Robert Guth of the WSJ recently wrote a fascinating article with respect to Microsoft's legendary challenges shipping Longhorn, WinFS, and quality software products. The article, titled Code Red, Battling Google, Microsoft Changes How it Builds Software, is an insider's review of Windows problems and the team assigned to make the product more modular, extendable, and easier to test. If you can, read it.
Not long ago, Detroit took 5-7 years to take a car from blueprint to the dealer's lot. Innovation fell prey to the inefficiencies of the Big 3's product development processes and customers abandoned US cars in favor of Asian manufacturers who responded more quickly to consumer tastes and sold higher quality products. Guth's article positions MSFT as the GM to GOOG's Toyota and underscores MSFT's inability to be first to market with innovative (desk top search, ad words, tabbed browsing, maps, etc), (endless patches and security warnings) quality products. Windows proved to be too large a boat anchor to allow MSFT to predictably ship products ahead of competitors.
The article gives credit to Jim Allchin, Window's top executive, for an effort to refactor Windows and, more importantly, the tools, culture, and processes of the Windows development organization. Allchin and Amitabh Srivastava set out to improve quality via new tools that automated unit testing, rejected checked-in code that failed quality checks, improved build processes, system tests and coverage, and a culture traditionally more focused on feature additions than architecturally integrity and quality software.
As a former BOD member of Klocwork, I know first hand that the enterprise and ISV market suffer from poor development processes, a lack of automated source code analysis tools, and a culture of missed ship dates and brute-force solutions. The market is waking up to the need to fix problems at "day zero" and to maintain architectural integrity as products mature. Failure to do so results in products that make innovation very challenging and impossible to maintain.
While MSFT is a poster-child for buggy products, the industry as a whole can benefit with a new generation of tools that improve software quality and reduce the cycle time for new releases that meet customer needs.
Hummer Winblad is an active investor in development tools solutions, with investments in companies such as Akimbi, Palamida, and others still in stealth.
If you know of other companies of note and interest attacking this problem, please send them my/our way.
Tuesday, October 11, 2005
Friday, September 30, 2005
Hummer Winblad Venture Partners
Per my prior post on early-stage havens, I am pleased to write that I am putting my hypothesis to work and joining Hummer Winblad Venture Partners.
Starting October 3rd, 2005, I will be part of HWVP and looking for exciting, early-stage software deals.
My contact info will be:
Hummer Winblad Venture Partners
One Lombard Street, Suite 300
San Francisco, CA 94111
w) 415 979 9600
e) wprice@humwin.com
I look forward to working with great entrepreneurs and the experienced HWVP team. Please feel free to send early-stage software deals my way!
Starting October 3rd, 2005, I will be part of HWVP and looking for exciting, early-stage software deals.
My contact info will be:
Hummer Winblad Venture Partners
One Lombard Street, Suite 300
San Francisco, CA 94111
w) 415 979 9600
e) wprice@humwin.com
I look forward to working with great entrepreneurs and the experienced HWVP team. Please feel free to send early-stage software deals my way!
Tuesday, September 13, 2005
Early Stage Haven?
Recent numbers suggest that early stage investing may yet prove to be a bastion of IRR and extraordinary returns. Why? Recent data provides interesting insights into industry dynamics.
In 1H05, VC firms raised roughly $11bn in IT Venture Capital. Over the same period, IT VCs invested roughly $5.5bn, for a ratio of IT$ invested YTD/IT$ raised YTD of .5. Not a sustainable number.
If IT VCs stopped raising money today (which will never happen), it would take ~12 quarters to invest the $32bn of IT VC$ available for new investment at the Q2 run rate of $2.747bn.
As we all know, the surplus capital appears to be a secular rather than a cyclical shift in the fundamentals of the venture industry.
A key question is, where is the capital going? Apparently, not in the early stage. According to VentureOne, the percentage of VC IT $ going into early stage is falling precipitously:
- 2000 Early Stage $/Total $ = 34%
- 2003 Early Stage $/Total $ = 20%
- 2004 Early Stage $/Total $ = 20%
- 1H2005 Early Stage $/Total $ =16%
With a -53% change in the amount of money flowing into early stage investments btwn 2000 and 1H05, it appears that the surplus will continue to flow into later stage deals. In later stage investing, winning is almost always a function of share price. Price discipline is eroded as firms bid deals up to deploy capital and "win."
With fewer dollars chasing early stage deals and meaningful non-share price based differentiators - deal flow, company evaluation in absence of customers/revenue, syndication, post-deal value add, etc - it may be that while extraordinary returns for the industry as a whole look challenging, early stage investing may prove to be a bastion of IRR and extraordinary returns.
I believe that smaller funds, specialized focus areas, and early stage investing are the way to go.
Thoughts?
Friday, September 02, 2005
Scale Free Profitability
Morgan Stanley's high-tech investment banking team present a wonderful chart that examines the effect of scale on software profitability. The chart powerfully illustrates that scale is increasingly necessary to achieve competitive operating leverage in the software industry.
For example, the distribution of LTM operating margin by revenue size is as follows:
For example, the distribution of LTM operating margin by revenue size is as follows:
- $75-300m in revenue = 7% operating margins
- $300-500m in revenue = 11% operating margins
- $500m-$1bn = 12% operating margins
- $1bn-$5bn = 18% operating margins
- >$5bn = 33% operating margins
The scale effect, as noted by Larry Ellison and Barron's, is driving rapid consolidation of the industry as vendors seeks to consolidate capacity, drive volumes, and get to minimum efficient scale. Consolidation, while good for exits in the near term, has troubling long-term implications wrt the market's expectations for future small cap software company growth, profitability, and viability.
Start-up companies and VCs, by definition, cannot rely on scale to help us achieve profitability. Rather, start-up companies must innovate their business models and strategies in order to reach attractive profitability metrics independent of scale.
As important as technical innovation, successful start-ups must innovate how we do business and prosecute R&D, marketing, sales, and operations.
If we simply innovate technically and rely on traditional business practices, we will suffer from the fate illustrated in the table above.
How we rip costs out of the software model while delivering value will be critical.
I would enjoy hearing from start-ups and investors on novel, optimized business practices that are helping to realize scale-free profitability. While open source software, offshore development, and channel based selling are well-known strategies, any fundamentally novel approaches would be great to share.
Monday, August 15, 2005
Pat your head and rub your tummy
Young start-ups need two things to survive: customer orders and funding.
The challenge, however, is that customers and venture investors often decide to "buy" based on very different messages.
To succeed with customers, start-ups need to articulate clear, focused value propositions. Often the nature of early stage product development is such that the product is of limited functionality and can best be sold by "narrowing the focus to broaden the appeal;" clear use cases, incremental value wrt products already in production, easy to install, and quick to show value.
Focus is often the key to early sales traction.
Investors on the other hand can often have a pejorative view of focus - VCs question nichey looking business plans ("is this a feature or a company?") and the proverbial "what is the TAM" and "can this thing scale" are often orthogonal to the product marketing challenges of selling version 1.0 products to skeptical customers.
In my experience as a VC and ex-startup CEO, young companies need to remember to develop and tell two stories. The first targets customers and explains specific, tangible, and focused value made possible via the currently available product. The second story targets the VCs and addresses the real concern with respect to scale, TAM, and a road map that supports the emergence of the company from a niche-product to a real company.
This challenge of orthogonal messages and the need to develop them simultaneously is similar to the age-old, "pat your head and rub your tummy" trick.
Some companies tell great customer stories and never get funding. Others are great at raising money, yet never seem to be able to sell the customer. It is the rare, and significant, early-stage company that can tell a story of relevancy that resonates with the buyer, while also painting a longer-term vision to VCs wrt how to build a large company that will make VCs a healthy return.
Any comments or experiences here would be great to share!
The challenge, however, is that customers and venture investors often decide to "buy" based on very different messages.
To succeed with customers, start-ups need to articulate clear, focused value propositions. Often the nature of early stage product development is such that the product is of limited functionality and can best be sold by "narrowing the focus to broaden the appeal;" clear use cases, incremental value wrt products already in production, easy to install, and quick to show value.
Focus is often the key to early sales traction.
Investors on the other hand can often have a pejorative view of focus - VCs question nichey looking business plans ("is this a feature or a company?") and the proverbial "what is the TAM" and "can this thing scale" are often orthogonal to the product marketing challenges of selling version 1.0 products to skeptical customers.
In my experience as a VC and ex-startup CEO, young companies need to remember to develop and tell two stories. The first targets customers and explains specific, tangible, and focused value made possible via the currently available product. The second story targets the VCs and addresses the real concern with respect to scale, TAM, and a road map that supports the emergence of the company from a niche-product to a real company.
This challenge of orthogonal messages and the need to develop them simultaneously is similar to the age-old, "pat your head and rub your tummy" trick.
Some companies tell great customer stories and never get funding. Others are great at raising money, yet never seem to be able to sell the customer. It is the rare, and significant, early-stage company that can tell a story of relevancy that resonates with the buyer, while also painting a longer-term vision to VCs wrt how to build a large company that will make VCs a healthy return.
Any comments or experiences here would be great to share!
Thursday, August 11, 2005
Fraternal Props
My brother, Rich, played a KFOG concert tonight in SF. The band sounded great and thanks to KFOG we enjoyed a wonderful evening of live music in front of the ferry building in downtown SF.
Rich is featured (track #2) with other emerging Bay Area artists on a really great CD, KFOG Local Scene 2. Check it out.
This new CD from KFOG features a variety of artists and bands from Northern California who deserve to be heard. Proceeds from "KFOG's Local Scene 2" will go to Music In Schools Today, a local charity that helps fund music education in Bay Area public schools. The CD is only $6 and supports a great cause, while introducing the listener to some great new music.
Rich is featured (track #2) with other emerging Bay Area artists on a really great CD, KFOG Local Scene 2. Check it out.
This new CD from KFOG features a variety of artists and bands from Northern California who deserve to be heard. Proceeds from "KFOG's Local Scene 2" will go to Music In Schools Today, a local charity that helps fund music education in Bay Area public schools. The CD is only $6 and supports a great cause, while introducing the listener to some great new music.
Tuesday, August 09, 2005
NSCP - 10 years later
Today is the 10th anniversary of the Netscape Communications IPO. (see link for great set of Fortune articles).
16 month-old Netscape Communications went public on August 9th, 1995. The stock priced at $28, peaked at $75, and closed that day at $58 valuing the young company at a cool $3.3bn.
1995 also brought us Verisign, Yahoo, and Amazon, among others.
1995 represents a seminal year in technology innovation. In many ways it parallels 1959, the year Jack Kilby and Robert Noyce independently invented the integrated circuit and gave birth to the digital age.
Reflecting on the staggering impact NSCP, VRSN, YHOO, and AMZN have had on our lives, economies, and careers reinforces the promise and excitement of innovation, while reminding us how hard it is to appreciate non-linear developments, and harder still to foresee their ultimate impact.
As investors and technologists, let's all hope that 1995 is a spring board for changes still to come, and let's us also hope that we have the foresight to recognize "it" when/if we see it.
16 month-old Netscape Communications went public on August 9th, 1995. The stock priced at $28, peaked at $75, and closed that day at $58 valuing the young company at a cool $3.3bn.
1995 also brought us Verisign, Yahoo, and Amazon, among others.
1995 represents a seminal year in technology innovation. In many ways it parallels 1959, the year Jack Kilby and Robert Noyce independently invented the integrated circuit and gave birth to the digital age.
Reflecting on the staggering impact NSCP, VRSN, YHOO, and AMZN have had on our lives, economies, and careers reinforces the promise and excitement of innovation, while reminding us how hard it is to appreciate non-linear developments, and harder still to foresee their ultimate impact.
As investors and technologists, let's all hope that 1995 is a spring board for changes still to come, and let's us also hope that we have the foresight to recognize "it" when/if we see it.
Thursday, August 04, 2005
State of the blogosphere
David Sifry, Technorati's CEO and founder, just published a series of State of the Blogoshpere posts.
Summary Stats:
Technorati was tracking over 14.2 Million weblogs, and over 1.3 billion links in July 2005
The blogosphere continues to double about every 5.5 months
A new blog is created about every second, there are over 80,000 created daily
About 55% of all blogs are active, and that has remained a consistent statistic for at least a year
About 13% of all blogs are updated at least weekly
Wow. Simply amazing growth and well worth watching as investors and business people.
Summary Stats:
Technorati was tracking over 14.2 Million weblogs, and over 1.3 billion links in July 2005
The blogosphere continues to double about every 5.5 months
A new blog is created about every second, there are over 80,000 created daily
About 55% of all blogs are active, and that has remained a consistent statistic for at least a year
About 13% of all blogs are updated at least weekly
Wow. Simply amazing growth and well worth watching as investors and business people.
Tuesday, August 02, 2005
Strategic Planning
As a BOD member, non-profit volunteer, and employee here at Pequot, I am often asked to attend strategic planning sessions. This post shares my observations on common pitfalls and methods for using time as a group to add value and solve real issues.
Strategic planning sessions often fail to be either strategic or helpful in planning for the future. The expense in time, energy, and dollars can be significant. And yet, often the process leaves people frustrated and unfulfilled.
Why? What to do?
In my experience, the most effective offsites benefit from utilizing a mental model or framework that bounds the discussion, defines the assumptions, and helps people with a common lexicon and method for discussing issues and deriving answers. The absence of a framework or model for decision making and discussion and the lack of a common lexicon to discuss issues results in people talking past one another and endless loops that lead nowhere.
I am always amazed how varied peoples perceptions are to issues and the degree to variance can only be overcome if a common vocabulary and framework is agreed upon. This is especially true when you bring people together from completely different functional backgrounds.
For example, I recently served on the strategic planning committee of my church. Ten very smart people, well maybe nine, were asked to come together and define a three year plan for the church and its ministries. The first few meetings were pure hell. We talked endlessly about how to organize the committee, what the deliverable would be, and others simply jumped in and attempted to solve "key" issues. We got nowhere and lost energy.
We finally saw real traction when we all read a book that provided a framework for the process - with templates, a timeline, a sample deliverable, and a model for discussing the issues at hand. As soon as we adopted the model and the associated language, context, and logic, we made amazing progress and finished in no time at all. A shared approach that defined the problem and provided a path to deriving a solution allowed the group to think as one and it provided a baseline that made each individuals contribution additive.
In business setttings, the same lessons apply. Unless people buy into a mental model or construct of how to define, discuss, and solve the problem(s), conversations are endless streams of non-sequitors and serve only to frustrate the people involved.
Accordingly, I am a firm believer in
Strategic planning sessions often fail to be either strategic or helpful in planning for the future. The expense in time, energy, and dollars can be significant. And yet, often the process leaves people frustrated and unfulfilled.
Why? What to do?
In my experience, the most effective offsites benefit from utilizing a mental model or framework that bounds the discussion, defines the assumptions, and helps people with a common lexicon and method for discussing issues and deriving answers. The absence of a framework or model for decision making and discussion and the lack of a common lexicon to discuss issues results in people talking past one another and endless loops that lead nowhere.
I am always amazed how varied peoples perceptions are to issues and the degree to variance can only be overcome if a common vocabulary and framework is agreed upon. This is especially true when you bring people together from completely different functional backgrounds.
For example, I recently served on the strategic planning committee of my church. Ten very smart people, well maybe nine, were asked to come together and define a three year plan for the church and its ministries. The first few meetings were pure hell. We talked endlessly about how to organize the committee, what the deliverable would be, and others simply jumped in and attempted to solve "key" issues. We got nowhere and lost energy.
We finally saw real traction when we all read a book that provided a framework for the process - with templates, a timeline, a sample deliverable, and a model for discussing the issues at hand. As soon as we adopted the model and the associated language, context, and logic, we made amazing progress and finished in no time at all. A shared approach that defined the problem and provided a path to deriving a solution allowed the group to think as one and it provided a baseline that made each individuals contribution additive.
In business setttings, the same lessons apply. Unless people buy into a mental model or construct of how to define, discuss, and solve the problem(s), conversations are endless streams of non-sequitors and serve only to frustrate the people involved.
Accordingly, I am a firm believer in
- defining the problem to solve
- agreeing on a model or framework for discussing the problem and deriving a solution
- ie defining the logic path and process that result in an answer
- defining a timeline
- getting team member buy-in wrt the above
Wednesday, July 27, 2005
Rich Price - music you need to hear
My brother, Rich Price, is an amazing musician and a wonderful talent. Richard is a singer-song writer who is growing a great fan base, radio play, on movie soundtracks, and has released two wonderful albums (Miles from Anywhere, and Night Opens). Both albums are available on iTunes.
He recently launched a podcast and joined the blogosphere. Check out his music and his podcast, which is a great mix of original music and his favorite artists.
Finally, if you know of artists who are setting the standard wrt leveraging web 2.0 tools to share their music, please let him know. Email him at rich@richpricemusic.com.
I know you will love Rich - please check him out.
Will
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
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.
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