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.

Scalent

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

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

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

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

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

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

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

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

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

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

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

Well said.

How Pure is Your Model

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

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

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

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

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

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

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

The economics of multi-tenant software are well understood:

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

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

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

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

Widgetbox Launches

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

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

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

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

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

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

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

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

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

Thoughts on Venture 2.0

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

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

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

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

Baynote

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

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

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

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

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

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

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

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

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

Widgetbox Competition

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

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

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

Grand Prize

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

The Four Runners Up

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

Deadline

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

Judging Criteria

Things that will influence the judges:

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

Eligibility

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

How To Enter

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

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

Who Are The Judges?

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

Consumer Health and Prospects for VC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rich Price

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

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

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

Stanford Technology Ventures Program

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

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

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

Carbon Footprint

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

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

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

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


The article includes a carbon index with the following statistics:

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

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

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

The High Cost of Optimism

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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