Friday, January 30, 2009

Degrees of freedom

As a prelude to a recent board meeting, I had a long meeting with a portfolio CEO who was seeking counsel on the myriad of budget alternatives available to him. The company is performing quite well, but not surprisingly, given the uncertain macro environment, many well formed opinions have sprouted regarding the going forward budget. Essentially, the age old question of whether it is nobler to be brave, or wiser to be conservative is rearing its head.

Oftentimes, these discussions at the board level become granular, delving into number of hires, departments to reduce/expand, and where to allocate suddenly scarce resources. My experience is that where a board maintains confidence in a CEO, such discussions, usually dominated by one board member (while the others seek an accommodation), rapidly become counter-productive as they reduce the degrees of freedom the CEO has available to produce the results desired by all stakeholders. Moreover, from a cultural perspective, granular, board driven, mandates separate authority from responsibility. Thereby, violating a timeworn good management tenant.

I am fully supportive of a board's role in providing advice and consent and have often found the advice part of the equation is best proffered in an informal setting. But too often I have seen the broad interpretation of this responsibility crossing a critical, yet invisible line where well-meaning thoughts on budgets, personnel, or (heaven forbid) product management, become the law of the land, tragically diminishing shareholder potential value.

Thursday, January 29, 2009


I am a believer that Information Technology companies, at their best, export deflationary capabilities to their customers. Amazon's CloudFront, their Content Distribution Network, is a great example of a service that enables software/internet companies to export lower prices to their customers. Here's a quote that details their recent pricing announcement:

"Today, Amazon Web Services (AWS) is announcing new pricing tiers for Amazon CloudFront, our high-performance, pay-as-you-go content delivery service. The new pricing tiers decrease the price of delivering content to as low as $0.05 per gigabyte delivered for high volume users. As you know, we are committed to continually reducing our costs, and to passing those savings on to you in the form of lower prices." I find a few things significant here:

1. The pricing seems to be substantially below CDN market leader Akamai (maybe as low as 50%), and on a par with a perceived lower quality, yet large avaialablity, Level3

2. Unlike Akamai and many other CDN's, there is no minimum commitment, so it's available for young companies striving for capital efficiency when it most counts.

3. The sign-up is via self-service. No salespeople, limited marketing, and Support Engineers means a huge % of the gross margin comes down to Amazon's pre-tax line.

Sales, marketing and support is precisely the area where the majority of expenses for young internet/software companies is directed. By affecting the 50-60% of a firm's total spending directed to sales, marketing and support, the fundamental economic equation changes.

More value is available to be distributed back to shareholders, invested in the company, or returned to customers in the form of lower prices. Extending self-service, usually seen in application provisioning (see Reimage for a classic example) is a natural progression that, when properly implemented, totally disrupts a market's existing Amazon is now doing to CDN's. This is a broad opportunity that cuts wide and deep for investors, management teams and customers. The only losers I can see here are existing industry players, and a prospect for reduced employment as efficiencies in production and distribution are realized throughout the value chain.

It seems as if Amazon is busy seizing a broader market opportunity than visibly apparent in CDN. Take a look at the other relevant services, listed below, easily available for its customers. When you do, think WebOS and the emerging importance of Amazon to the internet development ecosystem. Then compare these attributes to MSFT's focus on its proprietary ecosystem. I doubt MSFT's client-centric approach, or their lusting after Yahoo's search business, will free them to embrace this market shift. Speaking of Yahoo, however, it could be a wonderful opportunity for them to leverage a vast global web oriented infrastructure (as Google is) to be a contender for primacy within the WebOS sweepstakes.

Here's the related Amazon services:

Amazon Associates Web Service™
Amazon Simple Storage Service™
Amazon CloudFront™
Amazon Simple Queue Service™
Amazon Elastic Compute Cloud™
Alexa® Web Services
Amazon Flexible Payments Service™
Amazon DevPay Service™
Amazon SimpleDB Service™
Amazon Fulfillment Web Service™
Amazon Web Services Premium Support

Of interest to developers building applications is rapidly layering application components/distros on top of such an ecosystem. In an environment where 80+% of code is recycled, having access to discover, understand, and use market tested components is a logical extension to the WebOS (see information on my investment in Cloudsmith for more details).

Building, and exporting, deflationary services is a time tested way for IT companies to build value and will be an important investing consideration for me.

Wednesday, January 28, 2009

Yahoo, Robert Rubin and my smart friend Larry

Yesterday, Yahoo released its Q4 earnings (slides here) and, despite prognosticators who were expecting disaster, showed Y/Y net revenue down 2% and up 4% Q/Q. EBITDA was $542MM and cash was up $238mm Q/Q (to $3.5B).

Highlighting the strength of their online media based franchise, measured by page-views, Yahoo continues to lead eleven major categories (such as finance, mail, news, sports, homepage). No doubt that from a micro perspective, there is still gold in those hills.

Turning to a macro view, last night, my smart friend Larry and I saw ex-Treasury Secretary Robert Rubin speak about the economy and policy alternatives (link to Dealbook article here). Mr. Rubin is a brilliant and articulate businessman, turned politician, who opined about the causes and cure for the economic crisis. His sentiment is that for at least the past 4 years (I am not sure if this timing was intended to give distance from the Clinton Administration), systemic risk was being habitually understated and a confluence of low probability factors produced the most extensive market contraction we have seen in 70 years.

At its core, the surge in housing prices, while real wages remained stagnant, produced a pyramid that grew unnaturally. Aided by the failure of the ratings agencies and complacent banking practices a magnification of risk, through the rampant use of derivatives (whose use is not balanced/limited by underlying asset values, created a recipe for disaster. In short, the economic train was accelerating and no one was minding the speed limit (the government), or wearing seat belts (you and I).

He sees us engaged in a global economic crisis that requires Sovereign States to work in a coordinated manner in a world that is hyper-linked. Unfortunately, in his view, the G8, or G20 do not represent an effective body as States are hesitant to surrender elements of their fiscal policy authority, which is required for a unified response.

While supportive of the fiscal stimulus, as the #1 priority for the Obama administration, he is concerned that a long-term effect of the stimulus may lead to massive debt/deficits that will undermine currency and bond markets. Moreover, the moral hazard of industry bail-outs encourages risk taking, as the perception is that the government will always provide a safety-net.

Back to Larry and Yahoo.

Before the Mr. Rubin's speech Larry noted that most of the companies in his portfolio either met or exceeded their Q4 and yearly goals. Ticking down the various markets, management actions, and company objectives, he was wondering whether the industries at the eye of the storm (media and hedge meltdowns/frauds) were possibly generating a more dire perspective than was warranted. Certainly, Yahoo, being one of the most vilified companies in the Internet arena is not in the dire straights one would have expected by reading the articles lampooning Mr Yang as a dunce, or the Company as toast.

It is wonderful to hear a fresh perspective that challenges whether we are seeing Sunshine, or living a Daydream

Monday, January 26, 2009

The curious case of Benjamin Button

Meeting with a serial successful internet CEO the other day I was struck how recent events in his Company's business reflected the storyline from this well received movie where a man essentially lives life in reverse; from old age back to infancy.

Fast out of the gate, his Company successfully raised capital and introduced its first product nine months after its founding. Heartened by favorable reviews and initial customer wins management, with vigorous board support, completed an expansion round and set about investing the capital to build a business leader. Remote offices, staffed with experienced sales and BD folk were established, marketing dollars helped establish the brand, and the service was scaled to provide a good (though not extravagant) user experience. In short order, the Company rapidly grew from its infancy to adulthood.

Little did management/the board know that its life-stage was closer to old age than to infancy. Expectations were that a foundation was being built to serve a long and healthy corporate life. Nevertheless, over the past 90 days, in reaction to a vastly altered stage of its target market, the Company has been living life in reverse; shedding assets, becoming 'younger', just like Benjamin Button.

We're not talking about a cut here and a cut there, these are actions being taken by an experienced, and decisive management team. Not needing the prodding of a Sequoia memo, or a series of soul searching board meeting, offices have been shuttered, employees laid-off, unworthy customers terminated, and brand marketing severely reduced. Though only a couple of years old, the Company seems to be preparing for the second half of a hoped for up ->down->up round-trip life cycle.

With a few million dollars of revenue, management is close to reducing the team back to its few core employees, thereby forcing profitability and deferring 'aging' investments till a more favorable customer solution/environment presents itself.

In the annals of our Industry's history, not many firms have successfully navigated the Case of Benjamin Button; though quite a number completed mid-course corrections (Google, Yahoo, and Apple to name a few) with profoundly positive shareholder outcomes.

Friday, January 23, 2009

8 miles high and when you touch down....

A bit prematurely, Roger McGuinn really hit the tone that describes global economic sentiment.

Today, I spent time with a long-time friend who has spent a successful career making GDP sized bets around macro market themes. As a reference, last winter he was a raging pessimist as he was bemoaning that a prudent person could not short the market enough to reflect true underlying value. In our meeting, he shared an updated perspective for his core concerns:

1. The lead US banks are heading towards being nationalized. We are caught between choosing amongst a lesser evil; the existing mismanagement and misalignment between employers, shareholders and customers on one hand, and on the other, the potential that, under government management, it could be worse.

2. Our economy experienced faux growth over at least the past 5 years, the only question is how rapid will be the adjustment to a more normalized (lower) standard of living be.

3. This adjustment is deflationary and governments, with decades of experience in handling inflation are woefully ill equipped to handle declining prices, tax bases, and output.

4. Odds are that well meaning government actions will give us unintended consequences which only exacerbate an unsteady situation.

Given this sober perspective, he also noted that the best safe port he sees in this maelstrom is the Information Technology sector. "It is an industry with the mindset that next year's products must be less expensive, and offer more value than last year's. It is not capital intensive, and balance sheets tend to be flush with cash."

While I agree with many of his points, I think an important extension of the thesis is in order. When innovating, Information Technology companies export deflation to their customers. They enable them to perform tasks with less labor, lower overall costs, and to do them faster.

In the past few years, our industry was built on a 'permacheap' product management culture, fueled by Moore's Law, and augmented by Metcalf's . Over the past 25 years, customers learned to rely on important vendors, such as MSFT, CA, and Oracle to help them reduce costs, and share that value with their customers. They looked forward to learning about new vendors, with innovative sparks, that may accelerate this trend. In many ways, we have strayed from that vision...and our customers are letting us know it.

The fundamental elements (reduced infrastructure and development expenses, real-time feedback, and a wired globe) are in place to recapture the customer value that drove extraordinary shareholder returns for decades. A return to the time tested trilogy of 'faster, better, cheaper' seems like true religion to me.

Thursday, January 22, 2009

Windows 7, AJAX,, Bberry and my living room

Walt Mossberg wrote a positive pre-review of Windows 7 in the WSJ. He's a wonderful writer with a honed skill to express himself with the voice of you and I. His perspective is that Windows 7 looks to be Vista done right, with one major advancement towards UI support of touch screens for the desktop/notebook.

Perhaps, he's right that after 3 painful years, where hardware vendors 'upgraded' us to the PREVIOUS Windows version for $150, Windows OS' will again provide acceptable performance. I think not. What was designed as acceptable 3 years ago, pre iPhone/Blackberry Bold is no longer state of the art in this fast changing computing environment. Nor, as a platform supportive of where the going forward opportunity is for the industry and its entrepreneurs.

Over the past 3 years, many of us have enjoyed a steady migration away from desktop applications, towards cloud based services, including storage. I would love my PC to support, even enable this phenomenon. After watching a seamless feed of Mr. Obama take the oath of office via Hulu it's apparent that bandwidth, though not HD capable yet for a streamed environment, is a good enough, and rapidly improving, viewing experience.

Important innovations in the AJAX world are fueling a rich client feel to web based applications. No doubt we will shortly enjoy measurable improvements in the serving of content, and the web based application experience that will accelerate our move away from a client-centric OS. Already, GOOG's suite of applications, Zimbra/Yahoo, and Salesforce's experiences rival current 'rich' client experiences; and they are rapidly improving with steady browser, UI and computational innovations that are notable for MSFT's absence of leadership.

I would also like a PC to be as DUMB as possible, give me bullet proof appliance-like hardware, browser at the ready, with sufficient bandwidth to fetch cloud based applications, content, and bring relationships to me, or enable me to discover new and exciting places of interest. Facilitate a device to be my personal media server, on call to send my content, or web preferences to a chosen remote device (smart phone or XBox) on demand. Free me from limited content ownership by supporting access (like Pandora). While the PC is getting simpler, let's have an OS design philosophy that supports the stunning price/value equation embraced by consumers in the netbook market.

The metaphor of PC based computing, which happens to be web enabled, has reached its innovative dead-end. Cloud based computing, brought to a device (which may be a PC), is the present and near future. Till MSFT shows the courage to more aggressively 'eats its young' we will remain dissatisfied, as users, with their direction. Sure, Windows 7 boots faster and supports almost as many devices as XP...yawn.

MSFT rightfully earned its dominant position by commoditizing the desktop. They brought incredible value by simultaneously reducing the initial cost of applications, decreasing training through standardization of the UI, and plummeting our total cost of ownership. They have lost their 'permacheap' credentials to a host of competitors ranging from Google, to Red Hat and even a not for profit, Mozilla. This is only a sampling of the first generation of vendors attacking aging application and infrastructure 'permacheap' holdouts. I expect many more will savage the rising cost of ownership numbers, reduce user networked complexity, and cast a light on implicit relationships.

As an investor in early stage software/internet companies, I could not be happier that an older generation of vendors has built a walled-garden of maintenance drug-like revenue annuities. The IT industry's hardware, software and internet vendors are in the midst of a consolidation wave that exacerbates their exposure to permacheap, disposable solutions.

I am wishing them many more good reviews to support their somnolence while they cling to the tyranny of a client-centric time, whistling our favorite Cricket tune

Wednesday, January 21, 2009

Apple's CFO summarizes core values

Peter Oppenheimer, CFO of Apple, outlined the company's core values:

1. We believe in the simple, not the complex.
2. We believe we need to own the primary technologies that we make, and only participate in markets where we can make a significant contribution.
3. We believe in deep collaboration and cross-pollination of our groups. We don't settle for anything less than excellence. We admit when we are wrong and have the courage to change.

On a somewhat related topic, here's a link to the 2005 Stanford commencement address by Steve Jobs

Israel's outstanding VC

Menashe Ezra, one of my former Partners, was recently named Israels outstanding VC by the College of Management's High Technology CEO Forum. Well deserved recognition for a professional, now a partner at Gemini Israel, I learned from Menashe the value in recognizing the difference between the important, and critical.

In a world where time is a key limiting factor, you must choose amongst many important alternatives. Keeping sight of your strategic objective, and knowing when to put on blinders, and when to look broadly is an art that comes with experience.

An award well earned.

Permacheap hardware sales numbers released

Amazon and Wal-Mart published the top 10 list of notebooks sold last week (courtesy of Barclays Bank). Leaving out the specific model names, grab a look at the prices and digest the coming impact of the notebook volume being dominated by the recent netbook introductions:

Asus $378
Acer $369
Samsung $480
Acer $369
Asus $321
Apple $1230
Samsung $450
Asus $339
Acer $380
Acer $371

Despite the compelling UI and reliability of the Macbook, a 3x pricing differential will be under unremitting pressure and will be hard to sustain for anything other than the niche market that Apple found itself relegated to 10 years ago. Companies in the IT space, when faced with direct permacheap competition must respond in kind, or differentiate in a disruptive way. The netbook introductions precisely represent an example of the innovation that fundamentally changes markets. A 3x pricing change, with only a minimally perceived performance delta (sorry MSFT, but many folk do not think of Vista as an upgrade...especially when Dell charges an extra $150 for an XP upgrade for a new system!!).

Undoubtedly, the 3x price is proving to be disruptive and compelling. Highlighting the pressure on Apple, and other established computer manufacturers that are accustomed to ASP's in the $1k range, is that Wal-Mart's numbers came in surprisingly similar to Amazon's (essentially, replace Macbook with a Dell Studio priced at $798).

For cool, customers can opt for a $99 ipod, or a 3G smart phone. Especially, when the later opens the world to permacheap downloaded applications for $.99-$4.99, see leading apps below:

iShoot $2.99
Mod touch .99
Slot Z 2.99
Monopoly 4.99

Of course, there is a long list of free application downloads too.

Tuesday, January 20, 2009

Trickle down funding (click here)

According to the National Venture Capital Association (NVCA), funding for venture firms plummeted in Q4 '08, and showed a steep reduction for the year too. The combination of the dislocations in the financial services industry, stock market collapse (creating the denominator problem, where institutions become over weighted to alternative investments as a % of their portfolio, due to the decline of their public investments) PLUS, the poor exit performance of the asset class are each contributors to the poor performance.

Not surprisingly, the greatest impact was felt by new funds (my personal experience corroborates this), which faced a daunting environment.

No doubt the harsh fund raising experience faced by funds will have at least three impacts:

1. A shift towards later stage investments. Early stage funds will adjust their definition of early stage away from pre-product, and towards pre-revenue, or from pre-revenue to pre-$2mm revenue, etc.

2. A reduction in the number of new investments as funds will increase reserves for existing investments as firms anticipate a difficult follow-on environment.

3. More investment syndicates as funds seek to diversify risk by pooling sufficient capital (in a capital constrained world) to build market leaders.

As the cost of capital has surged, all participants in the value chain; from VC's, to entrepreneurs, to vendors, and ending with customers, will all seek efficiencies in spending, and innovative ways to build businesses and offer value.

Monday, January 19, 2009

To Sir With Love (Michael Stipe and Natalie Merchant) here

One of my 'forever young' buddies, Mr Brahms, sent me two great videos over the weekend highlighting the incredibly uplifting interplay between two amazing artists. If you enjoyed the first, here's the second one . If these don't get you out of your chair, here's REM with the BOSS playing Born to Run.

While watching them over and over again, and forwarding to my rock 'n roll leaning friends, it appeared to me that we are in the midst of an accelerating shift in media consumption highlighted by young vendors, such as Tversity and Boxee. It seems that the market emphasis will accelerate its shift from ownership (bringing YOUR content to YOUR device) and towards access (bringing content from the CLOUD to YOUR device).

As the market shift accelerates, old folk (who still consume a disproportionate % of entertainment sales) will join our younger brethren in adjusting our consuming habits from primarily playing purchased content, to consuming streamed content from the cloud. In fact, absent a substantially enhanced consumption experience, you probably won't ever download it, and significantly, most probably discovered it from one of your 'forever young' friends. The social aspect makes it far more directed, and complementary to, internet based radio (where vendors such as Pandora balance serendipity with controlled discovery).

It is still murky how vendors concentrating on the discovery aspect of media sharing will make money, though let's harken back a few years to a time when the music vendors were staring at the abyss of their IP being devalued (stolen) to zero, and along came Mr. Jobs and gave consumers an experience where they preferred buying IP, to stealing it.

It is clear that one innocent link can launch a consumer (like me) on hours of joyful discovery. This has real value that I would pay for. There's a pony somewhere here worth owning.

Enjoy MLK's a big couple of days in the US.

Thursday, January 15, 2009

An ambulance chaser's view of Apple's disclosures

Joe Nocera of the New York Times, has been following the Steve Jobs health situation for years now. He makes a number of good points and shares a juicy insider's perspective, but I think he misses a major issue that one of my litigious relatives (e.g. plaintiff bar member) raised.

Before commenting, let me say that, despite the Enron mischief and the restatements (sometimes criminal) of countless technology companies for backdating options, it took the Madoff abomination to make me listen more carefully to whining from the plaintiff bar. With that qualification, his perspective is twofold.

First, many small investors are committing inordinate amounts of their personal wealth behind the fortunes of Apple's stock. It may be irrational, but for sure, people of passion have done far whackier things. If there is material news known to an ever growing circle of people (directors, doctors, nurses, household help, attorneys etc), it's essential to make it public to ensure a level investment playing field for the average investor and avoid yet another body blow to the underpinning of our financial system; TRUST. I would bet dollars for donuts that professionals, who manage Apple positions in the tens of millions of dollars, are doing everything they can to lawfully ferret out the truth. We know that every confidant has a confidant, that's why we have these rules.

Let's not expose our system to yet another gross inequity...not while Madoff is ensconced in his penthouse apartment suffering the pain of having to order take-out from the Four Seasons.

The second point he made was to highlight the unfair burden Mr. Jobs, and the Company, are putting on directors, and all the people who have this material (a vague concept, but looking at the stock's gyrations on positive/negative news on his health, it's hard to deny materiality) information. If they sell, or buy Apple equity/options, while possessing this information, they open themselves to liability for what could be perceived of as, at worst, a criminal act. Does Albert Gore, Jr, or Dr. Eric Schmidt need this; do we?

Traffic jam or a new take on search?

With the Holiday season now concluded, I thought it would be interesting to reflect on the 220mm unique individuals (per that visited, and (Craigslist would have added another 40mm). With the notable exception of Walmart, it seems as if the commerce segment of the industry is heading towards a 'walled-garden' approach to the shopping experience; though far different from the failed AOL interpretation from a bygone century. Rather than forcefully inhibiting consumers from leaving, they are offering an open buying experience that is adding tremendous value by keeping visitors 'in-network'.

At Craigslist, Amazon and Ebay a large % of sales are consummated by affiliates, and the transaction, though seamless from a consumers perspective, is not handled by the named site. In essence, the value-add trend for these commerce players (excepting Walmart) is to really be a commerce portal; similar to water and gravity, attract traffic in, and let it find its own level.

The buying experience at Walmart for, say a tennis racquet, is far different (and less rewarding) than at Amazon. At Amazon, the featured racquet is shipped and sold by Midwest Sports, in-context advertisements (affiliates) selling the same product are displayed and links to 'similar items by category' also drives more affiliate sales without ever leaving the Amazon site.

These sites offer critical two way value. Even a franchise as mighty as Walmart can never approach the the deep selection and pricing options that 'open' commerce sites offer. Site affiliates live by the qualified traffic referrals generated by the host sites. As expected, as you go more 'vertical' the search results get even better. It will be interesting if successful, though still nascent sites such as Etsy, follow an Amazon or a Walmart path.

At its foundation, Amazon and its ilk are really bringing commerce oriented search to a level where a key word or phrase (tennis racquet) brings a myriad of in-context sites that readily serve its customer base. Moreover, unlike Google's model, where a cottage industry has been built around scamming the search (SEO) and Adwords (click fraud) results , the integrity of commerce based search, based on broad affiliate relationships, seems to have potential benefits that are deeper than information searches.

Wednesday, January 14, 2009

Another Yahoo related Piece from the cellar...Brad Garlinghouse's 'Peanut Butter Manifesto'

Written 2+ years ago, time has proved much of his points to be right on; a classic case of misalignment of authority and responsibility.

I suppose that Mr. Ballmer read this and rapidly came to the conclusion that he could fix this rather quickly.

Managing transition...what Carol Bartz walked into at Autodesk (click here)

Kara Swisher dug into the news archives and posted a piece from a WSJ 1992 article that speaks to the management shadow that Autodesk's founder, John Walker, cast over the company. The WSJ article is a wonderful prologue to John Walker's Information Letter 14 which, if you have time, shows the incredible challenge she had in coming in as an outsider and successfully executing the role of CEO. The memo is an excellent read, highlights the opportunities and pitfalls that abound in turbulent markets, and also displays the quirks of a founder who has shrugged responsibility, but exercises his founder's authority.

I would expect that she will receive much more initial internal support at Yahoo than was available in the chaotic Autodesk environment described here. It would be wonderful for shareholders (and the industry), if she can right this ship....It may take sometime to see favorable results as the ecosystem of 1992 Autodesk was far more favorable than she faces in 2009 Yahoo. I would not bet against her.

Tuesday, January 13, 2009

Sell direct or embed? (click here)

Tom Evslin, a former entrepreneur and senior officer at AT&T and MSFT posted an excellent piece that is highly topical for young companies which are exploring alternative revenue strategies. He begins his post by highlighting the news that Dash Navigation has laid off 65% of its workforce (venture backed by Sequoia and Kleiner) and is now looking to license its software to GPS manufacturers. In essence, switching from an end-user application to an infrastructure provider to its former competitors.

During the dark days of Apple, Steve Jobs was roundly criticized by analysts who noted that the world moved beyond vertical integration (where you make your own chips, OS, and applications) and towards horizontal integration (where you partner with various folk to produce a functionally similar box as the next guy). The rabble spouting a tyranny of dead ideas pointed to the success of Gateway, Compaq and the upstart Dell saying that only by licensing its OS would Apple prosper. We will never know if Apple could have been the 'next' Microsoft, but I suspect that the path of tight chip, OS and application integration is what gave us the iPhone and iPod.

Tom does a great job focusing on examples of license vs manufacture in the hardware business. This strategic quandary of being a licensed infrastructure element for someone else's solution (OEM), or a direct to end-user business, is amplified in a down environment where the necessary capital to build a sustainable revenue stream is in short supply....and expensive.

This key strategic element is today being faced by many software/internet companies. Back in the halcyon days of the internet, Google crossed the chasm when it moved from licensing its search, as an infrastructure element, to folk like Yahoo, to building its own brand by going direct to end-users (and advertisers). Adopting a business model that rapidly weaned its dependency from license revenue streams and pioneering search based advertising was a key success factor. Inktomi, an independent search provider, was acquired by Yahoo for $235mm as a response to Google going direct and threatening Yahoo's franchise. They never made such a transition. Phoenix Technologies is taking tentative steps down the same road with its HyperSpace solutions.

I suspect that in an era of ever declining cost of IP development, more standard API's, and multiple workarounds to IP patent protection, the long-term value of being an 'arms' supplier has been deeply compromised. Building sustained shareholder value depends more and more on building a broad customer franchise and reducing dependencies on a small group of customers, where you are ultimately at their mercy. Building such companies, in a capital efficient manner is the challenge today facing venture investors and software/internet entrepreneurs.

Interview with Yale's CIO, David Swensen (click here)

Yale University is one of the gold standard investors in the Private Equity world. Having visited with the folk there in the past year, I can say they are thorough, well informed and professional.

The University is well known for its proactive approach to alternative investing (venture, real estate and hedge funds) and eschewing Fund of Fund managers, which Mr. Swensen calls 'a cancer on the institutional-investor world.' Harsh words, and as with the case of broad generalizations, I can say after dealing with a number of value-add folk in the field, the comment was too broad and unfair.

Yale concentrates on finding inefficiencies in the market and taking an entrepreneurial approach by being an early adopter of strategies that may not yet be obvious. They execute this strategy with their own staff, which concentrates authority and responsibility.

Before the turmoil last year, where the endowment lost a reported 25% of its assets, they enjoyed a 10 year run with an average annual return of 16%.

Monday, January 12, 2009

Affiliate Summit, what happens in Vegas....

can spread like wildfire world wide. This Summit was sold out with an estimated 2,900 attendees, representing a 40% growth from the prior year and based on the number of small vendors, and entrepreneurial pitches, seems to resemble the Wild Wild west.

Previously, I posted about the success many internet businesses have enjoyed by adopting affiliate sales as a component to their sales strategy. The ability to instantly track sales, customer conversion rates, and gather demographic information enables companies to minimize the % of marketing/sales expenses that are inevitably wasted. With 50-60% of a company's expenses devoted to sales and marketing, leverage here is probably the most significant area for a CEO to concentrate.

Significantly, affiliates are compensated only if customers perform a desired activity (click through or purchase via CPA, CPC or CPA agreements). This capital efficient model is somewhat balanced with the velocity of turnover as high traffic affiliates will likely drop vendors rapidly if the real estate they lend for a particular action does not generate sufficient returns. Think of it as a compression of time in today's retail department store where a vendor's products need to produce instantly, as a 'season' can be as short as a few weeks, to earn continued shelf space.

Vendors often choose to recruit hundreds of affiliates either directly or through one of the popular affiliate networks such as Commission Junction or Linkshare. An emerging market is developing around efficiently paying these affiliates. It is not straightforward when often payments have many, if not all, of the following attributes:
* micro sizes
* international (often third world)
* they are made to a non-US bank account
* live customer support is required

Historically, payments were made via direct deposit or via Paypal. However, a proper vigilant regulatory environment, coupled with the efficiencies of debit cards has enabled a more effective payment method, specifically adopted to the affiliate world to take hold. Payoneer, a fast growing vendor (where I am an investor) epitomizes the opportunity that entrepreneurial companies have to fill a market vacuum.

The Company offers a co-branded MasterCard that adheres to compliance procedures, for customers who regularly pay affiliates; many of whom are located around the globe. With more than 175,00 outstanding cards, hundreds of companies participating, and tens of millions of dollars transacted per month, Payoneer is emerging as an early market leader.

I suspect that the affiliate channel will attract a host of other entrepreneurial offerings besides its own trade show (and magazine), networks and payments, to support its dynamic growth.

A 'permacheap' winner and a new contender

The same week that analysts cut expectations for MSFT, Red Hat announced strong performance for its fiscal Q3 (revenues up 27% when taking into account currency fluctuations) and guidance that Q4 should be within the range previously communicated to analysts.

As many of you know, Red Hat is best known as a Linux distributor, and has expanded up the software stack into middleware. The stock has doubled since mid-November and its financial metrics are a throwback to what we became familiar with during the heyday of software/internet growth; trailing P/E 38x, Price/sales 4.7x.

The New York Times on Sunday profiled Ubuntu and their version of Linux too. With more than 10% of computers sold by IBM, HP and Dell shipping with Linux installed, it is logical that other suites of Open Source Software, not as widely known, will follow the trend. Expect vendors/organizations, such as the following to accelerate market share capture:


It's interesting that so many of the Open Source articles highlight how satisfied users are with the code, and the community support is lauded. Price seems to be something that gets the software in the door, and quality and low(er) cost of ownership keeps them there. I suppose there's a bit of self-selection inherent in early adopters taking an extra dose of pain, but it's clear that this is exactly the environment where mainstream customers are open to trying new things; especially, when vendors of the ilk of IBM, HP, and Dell lend their brands/trust to the effort.

It's a well trodden path that application vendors follow the success of OS and middleware vendors, so folk, such as SugarCRM. would logically see positive momentum too.

These subjects have been widely followed in the press for the past few years. What is now different and to me significant, however, is the ability to discover, materialize and assemble the various components that developers use to build applications suited to particular needs of organizations.

The open source movement has been conservatively embraced by hundreds of thousands of programmers who have developed countless components that are embedded in applications and systems throughout the world. In a similar way that end users now customize their home pages, organizations will demand the same flexibility, at reasonable cost of ownership to do the same with their applications. To achieve the dual objective of flexibility and cost savings, it's critical that engineers have ready access to leverage the work of others. They need to understand what components are available, what's their quality, and are there any dependencies in the underlying code. These, and many more questions underlie trust.....'if I use this code, rather than developing my own, or buying a proprietary system, will it work?'

Systems such as Krugle or Google's Code Search address the 'find' part of the issue. A second generation of companies, such as Cloudsmith, where I am an investor, delves more deeply into the aforementioned elements that build trust (community ratings, popularity, dependencies, etc). Grab a look at one of the posts by fellow investor, Chris Horn, founder of Iona, who speaks eloquently on the topic.

Friday, January 9, 2009

Twilight or Dawn?

Bill Stensrud blogged an interesting piece using a speech given by Steven Chu, a Nobel prize winner, as its foundation. It's about innovation and venture capital in the technology area.

In essence, he explains that the doldrums in the VC world are tied to the lack of fundamental innovation we have seen in the last decade; he sees the age of the transistor as having run its course. Drawing an analogy with Stephen Jay Gould's evolutionary theory of 'punctuated equilibrium', where change does not happen in a linear manner, but in fits and starts (looking more like a staircase), he sees us past the apex of innovation and entering a stagnant trough.

He then goes on to make an argument towards the efficacy of smaller venture funds, with better GP/LP alignment, being best positioned to prosper in such an era.

Interesting reading, but I am not in full agreement. Looking at the technology industry, we have really seen its success rest on innovations in not one, but three distinct, yet related arenas; hardware (transistors), communications (optics), and software (compilers). These have never moved in lock-step. Advances in at lease one of these areas have always opened new frontiers for the others. The laggard today, represents the best investment opportunity for those focused on tomorrow.

Today, the typical user has way extra computing power and is on the way to having their bandwidth requirements more than satisfied. When this happens, we should have enough kindling to ignite another wave of software/internet innovations (perhaps around a new UI metaphor?)

Thanks again to my smart friend Larry for sending it over. If other readers see interesting things, please don't hesitate to send them over too.

Goldman's view on Software "the year of the ROI"

In an environment where they forecast IT spending to be down 4% in '09, Goldman anticipates software spending to be flat with '08.

Though spending will be flat, there will be winners as customer spending should consolidate towards larger companies. Expect Suite providers to continue to gain share at the expense of 'best-of-breed'. Moreover, 'must-have' software segments including security, storage, and tangible ROI technologies (e.g. virtualization) should garner increases at the expense of 'nice-to'have applications (e.g. SFA).

They are bullish on CA as they see continued margin expansion due to their leveraging their deep product suite, coupled with 60% of revenues derived from maintenance. In addition, they like Citrix's product suite and cost discipline.

Though concerned about MSFT and the 'anemic' PC environment Goldman expects a MSFT RIF in the 10% range to reign in expenses. The stock is trading at a P/E of 9x '09 earnings...a deep discount to the Software peer group. If the RIF happens, they like the value of the stock at today's prices.

Similarly, they like Oracle, BMC and Symantec as they offer mission critical products and have disciplined management that is showing expense sensitivity (maintenance revenue of 46%, 55% and 47% help too) in a difficult environment.

Goldman has a SELL rating on as they view their products as not being mission critical. Moreover, an intensifying competitive environment augers potential price erosion that may hinder growth. The other sells are on CommVault (concerned about management discipline) and Akamai (pricing pressure).

My take-aways were:

1. It was revealing that the most innovative, and potentially disruptive, technology discussed was virtualization.
2. An industry average P/E of 12x is at historic lows
3. The reliance these vendors have on maintenance revenues highlights that leading software vendors really are operating SaaS business models. The predictability is great, though it's amazingly difficult, absent large M&A deals (did anyone say Yahoo) to deliver growth above the mid-teens.

Thursday, January 8, 2009

'The Tyranny of Dead Ideas'

This recently introduced book by Matt Miller deals with macro issues such as school funding, merit pay, etc. On these pages I have chosen not to address such grand issues, though the title set me to thinking about the tyranny of dead ideas, within the technology industry, that when confronted with business or technology innovation, seem to crumble. Here's some examples that come to mind in the software/technology space:

1. John Moores and Rick Hosely of BMC fame proved the accepted wisdom that you can never sell software over the phone that cost more than $25,000 was nothing more than a shibboleth.

2. Microsoft proved showed CIO's that they can indeed be fired for only buying from IBM (and not innovating fast enough)

3. Linus Torvalds showed us that the wisdom of the 'Catherdral and the Bazaar' was not academic and that open source software can be more reliable and better supported than proprietary code.

4. Remember the thought that MSFT bundling its browser into the OS would kill the software industry and stifle innovation? In many ways, it accelerated the adoption of the content side of the internet and gave rise to Google's foray into the browser based OS world via Chrome.

5. After watching Hill Street Blues on my 18" monitor, streamed via Hulu, that tyranny of thought that the internet is the 'lean forward medium' and the TV is the lean back medium went up in smoke. Hasta la vista to Cablevision?...the thought just sends shivers down my spine.

6. A non-technology example of tyranny against ideas (yes, I altered the title because it seems the tyranny we have to be sensitive to in recessionary times of is the tyranny towards the status quo, and against innovation), is that no one would spend $2 for a cup of coffee; when alternatives are available for 75 cents per cup. Regardless of your taste for Starbucks, you gotta love Howard Shultz

I have no doubt that we are holding fast to a number of ideas that are rapidly 'dying' or should have never been accepted in the first place. The companies that debunk them first, or most completely, should have great futures.

Wednesday, January 7, 2009

The 20 VC's most exposed to Web 2.0

Despite its alarmist titile, this piece in Silicon Valley Insider, does a good job outlining the 'exposure' of some of the notable venture firms to the Web 2.0 'mischief'. From my perspective, it's heartening to read the article as it highlights that the capital efficiency of internet companies seems, for the most part, to be a core differentiator between the Internet bubble, and the economy bubble we now face.

If this is the worst of it, then the venture community seems to have done a good job at harnessing capital to properly diversify into the myriad of technology arenas, or to hold capital to invest more deeply in winners. Of course, the big test will come in '09 when tough decisions will be made on which portfolio companies to support and which will be left for an inglorious demise.

Oracle Corporation's M&A strategy, presented at SIIA PE forum

The Software & Information Industry Association sponsored a presentation with Vishal Bhagwati, VP Corporate Development of Oracle, to discuss Oracle's Acquisition and Integration strategy. Given the spotlight on venture exits, the topic, part of an ongoing series of events the SIIA is sponsoring for its Venture Capital members, was especially relevant.

Here are some quick Oracle facts that highlights its scale:

$22.6B Revenue for FY '08
320,000 global customers
20,000 Partners
80,000 employees

They are the second largest Saas vendor in the world where they think of it as yet another deployment option to make their products available via purchase or subscription.

Oracle Strategy:

To offer the most complete industry portfolio around standards-based architectures that are integrated to work together. They view IBM, SAP and MSFT as their key competitors and try to differentiate their position as follows:

IBM is not in applications
SAP is not in the database or in the application management field
MSFT is totally proprietary

M&A background

50+ acquisitions aggregating $45B in value. Now at the pace of completing 3-4 transactions (not including IP based deals) per quarter.

View M&A as a tool for growth, not a strategy in its own right. Post transaction, having someone accountable for the metrics is critical to bringing planned value.

Their focus is on the following value components (note to before presenting any portfolio company considering M&A with Oracle):

* Providing customers with broader and better product capabilities
* As a vehicle to meaningfully enter complementary industries
* Accelerate core product innovation
* Lower cost of customer ownership, through pre-packaged integration (drive towards permacheap).

Oracle has seen successes in their vertical industry offerings where markets such as Communications, Retail and Manufacturing have seen multiple transactions to boost organic growth. They have not yet completed any transactions in the Health care or the Public sector but, given these market sizes, it's logical they are looking deeply in these markets.

The current environment is intensifying their interest in transactions as they have currency and see an opportunity to fill in areas of interest at attractive values. Note that he stressed that Oracle deeply discounts prospective synergies in valuing their transactions.

Integration strategy

Capture hearts and minds of employees and customers
Rapid back-office integration
Track results on a weekly basis

Role of Bankers

He was asked (by me) where bankers bring the most value, introduction or deal structure. He was polite, but it seemed as if his answer was neither. They have an active industry touch program and tend to know many of the people who would be board members of acquisition targets, so approaches are easy and, if a Company is for sale, they inevitably get a call from someone (whether its a banker or board member). On structuring transactions, while they don't need assistance, a professional can readily assist the target's management team/board.

One area, where I have seen bankers greatly assist, is when the board/shareholders/management do not have aligned interests due to a 'funky' capital structure resulting from multiple funding rounds. In these instances, a professional ostensibly hired for their outside expertise can be invaluable when dealing with insiders.

Final thought

Over the years, we have seen a number of companies (best personified by Computer Associates) embark on aggressive acquisition strategies. Notwithstanding the accounting 'mischief' CA really used M&A as an effective means to emerge as a market leader. Their key flaw was abandoning innovation, therefore, when the company grew so large as to run out of meaningful acquisitions as a means to bolster growth, the deck chairs toppled into the ocean. I am not sure how much of Oracle's growth is tied to its thus far successful M&A integration, though I suspect they have the opportunity, to complement their very public transactions with some potential game changing technology based transactions (like Cisco and Citrix have so successfully done).

Tuesday, January 6, 2009

Guilty as charged

During the past year I have been somewhat negative about the ability for young companies to build serious stakeholder value in the segment of internet video space so visibly pioneered by YouTube. My concern is that, despite plummeting costs, the value-add of recycling someone's proprietary content, or running adds against yet another silly pet trick was limited in an era of surging page inventory and limited innovation.

Yesterday, at Techaviv a gathering of Israeli entrepreneurs heard 3 companies present their offerings to a physical audience of nearly 50 people, plus a global audience of Techaviv members. One of the firms, Boxee, recently funded by Spark Ventures and Union Square Ventures, (HQ in NY and R&D in Israel) presented an innovative approach that automatically merges your personal digital assets with content available over the internet to present on your TV a greatly enhanced user experience. Complementing the merging of your data with external content is a social aspect where you are able to invite/follow your friends' media experiences.

The user experience seems neat in the demo (I have signed up for the alpha but not yet installed the service, so can't say for sure), but what really attracts me are three other attributes that are integral to building a wonderful business. The IP is built on top of the XBMC active open source community that minimizes core development expense, so they can devote their resources towards the application and UI (and license agreements with MP3 and other folk). Second, the company seems to be executing quite well on a low-cost viral seeding strategy hitting many influencer's and speaking at industry forums large and small. Finally, the small team seems totally driven and comes highly recommended.

I am not sure if this company will ultimately be successful. However, for a relatively modest amount of capital deployed against quite a large market opportunity, that interests many deep pocketed companies, it seems to be just the type of venture bet that the asset class should make.

One company is not enough to reform a skeptic; two though gives great pause. SundaySky is two year old company which has just released its initial product (company also started in Israel, and is moving HQ to NY), an infrastructure platform that enables a site to generate dynamic video on the fly. The promise is that professional quality video can be created for your site with no human intervention(other than professional services when you deploy the platform)...if this works, it will enable sites to substantially increase monetization of content or conversion rates for commerce; while lowering the costs associated with doing this. I am not yet sure if the business behind SundaySky will conform to the capital efficient model that is core to giving customers a true disruptive value proposition that I'm convinced will be embraced by true disruptor's, but at the next Techaviv session, the team will be presenting their solution and answering questions. SundaySky is funded by my friends over at Globespan Capital Partners and Carmel Ventures.

Venture backed exit statistics

One of the major publications that follow the venture market, PEhub, recently published their recap of '08. As expected, the numbers were not pretty with:

M&A deal value was down 54% to $23B, representing 325 venture-backed transactions (down 29%).

The median consideration amount was down nearly 50% to $45mm; something to think about when these acquired firms raised a median $22.6mm

Seven IPO's generated a scant $551mm in liquidity.

Significantly, it took a median 6.5 years for a Company to reach liquidity via M&A and 8.3 years for an IPO.

No doubt these numbers were skewed by the financial downturn but I also sense something more significant that portends short-term bad news, and longer-term good news is happening, at least in the software and internet sector.

First the bad news.

Many of the investments in consumer facing applications that are dependent upon advertising dollars to support their businesses will be in for far tougher times than anticipated. The combination of a steep downturn in CPC and PPC rates, coupled with rising inventories will leave their backers with an unenviable choice of putting more capital to work in troubled companies (hoping for a short-term market rebound), or withdrawing support and allocating funds towards new investments or supporting the firms with positive momentum. While this Darwinian process is expected, and encouraged, in the venture business, it's happening earlier in the company life cycle than anticipated.

Investments in companies selling to the SMB's and Enterprise arenas are also seeing slower revenue momentum than anticipated, but all indications are that business spending is not as impacted as much as advertising budgets. The issue in this arena is crafting a value proposition that is so compelling that it overcomes the steepening conservatism seen in the early days of a recession.

The bigger market issue, in my mind, is that the dearth of IPO's has left the software and internet arenas with a large imbalance between the number of sellers (large increase) and the count of willing and able buyers (steady decrease). As a consequence, unless there is a rapid pruning of investments, I expect the 'time to liquidity' metrics to worsen over the next few years as many companies, lacking the growth story for a positive IPO, and having raised too much capital to show a positive liquidity event (but respectable businesses who have reached a critical mass to be self-sustaining), continue on their private path.

The good news is that these numbers do not reflect the intense move towards capital efficiency that many entrepreneurs, and their venture backers, have been preaching over the past 3 years. Harnessing instant information from the internet to optimize sales and marketing, and running their businesses based on 'just in time' infrastructure creates situations where less capital translates into better businesses that are equipped to pass these efficiencies onto their customers. Thereby, creating greater opportunities for all stakeholders.

Venture firms, which were formed in the past 5 years, seem to have the DNA to focus on these trends. In the NY area, we see firms such as First Round Capital and Union Square Ventures to be two examples of firms that vigorously practice the capital efficiency mantra; while focusing on high growth market opportunities. It is still premature to label these firms as institutions with the foresight of Kleiner or Accel; but their investing and portfolio maintenance styles bear watching.

Monday, January 5, 2009

Marissa Mayer blog post- Google's VP search and UI (click here)

As Google is the de facto user interface to content published on the internet, understanding the thinking behind where they think innovation in Search is required is important. Following are my key takeaways from her post:

1. The latest generation of smart phones, encumbered by network speed and coverage, only scratches the surface of user demand for fast data access when you want it.

2. Natural language (always one of Bill Gates' key interest areas) input, with voice and image awareness, has the potential to advance the search paradigm from today's limitation on 'key word' selection as your search kick-off.

3. Search results ought to be 'universal'. Meaning an inclusion and prioritization of images, video, maps, etc. would greatly enhance the user experience. Here's a link to the Google blog post from May 07, that describes what they are up to in this area.

4. Dealing with ambiguity of search terms, and personalization of results, are important. Recognizing that one person's Jaguar is a football team, and another is an automobile, highlights that the more a search engine knows about your preferences, and even location (hello privacy concerns), the better your search result will be.

5. In a nod to the 'implicit web' where non-obvious relationships are harnessed to gather information, mining relationships to assist in getting the right content can be a great booster. I suspect that doing this in a non-obtrusive manner will be a huge challenge/opportunity.

6. Recognizing that today's internet users speak a myriad of languages, and more importantly, generate content in these languages, having reliable cross-language information access will greatly improve access to the 'best' content.

For some time, my personal experience with internet commerce and looking for specific content has led me to an interest in vertical search. For example, a lifetime of entering key words into Google, to buy a handmade birthday present for my wife, will never give me the same experience that Etsy provides. Likewise, iMedix provides a great amalgamation of medical related information that's optimized for the health arena.

You would not necessarily think of either of these companies being in the search business, though their concentration on specific markets enables them to harness search, in a specific way, that obviates my temptation to use Google in these arenas. As markets get larger, they tend to create sub-markets that, with maturity become markets in their own right. Coupled with the Ms Meyer's thoughts, this should represent many entrepreneurial and venture opportunities.

Saturday, January 3, 2009


Jeff is one of my tennis playing buddies and a far better athlete than I ever was but what I really admire is that he's also one of these guys who really knows financial markets; far better than I ever will, and has a simple yet powerful way of explaining things.

He's never satisfied just beating me in tennis and always has decimation in his eyes and on his mind. Aiding him is a wonderful ability to distract me with some pre-game business related chatter. Today's distraction was around a trend he calls 'permacheap'. He sees asset values being fundamentally reset for the foreseeable future and advises his people against holding assets just because they are so cheap today. According to him, cheap is an absolute expression and if you think of it relatively and start comparing values to yesterday you are chasing fools gold. The market today is just different. He's not optimistic or pessimistic, just a realist who is adjusting his game to market realities.

Between sets he took a new distracting tact. 'Charlie, did you know that US Government is now the largest mattress company in the world?' People are giving them money, for 30-90 days and asking for zero return. It's like stuffing money in a virtual giant mattress.

That's how much trust has left the market and why companies that embrace permacheap, (like at Pando where the selling proposition is 25% of the cost and the same or better SLA as competitive alternatives) resonates well in the market.

Back to tennis, my revenge is to lend him rackets whose strings are just about to break. When he calls me out on it, I calmly explain that restringing tomorrow will be much cheaper than restringing today. Bring it on, 'just bring it on Charlie', so he says.

MSFT and market share...looking like GM in the 80's?

For nearly two decades the foundation of MSFT's success has been the interplay between its successful operating system and application franchises. Each reinforced each other to provide a superior customer experience as an alternative to the cackle of thousands of vendors; each with a unique perspective that brought us 2 pound user manuals. Unfortunately for MSFT, its Vista misstep, coupled with a stunning lack of innovation in their applications, and lack of market share in the fastest growing arenas puts their ongoing dominant role into question.

According to market research firm Net Applications, Apple's OS X operating system reached a market share of nearly 10% in December. Though significant in numbers, the % alone shows a distant number 2, till you see it represents a stunning increase from 7.3% in 2007. Early in the cycle of a new OS, Windows lost more than 3% of market share last year. In the context of a market move towards thin(ner) applications and the emergence of smart mobile devices (iPhone and Blackberry), at no time in the last 10 years (since vanquishing Netscape) was Microsoft's market share mantra under greater assault than in '08; or more fragile in '09

Looking at the market trend towards 'thin' computing, where the browser rules the User Interface, Firefox exceeded a 20% share for the first time in November, while IE fell to below 70%. From a market share perspective, Google's Chrome is still mostly irrelevant. BUT if, as widely reported, its Android OS is shortly deployed in the fastest growing segment of the PC market, Netbooks, the combination could represent a powerful combination embracing two critical market trends; cheaper computing and thin client applications where MSFT surely lacks momentum. Search, which one can think of as the information browser for the internet, today is probably the most prevalent thin client application. Google's share now exceeds 81%, while MSFT (MSN and Live) continues their downward share trend to a paltry 4.5%.

Along with thin computing (aka cloud computing), smart mobile devices represents the other critical fast growing computing platform. According to market research firm Canalys , the market grew 28% for the 12 months ending Sept 30th. Here, market share leader Nokia is in steep decline seeing share plummet from 51% to 39%. Apple and RIM were the chief beneficiaries surging to 17 and 15% respectively. Recent 3G shipments by Apple and RIM should reinforce their share capture for, at least 1H '09.

Looking at smart phones, from an OS perspective, Symbian is a troubled market leader seeing their share plummet from 68% to 47% in the last year. Here, 4th place OS vendor MSFT saw share rise from 12 to 13%. Though, given the innovative products shipped by RIM and Apple and the significant embrace of Android by Motorola, it seems as if MSFT will be hard pressed to maintain its momentum.

Microsoft has incredible assets ranging from brand, to market share to great people. Nevertheless, it's clear that its leadership, or even relevance in the most important computing trends is lacking. For customers, this will create a vacuum that will both confuse and serve as the impetus for innovating. For entrepreneurs, and the venture community, it presages a Spring Awakening.

Friday, January 2, 2009

2008 Public Internet M&A: Year In Review

Bill Burnham, an ex-Wall Street analyst and current hedge fund manager posted reviews on Public Internet M&A, Software IPO, and Internet IPO activity for 2008. As expected, all showed a dearth (understatement) of activity.

Looking at the M&A statistics, it seems to me that the lack of actviity is related to two factors; one short term and the other industry structural. Addressing the short term issue is that it's hard to place a value on a company when it's stock (and yours) is melting down an average 41% in a six month time frame. We have seen spastic run-ups and run-downs and they just about always freeze buying and selling.

The larger issue is the lack of IPO's. This multi-year freeze seems to be turning the software/internet market structure from a classic triangle (with the largest number of companies at the top and the greatest on the bottom), to more of an hourglass where the middle-market public companies, which historically account for an outsized % of transactions, are disappearing. The disappearance of these firms, not replaced by new ones, is limiting M&A volume. Three related factors ought to be in alignment to bring back the software/internet middle market; company performance, ready equity buyers, and Wall Street firms willing to bet their balance sheets.

We are in the midst of some tidal changes that will undoubtedly give us great opportunities, but just not the same one's we saw for the past 10 years. For many investors, as Warren Buffet once said, 'the shifting tides will expose those of us who were skinny dipping'.

Thursday, January 1, 2009

It's the numbers

One of the Companies that I have invested in, Reimage, has been experiencing torrid growth (off a relatively small base). The goal of the Company is to ensure, via a remote automated service, that your Windows based PC works like new; everyday.

It's a great vision, but the execution of the business is something that I would like to share with you. The CEO has deep technical talent and strong product opinions, yet the product decisions are made via live A/B testing with near instant results. With daily traffic in the low/mid tens of thousands, new features, site designs and promotions are being constantly tested and adopted or discarded within days, or even hours, based on quantified customer or channel partner results. Product debates rage for minutes, not days.

Much has been justifiably written about the capital efficiency brought to the development process for software and internet companies. A great deal of attention is being placed on the virality of internet distribution too. All are important, but having the right product is the foundation of all great technology companies. Mitch Kapor once said it well when he was asked to comment about a potential competitor with a great demo 'you're not worth spit without a great working product'. With relatively low barriers to competition, he's even more right now than when he was running Lotus.

The integration of rapid development, testing, and distribution, taken together are the foundations of the capital efficiency touted by entrepreneurs and investors. Rapid is the key word here and, counter-intuitively, adding capital often mitigates 'rapid' as a company's culture is quick to ossify when more people are added and financial plans are solidified. Today, independent of the market's 'mischief', many of us in the venture community are seeing a reduced demand for capital from entrepreneurs embracing 'rapid'. This bottom-up trend, affects the structure of the venture community where fund success often predates raising larger funds.

I expect the foreseeable future will bring us less well as smaller funds. Could be good news for entrepreneurs and LP's alike.