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 rich@richpricemusic.com.
I know you will love Rich - please check him out.
Will
Wednesday, July 27, 2005
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.
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
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.
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 questions...deal 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.
Thoughts?
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.
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 questions...deal 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.
Thoughts?
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.
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
PartyGaming
On June 27th, a remarkable thing took place in London.
PartyGaming.com, 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 pets.com. 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.
PartyGaming.com, 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 pets.com. 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
TechCrunch
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.
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:
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:
Education
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.
Leverage
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.
Access
Do not send email to jobs@company.com. 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.
Process
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.
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.
RIP.
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.
RIP.
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?
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.
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?
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.
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.
FYI.
Click here for article
FYI.
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 www.ibm.com/isv
I left IBM impressed by the cogency and power of their strategy, which is predicated on:
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.
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 www.ibm.com/isv
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
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
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:
At a high level, Revenue Per Search = Coverage x Click-through rate x Price Per Click
WRT verticalization, a few thoughts:
1. Future revenue f(revenue per search or "RPS")
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?
Thoughts?
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
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)
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
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
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?
Thoughts?
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