr
Thomas Anindya, a national of your country, who used to work with
shell development company in Nigeria.On the 2nd of may 1999, my
client, his wife And their three children were involved in a car
accident along Sagbama Express Road. All occupants of the vehicle
unfortunately lost there lives. Since then I have made several
enquiries to your embassy to locate any of my clients extended
relatives, this has also proved unsuccessful.

After these several unsuccessful attempts, I decided to trace his
relatives over the Internet, to locate any member of his family but of
no avail, hence I contacted you. I have contacted you to assist in
repartrating the money that belong to my client before they get
confisicated or declared unserviceable by the bank where this huge
deposits were lodged.

Particularly, the Bank where the deceased had an account valued at
about $30million dollars has issued me a notice to provide the next of
kin or have the account confisicated within the next ten official
working days. since i have been unsuccesfull in locating the the
relatives for over 3 years now I seek your consent to present you as
the next of kin of the deceased since you are from the same country
and bear the same last name ,so that the proceeds of this account
valued at $30 million dollars can be paid to you and then you and me
can share the money. 55% to me and 40% to you,while 5% should be for
expenses or tax as your government may require, I have the certificate
of deposit that can be used to back up any claim we may make. All I
require is your honest cooperation to enable us see this dealt

I guarantee that this will be executed under a legitimate arrangement
that will protect you from any breach of the law.Please get in touch
with me by my email to enable us discuss further.


Best regards,

Esq:paul debayo

Thursday, December 01, 2005

New Web Site

Hummer Winblad launched our new web site yesterday.

The site provides a great overview of the firm, timeline of investments since founding in 1989, and our process.

For those of you who know the firm well know that John's dog is a key member of the team.

See if you can find an overview on our honorary senior canine leader.

Saturday, November 26, 2005

H1-B Aliens and the Myth of Free Labor Markets

A wonderful constant in this valley of innovation, is the amazing contribution of immigrants to our economy.

In my daily meetings with founding teams and start-ups, there is not a single company that does not have an emigre as a key member. The contribution of Indian, Chinese, Russian, and other nationals to our economy is beyond question and a vital source of our success. From professors, to engineers, senior managers, company founders, and venture capitalists, our current success and prosperity is very positively influenced by our ability to attract the best and brightest to work and study in our country.

Unfortunately, America, while often a champion of free trade, is not a practioner of free labor markets. While technology talent is perhaps the most important input in Silicon Valley's decades of innovation, the US government artificially caps and limits the number of ambitious immigrants to our economy. This year, the H1-B Alien visa program is limited to 65,000. Moreover, since 9/11 the US government has clamped down on graduate student visas; current visa application security checks take 67 days and the total process takes over 3 months . The pernicious effect red-tape is that gifted students are less likely to bother applying, thereby greatly weakening our future prosperity and welfare.

A recent GOA study found that:

  • "Lengthy waits to obtain a visa might lead Chinese students and scholars to pursue studies or research in countries where it is easier to obtain a visa. A consular chief in Chennai, India, agreed, saying that lengthy waits are also causing Indian students to decide to study in countries where it is easier to get a visa and, therefore, the United States could lose out on intellectual knowledge these visa applicants bring to our country"
  • "Many officials with whom we spoke cited specific examples where scientific research and collaboration was delayed or prevented due to delays in obtaining a visa. NASA officials at post also noted that up to 20% of their time is spent dealing with visa issues when they should be focusing on program issues."
  • "According to several surveys, scientific research was postponed, jobs were left unstaffed, and conferences and meetings were missed as a result of the delays."

True globalization requires the seamless flow of ideas, products, and talent. While the world is moving in the right direction, the future of the Valley requires that we make it easy for the world's best to study, work, and contribute to our economy.

Tuesday, November 15, 2005

Running on Empty

Several years ago, Pete Peterson, the founder of Blackstone and an ex-cabinet secretary, wrote an important and sobering book titled Running on Empty.

The book indicts both Republicans and Democrats for ignoring two troubling twin deficits - the the trade deficit and the budget deficit - which, he believes, may ultimately bankrupt the country. The hard-hitting book highlights the off-balance sheet, unfunded entitlement program liabilities that will fall due in the coming decades. With trillions of dollars in Medicaid, social security, and drug benefits promised to current and future retirees, he warns of some very hard choices that face the nation. For example, he estimates if Congress was forced to fund promised entitlement programs, we would face, "an immediate and permanent 60 percent hike in the federal income tax, or a 50 percent cut in Social Security and Medicare benefits."

Recently, news of corporate pension plans failing reminded me of Peterson's important book. For example, Delphi's unfunded pension liabilities present a scary harbinger of what is to come in corporate and government pensions. Delphi, the world's largest auto parts maker, faces an $11bn shortfall in its obligation to retirees. Delphi management, unable to negotiate with the unions, may file for bankruptcy, which would transfer the pension liability to the Pension Benefit Guaranty Corp, a government agency that insures pension plans. Unfortunately, the PBGC is itself underfunded, with assets of $56bn and liabilities of $79.2bn. Total corporate pension plan unfunded liabilities are estimated to be $450bn, well beyond the financial resources of the PBGC. Ultimately, tax payers will be liable for the failings of management to properly fund future obligations.

Roger Lowenstein wrote a wonderful NY Times Magazine article, The End of Pensions, which provides scary and powerful insight into the failing of the defined benefit program and the massive state and local pension obligations that dwarf the corporate dilemma.

Why am I writing about this?

Economic growth is a function of investment. As entitlement spending drives deficits, we will need to finance them with either massive tax increases or massive borrowing to cover our shortfalls. As we borrow more, we will see a higher percentage of our tax base go to interest payments and the lions share of our local, state, and federal budgets go to entitlement spending that reward historical work rather than into investment programs that drive future growth. Both parties appear incapable of addressing this fundamental problem, and I hope that the writings of Peterson, Lowenstein, and others wake the electorate up to the scary prospects of a failing corporate and government pensions and the mortgaging of our future to fund entitlement programs.

Tuesday, October 11, 2005

WSJ Article: How to Ship Better Software

Robert Guth of the WSJ recently wrote a fascinating article with respect to Microsoft's legendary challenges shipping Longhorn, WinFS, and quality software products. The article, titled Code Red, Battling Google, Microsoft Changes How it Builds Software, is an insider's review of Windows problems and the team assigned to make the product more modular, extendable, and easier to test. If you can, read it.

Not long ago, Detroit took 5-7 years to take a car from blueprint to the dealer's lot. Innovation fell prey to the inefficiencies of the Big 3's product development processes and customers abandoned US cars in favor of Asian manufacturers who responded more quickly to consumer tastes and sold higher quality products. Guth's article positions MSFT as the GM to GOOG's Toyota and underscores MSFT's inability to be first to market with innovative (desk top search, ad words, tabbed browsing, maps, etc), (endless patches and security warnings) quality products. Windows proved to be too large a boat anchor to allow MSFT to predictably ship products ahead of competitors.

The article gives credit to Jim Allchin, Window's top executive, for an effort to refactor Windows and, more importantly, the tools, culture, and processes of the Windows development organization. Allchin and Amitabh Srivastava set out to improve quality via new tools that automated unit testing, rejected checked-in code that failed quality checks, improved build processes, system tests and coverage, and a culture traditionally more focused on feature additions than architecturally integrity and quality software.

As a former BOD member of Klocwork, I know first hand that the enterprise and ISV market suffer from poor development processes, a lack of automated source code analysis tools, and a culture of missed ship dates and brute-force solutions. The market is waking up to the need to fix problems at "day zero" and to maintain architectural integrity as products mature. Failure to do so results in products that make innovation very challenging and impossible to maintain.

While MSFT is a poster-child for buggy products, the industry as a whole can benefit with a new generation of tools that improve software quality and reduce the cycle time for new releases that meet customer needs.

Hummer Winblad is an active investor in development tools solutions, with investments in companies such as Akimbi, Palamida, and others still in stealth.

If you know of other companies of note and interest attacking this problem, please send them my/our way.

Friday, September 30, 2005

Hummer Winblad Venture Partners

Per my prior post on early-stage havens, I am pleased to write that I am putting my hypothesis to work and joining Hummer Winblad Venture Partners.

Starting October 3rd, 2005, I will be part of HWVP and looking for exciting, early-stage software deals.

My contact info will be:

Hummer Winblad Venture Partners
One Lombard Street, Suite 300
San Francisco, CA 94111
w) 415 979 9600

I look forward to working with great entrepreneurs and the experienced HWVP team. Please feel free to send early-stage software deals my way!

Tuesday, September 13, 2005

Early Stage Haven?

Recent numbers suggest that early stage investing may yet prove to be a bastion of IRR and extraordinary returns. Why? Recent data provides interesting insights into industry dynamics.

In 1H05, VC firms raised roughly $11bn in IT Venture Capital. Over the same period, IT VCs invested roughly $5.5bn, for a ratio of IT$ invested YTD/IT$ raised YTD of .5. Not a sustainable number.

If IT VCs stopped raising money today (which will never happen), it would take ~12 quarters to invest the $32bn of IT VC$ available for new investment at the Q2 run rate of $2.747bn.

As we all know, the surplus capital appears to be a secular rather than a cyclical shift in the fundamentals of the venture industry.

A key question is, where is the capital going? Apparently, not in the early stage. According to VentureOne, the percentage of VC IT $ going into early stage is falling precipitously:

  • 2000 Early Stage $/Total $ = 34%
  • 2003 Early Stage $/Total $ = 20%
  • 2004 Early Stage $/Total $ = 20%
  • 1H2005 Early Stage $/Total $ =16%

With a -53% change in the amount of money flowing into early stage investments btwn 2000 and 1H05, it appears that the surplus will continue to flow into later stage deals. In later stage investing, winning is almost always a function of share price. Price discipline is eroded as firms bid deals up to deploy capital and "win."

With fewer dollars chasing early stage deals and meaningful non-share price based differentiators - deal flow, company evaluation in absence of customers/revenue, syndication, post-deal value add, etc - it may be that while extraordinary returns for the industry as a whole look challenging, early stage investing may prove to be a bastion of IRR and extraordinary returns.

I believe that smaller funds, specialized focus areas, and early stage investing are the way to go.


Friday, September 02, 2005

Scale Free Profitability

Morgan Stanley's high-tech investment banking team present a wonderful chart that examines the effect of scale on software profitability. The chart powerfully illustrates that scale is increasingly necessary to achieve competitive operating leverage in the software industry.

For example, the distribution of LTM operating margin by revenue size is as follows:
  • $75-300m in revenue = 7% operating margins
  • $300-500m in revenue = 11% operating margins
  • $500m-$1bn = 12% operating margins
  • $1bn-$5bn = 18% operating margins
  • >$5bn = 33% operating margins

The scale effect, as noted by Larry Ellison and Barron's, is driving rapid consolidation of the industry as vendors seeks to consolidate capacity, drive volumes, and get to minimum efficient scale. Consolidation, while good for exits in the near term, has troubling long-term implications wrt the market's expectations for future small cap software company growth, profitability, and viability.

Start-up companies and VCs, by definition, cannot rely on scale to help us achieve profitability. Rather, start-up companies must innovate their business models and strategies in order to reach attractive profitability metrics independent of scale.

As important as technical innovation, successful start-ups must innovate how we do business and prosecute R&D, marketing, sales, and operations.

If we simply innovate technically and rely on traditional business practices, we will suffer from the fate illustrated in the table above.

How we rip costs out of the software model while delivering value will be critical.

I would enjoy hearing from start-ups and investors on novel, optimized business practices that are helping to realize scale-free profitability. While open source software, offshore development, and channel based selling are well-known strategies, any fundamentally novel approaches would be great to share.

Monday, August 15, 2005

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.

Any comments or experiences here would be great to share!

Thursday, August 11, 2005

Fraternal Props

My brother, Rich, played a KFOG concert tonight in SF. The band sounded great and thanks to KFOG we enjoyed a wonderful evening of live music in front of the ferry building in downtown SF.

Rich is featured (track #2) with other emerging Bay Area artists on a really great CD, KFOG Local Scene 2. Check it out.

This new CD from KFOG features a variety of artists and bands from Northern California who deserve to be heard. Proceeds from "KFOG's Local Scene 2" will go to Music In Schools Today, a local charity that helps fund music education in Bay Area public schools. The CD is only $6 and supports a great cause, while introducing the listener to some great new music.

Rich Price headlining a KFOG local artists show in San Francisco. KFOG's new Local Scene CD is definitely worth getting, featuring Rich, Jack Johnson with Animal Liberation Orchestra, Hyim, among others Posted by Picasa

Tuesday, August 09, 2005

NSCP - 10 years later

Today is the 10th anniversary of the Netscape Communications IPO. (see link for great set of Fortune articles).

16 month-old Netscape Communications went public on August 9th, 1995. The stock priced at $28, peaked at $75, and closed that day at $58 valuing the young company at a cool $3.3bn.

1995 also brought us Verisign, Yahoo, and Amazon, among others.

1995 represents a seminal year in technology innovation. In many ways it parallels 1959, the year Jack Kilby and Robert Noyce independently invented the integrated circuit and gave birth to the digital age.

Reflecting on the staggering impact NSCP, VRSN, YHOO, and AMZN have had on our lives, economies, and careers reinforces the promise and excitement of innovation, while reminding us how hard it is to appreciate non-linear developments, and harder still to foresee their ultimate impact.

As investors and technologists, let's all hope that 1995 is a spring board for changes still to come, and let's us also hope that we have the foresight to recognize "it" when/if we see it.

Thursday, August 04, 2005

State of the blogosphere

David Sifry, Technorati's CEO and founder, just published a series of State of the Blogoshpere posts.

Summary Stats:
Technorati was tracking over 14.2 Million weblogs, and over 1.3 billion links in July 2005
The blogosphere continues to double about every 5.5 months
A new blog is created about every second, there are over 80,000 created daily
About 55% of all blogs are active, and that has remained a consistent statistic for at least a year
About 13% of all blogs are updated at least weekly

Wow. Simply amazing growth and well worth watching as investors and business people.

Tuesday, August 02, 2005

Strategic Planning

As a BOD member, non-profit volunteer, and employee here at Pequot, I am often asked to attend strategic planning sessions. This post shares my observations on common pitfalls and methods for using time as a group to add value and solve real issues.

Strategic planning sessions often fail to be either strategic or helpful in planning for the future. The expense in time, energy, and dollars can be significant. And yet, often the process leaves people frustrated and unfulfilled.

Why? What to do?

In my experience, the most effective offsites benefit from utilizing a mental model or framework that bounds the discussion, defines the assumptions, and helps people with a common lexicon and method for discussing issues and deriving answers. The absence of a framework or model for decision making and discussion and the lack of a common lexicon to discuss issues results in people talking past one another and endless loops that lead nowhere.

I am always amazed how varied peoples perceptions are to issues and the degree to variance can only be overcome if a common vocabulary and framework is agreed upon. This is especially true when you bring people together from completely different functional backgrounds.

For example, I recently served on the strategic planning committee of my church. Ten very smart people, well maybe nine, were asked to come together and define a three year plan for the church and its ministries. The first few meetings were pure hell. We talked endlessly about how to organize the committee, what the deliverable would be, and others simply jumped in and attempted to solve "key" issues. We got nowhere and lost energy.

We finally saw real traction when we all read a book that provided a framework for the process - with templates, a timeline, a sample deliverable, and a model for discussing the issues at hand. As soon as we adopted the model and the associated language, context, and logic, we made amazing progress and finished in no time at all. A shared approach that defined the problem and provided a path to deriving a solution allowed the group to think as one and it provided a baseline that made each individuals contribution additive.

In business setttings, the same lessons apply. Unless people buy into a mental model or construct of how to define, discuss, and solve the problem(s), conversations are endless streams of non-sequitors and serve only to frustrate the people involved.

Accordingly, I am a firm believer in
  • defining the problem to solve
  • agreeing on a model or framework for discussing the problem and deriving a solution
    • ie defining the logic path and process that result in an answer
  • defining a timeline
  • getting team member buy-in wrt the above
Anyone else have experiences or processes wrt strategic planning worth sharing?

Wednesday, July 27, 2005

Rich Price - music you need to hear

My brother, Rich Price, is an amazing musician and a wonderful talent. Richard is a singer-song writer who is growing a great fan base, radio play, on movie soundtracks, and has released two wonderful albums (Miles from Anywhere, and Night Opens). Both albums are available on iTunes.

He recently launched a podcast and joined the blogosphere. Check out his music and his podcast, which is a great mix of original music and his favorite artists.

Finally, if you know of artists who are setting the standard wrt leveraging web 2.0 tools to share their music, please let him know. Email him at

I know you will love Rich - please check him out.


Ghenghis Khan

I recently read a fabulous book, Ghenghis Khan and the Making of the Modern World.

The author, Jack Weatherford, outlines Khan's amazing life story and rise from outcast/orphaned Mongol nomad to ruler of the world's largest ever empire. The book serves as a major rehabilitation of Khan's legacy and transforms the traditional view of Ghenghis Khan from brutal tyrant to transformative ruler who spread the rise of free trade, religious freedom, science, standards, paper currency, postal services and communications, and national identities in lieu of tribalism, religious persecution, and autarky.

Khan's genius lies in his ability to transcend his circumstances and envision completely novel means of organizing armies, ruling empires, and structuring society (merit vs hereditary and tribal). An Indian friend of mine and admirer of Khan's describes him as being "self-born," a force in history with no precedent and a man of ideas and achievement completely non-linear to his context and roots.

The reviews on AMZN are excellent and for the Western reader, the author challenges long-held stereotypes and reintroduces a familiar historical figure in a new, influential light.

Monday, July 25, 2005

Top Posts

Based on a new reader's request and as a large number of readers are new to the blog, I copy below links to the top six posts by reader interest since I launched the blog in May.

BTW, Feedburner's "Content Item Stats" are a great way to track what people are reading on your blog.

Search: The Rise of Specialization
The Golden Age of IT Buying and What Does it Mean for Investors
Sales Forecasting
Sales Management
IBM: Standards, Customer Alignment, and Ecosystem-based Competition
The Cost of Optimism

Friday, July 22, 2005

Seeking Alpha

My blog recently was added to the VC section of Seeking Alpha.

Seeking Alpha is a blog focused on investment strategy, portfolio management, and alternative assets (hedge fund, venture capital, etc).

The site is a useful aggregation of information pertinent to those interested in alternative asset management. For example, the blog's most recent section deals with the investment ramifications of the yuan's revaluation and easing of peg to the US $.

Check it out.

Thursday, July 21, 2005

Due Diligence, Customer Visits, and the Value of Face-to-face Meetings

Last week, I met with a good friend and start-up CEO. Mike is a veteran of multiple VC backed start-ups and a seasoned executive.

He asked me a very good question, "why is it that VCs call our customers during the investment process but rarely call/meet with our customers once they have made the investment?"

He went on to say, "in all the start-ups I have worked with, my investors did not make it a priority to get in the field, go on sales calls with me, and meet the customers on their premises to better understand our products, the sales process, and the market need. "

Along those lines....I recently had an experience that changed my strategy and perspective on the due diligence. As many of you know, when considering an investment, we always arrange to speak with the company's customers, management references, and key prospects. I have made hundreds of calls over my 3.5 years in VC, with the operative word being CALLS.

WRT the deal in question, I called their largest customer and spoke to the end-user. I went through a traditional set of status, contract size and terms, other solutions considered, perceived product differentiation, installation and integration process, concerns or suggestions, rating of company and product, etc.

The caller provided me a glowing report. Right before I hung up, however, I realized I would be in San Jose the next day and offered to buy the customer lunch as a thank you. He readily agreed.

Over lunch, an amazing thing happened. In person, the conversation became much less structured and much, much more nuanced and free-flowing. In person, I picked up on visual cues, body language, and began to get a much less positive view on the company and its prospects. The lunch proved to be the defining moment in the diligence process and led to our passing.

Why were the interactions so different? In-person meetings provide verbal and physical cues and a level of connection that phone calls cannot match. Scheduled conference calls somehow limit non-linear discussions and tend to follow a more formal script or call and response protocol that restricts authentic communication. On a scheduled customer call, the customer tends to be less expressive and revealing. In person, however, I discover much more about their business, problems, context for evaluation of technology, and in-depth perspective on the company/product in-question.

Over lunch, I decided that when making material investment decisions that I will always, when possible, drive to the customer's premises and conduct the diligence session face-to-face. So far, very good.

Finally, I am taking Mike's advice and counsel to heart. I am going on sales calls with both prospective and current portfolio companies. While perhaps no surprise to many of you, the focus on "live meetings" and post-investment field sales calls is making me a better investor with much better insight into the companies, customers, and markets that I work in.


Quick post-script to my original post here - another very good reason for in-person diligence calls is the following...developing friendships and great relationships...for every deal that I have diligenced, I develop a relationship with at least one great technologist whose input and perspective helps shape my thinking and direction long after the deal in question is completed.

Tuesday, July 12, 2005

Decision Making

I recently read a fascinating scientific paper by Anthony Bastardi and Eldar Shafir titled On the Pursuit and Misuse of Useless Information. The paper's thesis is that decision makers often delay decisions to pursue additional noninstrumental information - information that a priori will not affect the decision at hand - yet then proceed to make use of the information, thus making it instrumental, once it is obtained.

The key issue for executives and venture capitalists is the following: one needs to determine what information may prove critical to the decision at hand, and, therefore is worth waiting for, and what information is unlikely to affect (and thus need not delay) the decision at hand. The authors note that "people often arrive at a decision problem not with well-established preferences and clearly ranked preferences, but rather with the need to determine their preference as a result of having to decide, and they often look for additional information in hopes that it may facilitate the choice."

The venture capital process is a class example of this phenomena.

Investors often do not have a priori preferences with respect to an investment decision and need to determine their preference to fund a company and do indeed, as all entrepreneurs know well, seek additional information with which to make their decision. The central issue is clearly identify which information is instrumental, "information that can alter what decision is made," versus which information is noninstrumental, "information which will not impact the decision at hand if it were available."

Given people like to obtain information and base their decisions on compelling reasons for one option versus another, research finds that, given the option, people will wait for noninstrumental information. Worse yet, once the noninstrumental information is gathered, people alter their choice based on this noninstrumental information. The cost is not only delayed decision making but also poor decision making as noninstrumental information impacts the final choice.

The key take-away is that all of us, when making a decision, need to carefully think through what we absolutely need to know in order to make a good decision, rather than delaying decision making and leaning on the crutch of more time to gather non-essiential data that may contribute to a poorer decision.

Monday, July 11, 2005


On June 27th, a remarkable thing took place in London., an on-line site best known for poker, raised $1.4bn dollars in an IPO. All $1.4bn went to the founders, who retain material stakes in the company, and the IPO raised no new money for the company. The IPO's success comes despite the fact that the US government bans on-line gaming, that the founders will be arrested if they ever come back the US, and that the founders previously ran on-line porn businesses.

The company's financials tell a remarkable story of growth and profitability.

Revenues grew from $30m in 2002 to $600m in 2004. Annualized first quarter revenues were $890m. The company is not only growing rapidly (30x in three years) but is also delivering profit margins in in excess of 50%. Click here for more detail on financials. The company's PE ratio remains in the low teens, despite the growth and profitability delivered to date. Clearly, a regulatory overhang impacts the valuation, however, the fundamentals and prospects of the business are remarkable.

Is this an anomaly? Is the company and IPO a freak event?

In my mind, Partygaming represents a wealth creation vehicle that validates the power of consumer Internet applications and the marginal profits possible in electronic content. Partygaming's backend supports up to 70,000 simultaneous users, with the marginal cost of another user/player close to zero. Growth will drive increased profits as largely fixed IT costs are amortized across a larger universe of players. The demand for on-line gaming is exploding as broadband penetrates households and multi-player games attract off-line enthusiasts.

Google, Yahoo, Partygaming, and a myriad of emerging companies are validating that Web 2.0 business models can be cash-flow machines. The return of the consumer Internet investment is an increasingly common story. When I first got into the VC business, in fact when I tried to raise money as a consumer Internet service CEO, consumer investments were an anathema. Investors associated all Internet deals with webvan and Three years after the crash, it is fascinating to see the Internet's hype instantiated in 50% net margins and I am confident that PartyGaming is a herald of more interesting consumer applications and innovation to come.

PartyGaming's IPO is true testament to profitability and growth possible in Internet services and a good reminder to all of us that contrarian investing (think about backing this in 2001)leveraging pretty clear market characteristics (gaming is big, web access is growing, etc) drives healthy returns.

Thursday, July 07, 2005


I write to introduce people to a great blog written by Keith Teare and Michael Arrington, ex-Realnames executives. The blog, TechCrunch, profiles newly launched Internet businesses, products, and services.

The blog is a great way to stay abreast of the latest and greatest on the web. As an example, the site recently profiled Skype's Outlook plug-in.

Check it out.

Wednesday, July 06, 2005

Looking for a job?

As a VC, I am frequently asked to meet with people looking for a job. The broad perspective enjoyed by many VC firms provides a birds-eye view into emerging markets, new companies, and areas of opportunity. It is a privilege and a pleasure to meet with smart people eager to identify the next great career opportunity.

This post is an effort to consolidate my advice into an actionable list of suggestions to help people who want to enter the start-up world.

First the good news; new companies are being created and funded at a rapid clip. New companies drive new innovation, and innovation (see my post on the MS CTO Summit) creates new jobs and opportunities.

In 2005 Q1, VCs funded 290 IT deals with $2.9 bn of investment. 52% of the $2.9bn went into A and B rounds, which implies that over $1.45bn of capital sits on the balance sheet of young IT companies looking to ramp headcount as they scale from product development into sales and marketing. In 2004, the VC industry invested $11.8bn into 1,303 IT companies.

The key take-away is that there is a large pool of new companies who will be adding headcount in the months ahead and are funded to grow.

With respect to a process for looking for the right next gig...I suggest the following steps:


The web offers a variety of very useful tools and sites that help discover companies of interest. Before beginning a search process, I encourage job seekers to avail themselves to resources that can help map out areas of interest, representative companies, and funding events.

I recommend subscribing to VentureWire, VentureWire's events (see which companies are attending relevant conferences), reading The 451, AlwaysOn, VC blogs and tech news sites, and venture capital firms' portfolio listings.


Start-up's cost of capital is high. Accordingly, BOD members and CEOs are focused on maximizing the return on every dollar invested. Given that HR costs represent over 70% of a start-up's burn rate, CEOs need to hire carefully and prudently in order to ensure that capital is invested wisely in reaching key company milestones. Therefore, I strongly encourage people to leverage their prior track record of expertise and achievement in looking for a start-up role. Specifically, start-ups can ill afford to experiment with an engineer interested in a move into marketing, or a consumer electronics product manager looking to move into the financial services vertical. When a req is open, the company needs to feel very confident that the prospective hire brings the skills and experience necessary to do the job. The cost of failure is too high.

If you are looking to move industries and/or career functions, I suggest the chances of securing a position are very low. Rather, try to leverage the expertise developed to date in a given market or function.


Do not send email to This is a recipe for frustration. Given the high cost of a bad hire, start-ups like to hire known commodities. What if you don't know lots of start-up CEOs directly? Don't worry.

These relationships/touch points can be more than one degree of freedom away and still be very effective - referrals are the best source of qualified leads. Accordingly, once research uncovers a sector and set of companies of interest it helps to look carefully at the backgrounds of key management team and board of director members. Also see if the VC firms backing the company employ a full-time recruiter; VC HR resources are a wealth of information and access regarding opportunities across large numbers of young companies.

Remember, that personal references are vital and leveraging a network of relationships to secure access to the hiring manager is key to traction in a job process. If you use LinkedIn, you can search for a given target's name and see if your personal networks overlap. As an example, on LinkedIn I have 74 direct connections, 16,100 connections two degrees of freedom away, and 372,000 three degrees of freedom away. Amazing. Other useful networks to tap into include school alumni boards and company alumni groups.

Once the companies and a contact are identified, prepare diligently with respect to how you can help the company and play the game of numbers. To be successful, you will need a pool of targets to help yield one strong offer.


Plan on a six month process. Split the process into manageable parts - 1) identify markets and companies of interest, 2) identify access points, and 3) leverage your background, preparation, and network to get an audience and opportunity to compete for a position.

In summary, start-ups continue to be created and funded at a very healthy rate. Life is too short to work in a job that you find unfulfilling, or for a company that is in decline. The start-up world will need to recruit hundreds of qualified senior managers to fill positions as young companies grow and scale. To be successful, however, I believe it will pay to focus on education and awareness of what is happening in the market, leverage prior track records of success and achievement, secure access to opportunity via trusted network connections, and prepare diligently for a lengthy process.

Good Luck.

Wednesday, June 29, 2005

Alan Morgan - VC Best Practices

A common start-up complaint is that the VC process is black-box. Start-up executives struggle with a seemingly arbitary process and are often frustrated by the dyanmics of raising capital from VCs.

I find the most useful VC blogs offer postings that help shed light on the process of raising money and/or share best practices on how to run start-ups, raise money, or effectively manage board of directors.

Mayfield's Alan Morgan's blog includes a series of very useful posts that are worth reading.

The first series of posts provides insight into how entrepreneurs should work with VCs during the capital raising process. Click here to read the series - Ten Commandments for Entrepreneurs.

The second post provides advice for start-up CEOs with respect to managing and working with a Board of Directors. Click here to read the post - "Managing" Your Board of Directors.

Tuesday, June 28, 2005

Jack Kilby

Jack Kilby, co-inventor of the integrated circuit, died last week after an amazing life.

Kilby and Noyce independently invented the IC, with Kilby's pioneering work ultimately recognized with a Nobel Prize in 2000.

For anyone in the technology industry, I strongly suggest reading The Chip.

The book is a wonderful account of the two men, their inventions, and the IC's impact on the world.


Monday, June 27, 2005

The Cost of Optimism

The Economist recently ran a wonderful piece on the sorry state of project management.

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 44% 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.

Thursday, June 23, 2005

Roku SoundBridge

Last month at Microsoft's VC Summit, the company generously handed out Roku Soundbridge devices to attendees. Thank you Mr. Ballmer:)

The device serves as a "bridge" between digital music on the PC and the stereo. Roku's device includes a compact-flash wireless NIC that enables the PC to stream music from iTunes or Windows Media Player to the stereo.

While at first the Roku device had trouble communicating with my Netgear wireless router, after working through a few issues, I am loving the convenience of playing my iTunes library and playlists on the stereo.

The product is a great link between two worlds and allows me to leverage two sets of investments - while I am sure that my stereo will soon go the way of all flesh, I recommend using the Soundbridge in the interim.

One problem with the Roku device is that AAPL's file format prevents the playing of music purchased at iStore - anyone have ideas on how to fix this issue?

Saturday, June 18, 2005

The Value of Virtualization

Quick edit to my post on virtualization - Information Week published an overview of the market and key drivers recently. It is worth reading.

Utility computing is a hot topic. Companies are spending millions of dollars on VMWare and other virtualization technologies in order to consolidate data center operations and pool IT resource demand. Utility computing and virtualization are reshaping today's data center technologies and operations. Why?

Quite simply, virtualization technologies drive significant improvements in asset utilization by pooling resources across variable demand. By pooling fluctuations in demand, one needs fewer physical resources to meet resource demand. Fewer provisioned resources reduces operating and capital expenses, a good thing:)

The technology industry is borrowing an important operational best-practice from supply chain practioners - that is the pooling of inventory. Why does this work?

It works because averages are additive, while standard deviations are not. This statistical fact drives the benefits of pooling inventory (IT assets), across variable demand for those assets.

In operations, in order to avoid lost sales, supply chain managers pad inventory levels in order to avoid expensive stock-outs. The IT equivalent is to overprovision. Supply chain experts leveraged basic statistics to realize that by pooling inventory one can greatly reduce the amount of safety stock required to adequately meet demand.

How? A simple (VERY) example shows the power of pooling.

Assume two applications, managed independently, with the following weekly demand characteristics:

Application I
Mean Demand 50 servers
Standard Deviation 4 servers

Application II
Mean Demand 50
Standard Deviation 3 servers

If we set safety stock equal to two times the standard deviation, application I needs 58 servers to adequately meet demand (ie with 95% confidence), while application II requires 56 servers. The data center responsible for both applications, in aggregate, overprovisions by 14 servers of "safety stock."

Now if we decide to pool the two applications, we would observe the following:

Consolidated Applications
Mean Demand 100 servers (averages are additive)
Standard Deviation 5 servers, or sqrt(4^2 + 3^2)

Pooling the server demand of the two applications allows the enterprise to reduce server safety stock by 4 units, or by 28%.

For a large enterprise, reduced server safety stock translates into large savings.
Theoretically, 4 servers x 1,000 applications x $5,000 per server (estimate) = $20,000,000

This is an artificial example, but I think it is illustrative of the value of virtualization. It helps me, at least!, tie supply chain management operations theory to high-tech market adoption.

By leveraging enabling technologies to pool spare capacity and statistics (averages are additive but that standard deviations grow by the square root of the sum of the standard deviations in question), IT operators can continue to strip capacity and costs out of the data center while continuing to meet demand.

Thursday, June 16, 2005

Morgan Stanley CTO Summit

This week, Morgan Stanley hosted its 5th Annual CTO Summit.

The summit serves as a testament to why innovation matters and how large companies can effectively partner with start-ups to make a difference.

First, Morgan Stanley's CTO, Guy Chiarello, makes working with start-ups a top priority. He recognizes that he simply cannot wait for his incumbent vendors to deliver on next-generation technology, and he works hard to ensure that Morgan Stanley's competitive advantage is maintained by the identification and adoption of cutting edge technologies.

For example, Guy handed out two innovation awards to companies that embody how technology can help large enterprises grow IT capacity without a correlated growth in head-count or costs. This year's winners were VMWare, which provides processor virtualization technologies, and Avamar, a provider of disk-based, rather than tape-based back-up solutions. Both companies were identified by Morgan Stanley in prior West Coast CTO conferences and since implementation have helped Morgan Stanley increase IT asset utilization and data back-up efficiencies.

Second, he brings his entire senior team to the West coast for the two-day event, no small expense in time, logistics, and coordination. This year he brought out 40 of his best and brightest to meet with emerging start-ups and VCs. The 40 represent the bank's leaders in BI/information management, collaboration and web applications, compute and storage platforms, enterprise and application management, network connectivity, risk and security, and the CTO's office.

Third, his staff candidly explain where they need help and where technology can, on the margin, better help Morgan's IT group deliver on business benefit and advantage.

Fourth, he devotes an entire day to meeting with pre-screened start-up companies that appear to meet one of MS' unmet needs. This year, one of my companies, Klocwork, had the privilege of presenting to Guy and the security group. Klocwork provides source code quality and security analysis and is in a position to help Morgan automate code review and improve the performance and security of its home-grown applications.

Over the last three years, Morgan Stanley used start-up technologies, such as VMWare, to dramatically increase its compute, storage, and network capacity (in some cases by over 100% without ANY increase in head-count and operating costs). MS offers the IT world a paradigm of how to leverage commodity hardware (x86), commodity software (Linux), in combination with cutting edge innovation to grow IT capacity and drive business advantage without seeing an equivalent growth in cost.

Why does Morgan Stanley send 40 of its smartest guys to the West coast every year?

They recognize that young, start-up technology companies can help large enterprises solve complex business and technology challenges in ways that larger system vendors and software houses simply cannot match. Per my post on the Golden Age of IT, Morgan is embracing two powerful trends (standard hardware and commodity software) in complement with innovative, start-up technologies that help accelerate cost-reduction, efficiency, and capacity.

I left impressed by their commitment to innovation and how well they APPLY innovation to solve real problems.

Guy is a model CTO/CIO and he gives all us in the technology industry hope that the enterprise will continue to recognize and reward technology innovation. Now, who said IT is dead?

Wednesday, June 15, 2005

Firefox Tip

Firefox, the opensource browser from Mozilla, is rapidly gaining market share from IE with a reputation for better security, tabbed browsing, pop-up blockers, small footprint, RSS integration and other features.

For Firefox users, Brad Feld posted a helpful set of configuration tips to improve Firefox's performance. See the below.

Go to the address bar in Firefox and type in "about:config"

Look for the following lines:

  • network.http.pipelining = false
  • network.http.pipelining.maxrequests = 4
  • network.http.proxy.pipelining = false

Change them to (by click/double-click the line):

  • network.http.pipelining = true
  • network.http.pipelining.maxrequests = 30
  • network.http.proxy.pipelining = true

This configures the browser to make 30 requests at once and not wait for a reply to the request before making another request

Then you need to create one new option:

  • Right click anywhere on the page and select New-> Integer.
  • Name it "nglayout.initialpaint.delay"
  • Set its value to "0".

This value is the amount of time the browser waits before it acts on information it receives. You need to restart Firefox for this to be enabled. On sites that support pipelining (not all do) the results are dramatic.

Thanks Brad for passing on the tip.

Sunday, June 12, 2005

Mark Leslie, VRTS founder, on Sales Life Cycle

Per my posts below on forecasting sales, Mark Leslie wrote an interesting article on the subject and the importance of quickly moving down the sales learning curve for start-ups.

The Sales Learning Curve - Optimizing the Path to Postive Cash Flow
By Mark Leslie

There's an old saying about rolling out a successful new product: "It always takes longer and costs more." Many company executives are resigned to this state of affairs, determined to ride out the tough phase of the new product cycle on the path to positive cash flow.

But it doesn't have to be that way. By learning from the mistakes of the past, start-ups can build cost-effective, successful sales teams that burn through a minimal amount of cash on the road to breakeven.

This method of establishing a sales force is called the Sales Learning Curve (SLC). It's a concept adapted from the Manufacturing Learning Curve (MLC), which is widely accepted in the manufacturing sector. The MLC states that the cost to produce the early units of a new product normally is high, but over time, as the production team learns how to optimize manufacturing and wring out costs, volume increases and per-unit product costs decline sharply.

When we apply the MLC to sales, we come to the following conclusion: The time it takes to achieve cash flow breakeven is reasonably independent of sales force staffing. It is, instead, entirely dependent on how well and how quickly the entire organization learns what it takes to sell the product or service while incorporating customer feedback into the product itself. Because the entire organization has to come up to speed, hiring a large initial sales staff does not speed up the time to breakeven, it simply consumes cash more quickly.

Let's look at a case study of what happens when the SLC is not applied. Our model company experiences positive early product revenues from beta customers. Top management, eager to establish an early leadership position in the market, adopts an aggressive approach to sales. The company hires a VP of sales, as well as regional sales managers, systems engineers, inside sales reps and field sales reps. The clear expectation is that this team - often upward of 30 people - will deploy rapidly and efficiently, reaching breakeven within three or four quarters.

Then reality sets in. It takes longer than expected to convince initial customers to buy. The positioning of the product is not quite right, the price needs to be adjusted and product features need to be tweaked. Meanwhile, typical start-up issues, such as opening regional sales offices and establishing lines of command, distract the sales force. The result: This oversized team burns through tons of cash and does not come close to reaching breakeven within the target timeframe.

What happened? Management incorrectly assumed that by simply ramping up the sales force, revenues would automatically increase at the same pace.

If the company had applied the SLC, it would have staffed sales at a much lower and cheaper level, in anticipation of a slower initial sales ramp. This would allow the company to fine-tune the product or service (feature set, ease of use, integration needs, etc.), to hone its sales and marketing processes and to learn from customers about positioning, promotion and pricing, all before deploying a large and expensive sales force.

Rather than starting with a large sales force, a company using the SLC is better served by hiring a small team of sales execs with the analytical skills and patience to lead the company through an iterative learning process that includes the continuous discovery and solution of small but crucial problems.

Let's revisit our model company. Let's say it adheres to the SLC. When should it start expanding the sales force? Keeping in mind that the slope of the SLC varies depending on the product being sold, a good starting place would be to wait until the initial sales team is generating a marginal contribution of two times the cost of a field sales rep. While data points in sales tend to be scarcer than in manufacturing, this is a reliable indicator that you've started to climb the Sales Learning Curve.

By adhering to the Sales Learning Curve model of sales force staffing, you can safely toss out that old adage we started with. It doesn't have to take longer and cost more than you planned.

Mark Leslie is an El Dorado Ventures Technology Partner. He is a managing director of Leslie Ventures and teaches at Stanford University's Graduate School of Business and Graduate Engineering School. From 1990 to 2000, Mark served as Chairman and CEO of Veritas Software and oversaw the growth of the company from start-up mode to $1.2 billion in annual revenues. He is on the boards of Avaya Corp. (NYSE: AV), Metric Stream, Model N, Outerbay, Panta, PostX and Scalix.

Friday, June 10, 2005

After the Term sheet

Levensohn Venture Partners authored a useful guide to start-up board dynamics, and in particular how boards influence the success or failure of technology companies.


Click here for article

Thursday, June 09, 2005

IBM: Standards, Customer Alignment, and Ecosystem based competition

Yesterday, I attended IBM's Venture Partnering Symposium at the Thomas J. Watson Research Center in NY.

The event focused on exposing VCs to IBM's software and systems strategy and detailed a "how to" guide for start-ups to work with IBM. See

I left IBM impressed by the cogency and power of their strategy, which is predicated on:
  • standards-based software and hardware
  • open source and open systems (shared specifications)
  • ecosystem based competition
  • customer solutions
For example, IBM seeks to align customer and vendor interests by recognizing that IT buyers will increasingly favor commodity hardware (blade servers), open standards and open source (which lower switching costs), and solutions rather than tool-kits.

Ideally, IBM's Software unit provides standards-based software solutions that run on IBM's Systems groups commodity hardware built by IBM Global Services into vertically-relevant solutions. Contrast this with Microsoft's approach of proprietary, closed source software that creates major switching costs, with no MSFT enterprise delivery arm to ensure that components are effectively built into customer solutions.

Microsoft's interests are increasing orthogonal to those of their customers, while IBM's commoditization of certain elements of the software stack and embrace of standards continue to align IBM with the best interests of their major customers who aspire to fungible, easily integrated, standards-based software components. This is a hard riddle for MSFT to solve.

IBM also highlighted the power of ecosystem-based competition. For example, to maintain an enterprise-scale operating system costs $500m per year (according to Paul Horn, IBM Research). By moving to Linux, IBM invests $50m per year (1/10th the cost) in Linux and benefits from a cumulative pan-industry investment of $1,000m, 5,000 developers, etc. IBM's embrace of Linux allows it to free human and financial resources away from low-value commodity functions to higher value opportunities, whereby the cost of operating system development is reduced and investments in new classes of infrastructure software and innovation are funded via an industry/ecosystem pooling of resources and effort.

Paul stated, "companies that innovate on top of open standards are advantaged because resources are freed up to higher value work and market opportunities expand as standards proliferate." IBM is focused on raising its collaborate/compete ratio - the greater the community focus on shared resources and advances, the lower the cost of the components that drive composite solutions, the greater the customer value, and ultimately, the greater the profits.

Where does this leave start-ups without a services arm (IBM GS) to drive revenue?

There is a wisdom of crowds with respect to innovations, extensions, documentation, best practices, etc. - we need to ask, how can we leverage the power of crowds in order to increase the value of what we bring to the table?

But there is an attendant danger - IBM is commoditizing the stack to drive the standardization of componentry and the cost of solutions. Fungibility has negative implications for start ups, but the concept of ecosystem based competition rather than company level competition is interesting and worth thinking more about.

Standards are the stated rules of engagement - which reduces friction. We need to think about how we tap into the benefits of ecosystems based on collaboration and openness, while delivering sufficient incremental value to build viable businesses that improve the performance and availability of applications and systems.

Tuesday, May 31, 2005

Search: The Rise of Specialization

Adam Smith once said that specialization is a function of market size.

It is no surprise then that the search market, as it grows, is seeing the emergence of specialized, vertically-oriented search algorithms and companies. Searching for good answers wrt the types of search companies starting today and how an investor might want to participate in Adam Smith's prophesy of specialization, I attended today's Under the Radar conference in Mountain View. Under the Radar is a showcase for emerging search and mobile application companies and is targeted at the press and venture investors.

The common abstraction across all the presenting search companies is that while generalized, web-searching is useful, certain classes of queries demand a move from page-link analysis to algorithms more germane to the query at hand. Categories of specialized search include
  • Mobile search (optimized for handset form-factors, location-based services, and carriers): Medio Systems
  • Product search (optimized for product reviews and comparison shopping): Fatlens and Become
  • Rich media search (optimized for video and audio): Blinkx, GoFish, and Meevee
  • Travel: Kayak
Wrt product search, an example helps to make the point. If you search on Google for "Red Sox," the first listing is, appropriately, If you search on FatLens for Red Sox, you get a listing of available tickets to buy for Redsox games. Fatlens is an example of a company optimized to solve a problem ( help find tickets to events), rather than generic information about a category/topic (help me find the Red Sox home page).

The elephant in the room is obviously, what about GOOG, YHOO, and MSN? The major giants are investing heavily in search and extensions to web search. Will consumers seek results optimized for specific queries - travel, rich media, product shopping, event tickets, etc? Will the very models of analysis that make GOOG so powerful on the web (link analysis) leave room for specialists to enter with algorithms with limited general value but strong, vertically specific search results? Will the search start-ups be destination sites or will they syndicate their specialized search results to aggregators of queries (today's big three)?

A further observation is that the business models of various search companies are coalescing around a few key variables:
  • Advertising (Ex. Google Adsense as a partner, direct sales to advertisers)
  • Lead generation or referrals (revenue per click, revenue per customer acquisition, etc)
How does a search site generate revenue? A breakdown of revenue per search helps to understand.

At a high level, Revenue Per Search = Coverage x Click-through rate x Price Per Click

  • Coverage (#searches that show ads/total # searches)
  • Click-through rate (total # clicks on ads/# searches that show ads)
  • Price per Click (total amount received from advertisers/total # of clicks)
  • or total amount received from advertisers/total # searches
The specialized search vendors' business models presume that specialization will lead to higher value to consumers (greater relevancy) and hence more qualified leads to advertisers. Sounds reasonable.

WRT verticalization, a few thoughts:
1. Future revenue f(revenue per search or "RPS")

2. RPS f(domain specific problem resolution)

3. Domain specific problem resolution f(verticalization and specialization)

4. Verticalization f(investment in domain specific search algorithms)

5. However, venture returns are a f(scale and market size)

6. Focus limits scale

7. Therefore, future scale must be f(indirect sales and extensible product platform)

Accordingly, I buy that all queries are not created equal. A search for Red sox tickets, Red Sox jerseys, Red Sox highlight clips, and Red Sox pitchers may all require search engines optimized for the nature of each request. I do not buy, however, that consumers will want to visit N number of search companies to answer N number of queries. Nor do I believe that it is capital efficient to raise money to compete to become a destination site.

Rather, I believe the vertical search space will only see scale and success to the extent that major content or web properties see sufficient value in specialized search that they syndicate results from specialist search engines and play the role of aggregator of traffic and integrator of best of breed search function.

The key bet for a vertical search vendor today, in my mind, is that will engineering driven cultures, like GOOG and MSFT, overcome their not-invented-here bias and grant that specialized vendors produce better results than they are capable of producing through incremental hiring of specialists and tweaks to their search engines. If the answer is no, then I think the specialists lose. If the answer is yes, then MSFT and GOOG may morph from technology innovation companies (the best search innovators) to integrators of best of breed function and ad networks that drive queries across underlying and optimally suited third-party search engines. As a user/consumer, I clearly believe we will "win" if GOOG, MSFT, and YHOO aggregate specliazed search on our behalf rather than force us to alt-tab across N search engines to get us our much needed N answers!

GOOG's market cap and traction is clearly heralding in a new golden era of search innovation - will it pay off for venture investors?


Friday, May 27, 2005

Sales Management

My prior post provides a model for how to create a revenue plan for the year. Another classic start-up conundrum is how to forecast revenue for this quarter.

Sales forecasting is a notoriously difficult problem and start-ups generally learn the hard way that sales meetings, prospect interest, and apparent momentum do not translate into purchase orders in any where near the time and speed one would hope. Professional sales management forecasting techniques can help eliminate emotion and excitement ("We had such a good meeting, I know they are going to buy!") out of the process. Missing a sales forecast really hurts no matter what size company you are. However, given that most start-ups are not profitable, missing a topline revenue number can have disastrous impacts on cash burn, employee morale ("we are working so hard and getting nowhere"), and shareholder confidence.

While there are many different models out there, I will share one with you that works well for the companies that I work with in conjunction with an investment in a CRM system, like Salesforce.

As a first time CEO or manager, a managing a sales pipeline by sales stage can improve forecast accuracy. A key, however, is that the whole sales team buy into the process and be religious wrt its application. Top leaders must constantly evaluate where an opportunity is relative to the key sales milestones and if sales reps are realistically categorizing various opportunities.

Sample Pipeline by Sales Stage
  • Prospect New (10% probability - telemarketing lead or tradeshow follow-up)
  • Prospect Engaged (20% probability - webex, phone contact, early requirements discovery)
  • Technical Evaluation (30% probability - demo/presentation completed, NDA executed)
  • Budget Qualification (40% probability - major discovery requirements phase)
  • Proposal Submitted (50% probability - confirm budget, test commitment)
  • Technically Selected (60% probability - building ROI analysis with customer)
  • Contract Negotiations (70% probability - reviewing proposals, technically selected)
  • Getting Final Signatures (80% probability - selected, budget confirmed)
  • In Purchasing (90% probability - waiting for fax to ring!)
  • Closed (100% - purchase order in house!)

When forecasting revenue, try to match each sales engagement against the milestones/stages listed above. The forecast is then equal to the sum of the dollar weighted opportunities by stage.

While a rigorous process is not sufficient to hit the number, I believe it is a necessary condition to doing so in a predictable and repeatable manner.

Sales Forecasting

This post addresses a key question for start-ups, how do you model and forecast sales?

Forecasting Revenue
A key mistake start-ups make in raising money relates to how they model future revenues. This post explains a bottoms-up approach to forecasting revenue. My favorite bottoms-up forecasting method is the productive sales rep model. In this model, future bookings are NOT a function of market share, size, and penetration rates ($500m market x .005 penetration, or $2.5m) but rather of how many mature sales reps are in the company and the expected sales rep quota and productivity. A top-down approach is simply too hard to handicap and fails to ensure that a company matches an investment in sales resources with projected bookings and revenue.

First Model Bookings
Bookings = mature reps x quota per rep x productivity
Bookings = purchase orders
Mature reps = the number of reps with sufficient market and product experience to be effective (typically six months with the company)
Quota = bookings quota per year (typically $1-2m per rep in a start-up, and $2+m per rep in a mature company)
Productivity = percent of total quota achieved, on average, by the sales force

Therefore, for a start-up, with two mature reps entering the year, one rep joining in January, a $1.5m quota, and an expectation of 75% productivity, bookings would equal:

2.5 (mature reps) x $1.5m (quota) x 75% (average productivity as % of quota), or $2.8125m.

Then Assume Bookings Mix and Revenue Recognition Policy
To get to revenue, we then need to assume 1) a revenue recognition policy and 2) a bookings mix across license, maintenance, and professional services. This mix is typically 70% license, 15% maintenance, and 15% professional services.

Wrt revenue recognition, license revenue is recognized at the time of sale, while maintenance and professional services revenues are recognized pro-rata over the course of the year/project. For example, assuming the bookings mix above a $1m purchase order (booking) on April 1 would contribute the following revenue in the year:

License revenues: $1m x 70%, or $700k
Maintenance revenues: $1m x 15% x 9/12, or $112.5k
Services revenues: $1m x 15% x 9/12, or $112.5k.

While there were $1m in bookings, revenues would be $925k, with the $75k difference on the balance sheet at year-end as deferred revenue.

I have a good worksheet I am happy to share if people are interested. The key issue is make sure that sales projections are tied to tangible investments in sales resources and are based on reasonable assumptions of sales rep productivity, time to maturity, and quota. Finally, think through how bookings translate to revenue. A sophisticated approach to the problem will go along way in gaining credibility with a prospective investor.

Term sheet review

Brad Feld and the Mobius team put together a very insightful set of posts on term sheets.

For entrepreneurs looking to raise money for the first time, I highly suggest reading the posts.

Subjects covered include: liquidation preferences, stock vesting, conversion ratios, redemption rights, and other material elements of most vc firms term sheets.

Click this link to read on.

Thursday, May 26, 2005

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.

Any thoughts?