Wednesday, July 25, 2007

Star Analytics Raises Series A

Last week, Lightspeed Venture Partners and Hummer Winblad announced the Series A funding of Star Analytics, a provider of financial data management solutions.

Star provides ETL software designed to bridge multi-dimensional and relational data and applications.

The company boasts 16 enterprise customers across key verticals and the A round represents the first paid-in-capital. The team is led by early members of the Hyperion team, also backed by Hummer Winblad.

The investment thesis is clear and the product offering unique relative a large pain point.

Pain Point in Market

1) Fortune 500 companies deploy OLAP-based planning and reporting applications (Hyperion, Cognos, and Business Objects)

2) Data in cubes is A) in proprietary data formats and B) is often largely dynamic (i.e. not persisted)

3) Access to the data requires the use of native client applications from said vendors

4) Corporate America is deploying standard, relational reporting and analytics applications for KPI, BPM, and financial reporting

5) Currently, these applications (Crystal, MicroStrategy, ORCL, SAP, MSFT) are not able to query or view the data trapped in cubes

6) Current solution involves professional services dollars to map OLAP to star schema data structures

Core Product

1) Extracts OLAP data into standard tables (data, metadata, security access controls)

2) Captures dynamic (non persisted) data

3) Manages synchronization – delta’s flagged and continuously exported to maintain consistency between source (OLAP) and target (RDBMS)

As enterprises seek to break data silos and ensure corporate wide access to unified and accurate data, barriers such as data structure, data source, and proprietary interfaces frustrate that goal.

Star breaks the shackles of proprietary data formats, connectivity, and unshared calculations and consolidations and allows for key financial data to by syndicated to business users and processes across the enterprise.

Congratulations to the team.

Competitive Strategy: Play to Your Strengths

Fighting battles that leverage your assets and competitive position rather than your competitors is common sense.

Too often, however, underdogs choose to compete with the market leader on the leader's terms; ie mimicking their strategy and business practices. Rather than seeking to shift the terms of the battle, companies seek to match the products, pricing, and delivery best practices of the industry leader. Think MSFT's current strategy vs Google - ie let's out Google them by focusing on search and text advertising.

The WSJ recently ran a great article on HP's PC business and its battle with Dell.

The article focuses on HP's new PC chief, Todd Bradley, and his decision to change the battlefield and basis of competition.

Prior to Bradley's arrival, HP took on Dell at their own game; HP focused its efforts on battling Dell in direct sales over the Internet and phone.

Bradley's epiphany was to realize that fighting Dell on their terms put HP at a disadvantage and that the HP should instead focus on its core assets, namely the retail channel and retail stores.

A quick inventory found that HP's obsession with Dell's online advantage had left the core retail channel under served and under utilized. Bradley's audit of the channel found HP lacking in on-time shipments to retail, shoddy retail and wholesale account management, and poor supply chain controls.

He actively courted large retailers and committed HP to on-time channel shipments, improved account management, and marketing and product design campaigns to help retailers market the in-store buying experience and custom product offerings.

In one year, HP's market share grew from 14.9% to 17.6%, while Dell from 16.4% to 13.9%. In-store PC purchases went from 54% to 61% over two years.

I found the article compelling and an excellent reminder that head-on competition with market leaders will likely lead to large losses and that it pays to play to your strengths rather than theirs.

Friday, July 13, 2007

You Owe it to Yourself

This summer buy and read Woody Allen's The Insanity Defense: The Complete Prose.

You will laugh out loud at least once a page.

The Insanity Defense: The Complete Prose

Be careful reading it on a plane. The passengers may start to worry.

Wednesday, July 11, 2007

Widgetbox and

Widgetbox, a Humwin portfolio company, announced today a partnership with

Widgetbox will distribute Forbes content and advertising via eight initial widgets all sponsored by Visa.

The atomization of the web is underway and media companies and advertisers are looking to distribute content, application functionality, and advertising to social media and web site end points. The Forbes widgets are a powerful example of a major advertiser, Visa, and content publisher, Forbes, recognizing the power of widgets to reach a distributed audience.

The widgets can be found here and I include an example below.

Congratulations to Widgetbox and on a great launch.

Tuesday, July 10, 2007

3M: Six Sigma vs Innovation

Innovation is the lifeblood of Silicon Valley. Technological and business model disruptions drive the cycle of category, company, and wealth creation.

Innovation often leads to high growth and growth often demands the introduction of processes to ensure quality and scale.

There is, however, an obvious tension between innovation and process, between standardization and disruption. How does a company best manage that tension and avoid the extremes of creative anarchy vs bureaucratic and rigid process?

Companies that optimize for scale often begin to look like eBay - a monolithic app that is always up but still looks the same five years later. While companies that optimize for creativity, like Handspring, stumble with quality and return issues.

BusinessWeek recently profiled the impact of process, via Six Sigma, on innovation in an article on 3M. In 2000, 3M hired Jim McNerney from GE and introduced a total quality management initiative designed to lower costs and drive efficiencies. The company cut 8,000 jobs, operating margins grew from 17 to 23%, and thousands of Six Sigma black belts were trained and turned loose on the company. The short term gains proved popular with Wall St, however, longer term cracks began to appear.

Historically, 3M prided itself of delivering 1/3 of its sales from products introduced over the last five years. Under the Six Sigma regime, however, the ratio of revenue from new products fell to 1/4 and the company lost its creative edge.

The article notes, "while process excellence demands precision, consistency, and repetition, innovation calls for variation, failure, and serendipity."

At Hummer Winblad, we believe that founders are the key creative sparks that drive innovation and vision.

A business school framework defines three classes of company: operational excellence, customer intimacy, and product leadership. VC-backed companies typically succeed via a focus on either customer intimacy or product leadership. Senior executive hires that seek to optimize operational excellence too early in the company's development tend to lead to frustrated engineers and a rigidity that eliminates the chance to innovate. The absence of innovation in a company with few customers or product offerings is an almost certain predictor of failure.

Ideally, our founder-CEOs add a wrapper of operational excellence to their core focus on product leadership and innovation. Rather than move founders to CTO roles and bring in "grey" hair CEOs to drive process-led execution, we would rather see the founder as CEO, infusing the culture and product with their passion and creativity while learning the "tools" of the management trade.

Process, moreover, can be brought in at the VP level to compliment innovation and to help institute best practices that help with visibility and predictability while working to avoid hindering creativity and a culture of trial and iteration.

In summary, it is hard to balance innovation and process, however, in early stage companies innovation is a prerequisite to success. Accordingly, it is often very dangerous to move company founders to staff roles and to hire senior executives with operational depth but little emotional or intrinsic connection to the product market and problem.

Just as it is hard to Six Sigma your way to innovation, it is hard to execute your way to disruption.

Food for Thought: Target Post Money Valuations and Capital Structure

Jeremy and Josh's thoughts on valuation are well worth reading.

Not only should founders be mindful of valuation issues, but also need to be thoughtful about capital structure and shareholder mix.

Venture capital is often described as a business of pattern recognition - experienced investors pick up on market patterns, management team dynamics, and seemingly random data points to draw powerful insights. While I am still relatively new to the industry, I am struck by a few capital structure patterns that are generally bad omens.

The Too Large "A" Round
Ideal company formation reminds me of agile programming - small teams driving quick, iterative cycles that allow for the most insights, appropriate changes in strategy, and, ultimately, the highest quality "product."

I often say that genius is a function of context, and until a company is fully immersed in the context of the given problem set the best insights and strategies are often not apparent.

Too much money too early and too many people too early interferes with the productive process of iteration. Large teams with lots of resources and a very uncertain sense of direction or purpose are a bad combination.

Too High "A" Round Post-Money Valuations
While a self-serving argument, an equally challenging problem is a too high "A" round post-money. High "A" round valuations are often Pyrrhic victories.

High posts and middling execution often leaves a company in a grey zone whereby objective value creating milestones have not been clearly met, yet some qualitative progress has been made. A common result of such a financing is a bridge round that extends the runway and is designed to allow the company a quarter or two to "grow" into its post-money "A" round valuation. More often than not, the bridge becomes a pier and the company and founders suffer from a post-money that proved you can win the battle and lose the war because of it.

"A" round financing strategies should be tied to discrete logic tests and proofs and the goal should be to optimize the validation/dollars ratio. Can we validate the technology and business model on as little as capital as possible? The ratio forces founders to think through the material questions that need to be answered with the use of proceeds. Will the product work? Will customers buy it? Can we sell it? If so, how? How much do we need, with a slight cushion, to answer these questions? Given all the noise in a start-up, what are the real issues and risks we need to manage?

The validation/dollars ratio is a measure of efficiency and a quasi measure of return on equity. Start-ups that maximize the ratio are generally rewarded for it.

A reasonable Series "A" raise and post-money combined with realized value-creating milestones generally leaves a company in an enviable position when raising the Series " B". The key hypotheses have been validated and a reasonable mark-up is possible.

To that end, Fewnwick's recent report on trends in venture capital reported that the median valuations for A-D rounds were $5m, $12m, $23.5m, and $41.71m respectively.

Patterns and data suggest that for software companies an $8-10m "A" post appears to maximize the probability of a healthy B round and good optics and pattern recognition.

Monday, July 09, 2007

Debtor Nation

This month's Harvard Magazine includes a great article on the implications of America's current account deficit and negative savings rate.

The article addresses a key question - how much longer can the US continue to consume more than it earns? And equally importantly, how much longer will other nations continue to provide the US access to cheap capital by buying US Treasuries and holding US dollar reserves?

The long term fear is that a move away from US dollar reserves, ex. to Euros, will lead to a depreciated dollar, negative impact on US consumer purchasing power, and a rise in interest rates to attract capital back to the US.

The opening paragraph outlines the scope of the problem:

"In 2006, the infusion of foreign cash required to close the gap between American incomes and consumption reached nearly 7 percent of gross domestic product (GDP), leaving the United States with a deficit in its current account (an annual measure of capital flows to and from the rest of the world) of more than $850 billion. In other words, the quantity of goods and services that Americans consumed last year in excess of what we produced was close to the entire annual output of Brazil. “Brazil is the tenth largest economy on the planet,” points out Laura Alfaro, an associate professor of business administration who teaches a class on the current account deficit at Harvard Business School (HBS). “That is what the U.S. is eating up every year—a Brazil or a Mexico.”

As investors, entrepreneurs, and technologists, we have a vital interest in positive net savings rates that allow for investment in the future rather than debt service payments to cover historical obligations and spending.

If Gross Domestic Investment = Private Saving + Government Saving + Foreign Saving, then the low rate of private and government savings demands that we import capital. Future growth is conditional on investment in infrastructure, education, and health care. However, we as a nation are no longer saving; thereby forcing us to borrow abroad to fund our consumption and investment.

The key concerns are

1) that the debt service associated with the current borrowings drowns out the ability for net new investment or
2) foreigners stop providing us cheap capital and dollars available for investment (and hence growth) are limited.

It will be interesting to see how quickly the current account deficit becomes part of the public policy discourse and how politicians will wrestle with the enormity of the problem and complexity of the issues involved.