How startups succeed

If you ever wondered what it takes for a startup to succeed, please read the email below sent from the CEO of one of our portfolio companies to his whole staff. Sure, startups don’t have the cash, the people, the distribution channel, and brand to compete with the established players but passion, drive, and an insanely great product can take you a long way.

Dear team members:

I have always believed that the key reason for our continued success over the past few years has been, the contributions made by each and every one of you. Without your sincerity, commitment and hard work, we would not have become the #1 partner for Company X.

I want to share with all of you, an extremely powerful example of sincerity and commitment, shown by one of our fellow team members. I am sure that each one of you will feel proud of him after reading what he accomplished this week!

On Tuesday, July 13th, after finishing a bunch of very successful presentations in the Washington DC Area, John Smith (aka Mad Dog from his army days) took a flight for Memphis, TN where he had to do a presentation in the morning on Wednesday, July 14th. John had to change flights in Atlanta on the way to Memphis. Due to extremely bad weather on the east coast, his flight into Atlanta got delayed and he missed his connecting flight to Memphis. The next available flight to Memphis was the next day at noon, which would cause him to miss his morning presentation. So John asked the airline if they would reimburse him for a rental car to drive from Atlanta to Memphis, thinking that it would be a few hours drive. The airline agreed, so John rented a car and started driving to Memphis from Atlanta. John had been in touch with Dave when all this was going on, so after he started driving, Dave did a quick check on Mapquest and realized that it was a 400 mile, 7 hour drive and not a “few” hours drive as John had thought (it never hurts to be good at Geography!). But Mad Dog did not stop or turn around, he kept driving (with a few coffee breaks to help keep him awake at the driving wheel). He reached Memphis at 5:30 AM, rested for an hour at his hotel and went on to do his presentation – which was very well received. Folks, this story does not end here………..

John then took a flight from Memphis to Jackson, MS where he was scheduled to train 30 users for one of our major customers THROUGH THE NIGHT of Wednesday, July 14th! He got into Jackson, slept for a couple of hours and then went to the customers offices to conduct training for these 30 users from 10 PM to 5:30 AM! The training was extremely well received (I have received e-mails from the Company X Sales managers giving kudos to John for his quality of training that night). Today morning he flew from Jackson, MS back home to Dallas, TX.

John: I am very proud of your commitment and dedication to work. Please make sure you get some well deserved rest over the weekend.

PS: In the future, please call one of us from the airport to check how far your destination is, before you start driving!


CEO of portfolio company

Influencing the influencers

If I were a startup, one great and cheap way to build buzz and excitement is through the blog community. I call this “influencing the influencers.” Think about it – many of the more well known bloggers are also well known tech journalists, industry pundits, VCs, and technology executives. Forget about using the traditional PR route – if you can get these influencers to write about you on their highly targeted blogs, others will hear about it, write about it, and generate links to it. There has been much discussion about measuring the value of blogs but at the end of the day it is all about being influenced by a trusted source. Each blogger has his own unique audience that trusts his/her opinion. Many of us try and buy products and services based on trust and recommendations. This is no different in the blog community. A number of web 2.0 companies have already leveraged the blogosphere to generate buzz. Not that I am a big influencer by any stretch of the imagination but some of the new companies I have written about recently include Pluck, Bloglines, and Onfolio. And yes, there are many more influential people than I who wrote about these companies as well. I am quite sure all of these posts delivered significant name recognition, brand value, and traffic for the companies mentioned above. Once again, it is not about how many posts, but who posted that really counts because the word and links can spread quickly.

Along those lines, Om Malik is certainly a guy you want on your side. Here is a great post by Om where he writes about getting quantifiable evidence for the first time on his influence regarding a post on a new startup, Blinkx:

The blog was posted on a Friday, and by the Monday there were 5,000 links to it and people were discussing it all over the world. Since then, there have been 130,000 direct downloads, and many more through users swapping files. This week, the site – which is only launched today – has been recording 6m links or hits a day solely from word-of-mouth publicity.

That is pretty damn cool! Let me repeat – 5,000 links, lots of discussion, 130,000 downloads, and 6m links/hits all generated for $0 – yes, no money!

Subscription accounting

Ok, now for some boring accounting stuff. Red Hat (RHAT) recently restated its financials. Its auditor, PWC, suggested that it change its revenue recognition policy. According to a CBS Marketwatch article:

Under the accounting method used in the past, the company would recognize a full month’s revenue from a subscription agreement, even if a deal was sealed in the middle of the month, for example.

The effect of the accounting change is to defer a portion of the revenue that had previously been recorded during the month that the subscription started to the end of the contract.

So what it comes down to is a timing issue. In the example above, a full month of revenue gets recognized even only if the customer signed in the middle of the month. I don’t really think that this in and of itself caused such a huge selloff in the company. One could argue that the company is overvalued at a $2.8 billion market cap and a 20.5 TTM revenue multiple.

Anyway, I checked around with my portfolio companies which sell hosted software and it seems that we are taking a conservative approach by recognizing a set up fee in the month that we sign a deal and do the work and then begin recognizing the subscription revenue the following month. Anyway, while a boring and mundane issue, I believe this will impact a number of other companies in terms of revenue recognition. My general rule of thumb is to always have portfolio companies prepare for success – this also includes making sure our accounting is conservative and inline with best practices.

On technology commoditization

If you ever wondered how Sun monetizes Java, I suggest reading Jonathan Schwartz’s (President of Sun) post on commoditization, standards, and Java. The crux of his discussion is that standardization and commoditization is not terrible as it inevitably opens up new market opportunities for industry players (just look at the railroad industry as an example). On the tech side, Jonathan believes it is mainly bandwidth that has been commoditized as opposed to a broader trend in software.

So I’d like to answer once and for all the question, “how does Sun monetize Java?” with a historical reference: the same way GE and General Motors have monetized standard rails, Vodafone monetizes GSM, banks monetize ATM networks, and oil and gas companies monetize the fact that my car can use “gas.”

The Java community, which we steward, drives a broad array of platform standards, among an even broader array of industry participants. That activity levels a playing field, that just so happens to be the single biggest playing field the technology industry has ever seen. The network is a commodity. We should all be celebrating.

In some respects, one could view commoditization as a bad thing as it is difficult to differentiate one product from another as they are easily replaceable based on price alone. However, what Jonathan is saying and what I agree with is that it is what you do with the commodity bandwidth, standards, and platforms that separates the winners from the losers. Sure, companies are all on a level playing field due to advancing technology and platforms. For example, with standardization, building new software and technology products and integrating them with existing solutions takes much less time and costs way less than ever before. Despite that, we continue to see innovation and new business models. The value just resides in a different layer. While Jonathan would like to believe that the creation and promotion of Java would soley benefit Sun, his argument is that it makes the market bigger for everyone, including Sun, so that is a great thing.

The one thought that could cause worries is that if you buy into Jonathan’s story of commoditization, the inevitable result is that the industry will consolidate leaving only those with scale and monopoly power to survive. Just look at the examples from his post – GE, GM, Vodaphone, and banks have benefited from standardization. Well, those are all big guys. In my mind that’s ok, as consolidation will be a long time coming as we are in the very beginning of this commodity movement in the technology space. Sure certain markets are in more advanced stages, but overall as an entrepreneur and venture investor you will have plenty of chances to make your impact. Remember, as markets commoditize, new opportunities will continue to arise, huge ones that we never even thought of today.

Another day, another high profile blogger

Another day, another politician or high profile executive launches a blog. This time it is FCC Chairman Michael Powell and Sun’s Jonathan Schwartz. According to Michael Powell, he decided to blog because he wants to interact direcly with his constituency, creating a dialogue and urging Silicon Valley to get involved. He goes on to say:

One reason I am participating in AlwaysOn Network’s blog is to hear from the tech community directly and to try to get beyond the traditional inside the Beltway Washington world where lobbyists filter the techies. I am looking forward to an open, transparent and meritocracy-based communication—attributes that bloggers are famous for! Regulated interests have about an 80 year head start on the entrepreneurial tech community when it comes to informing regulators what they want and need, but if anyone can make up for that, Silicon Valley can. This is important not just for Silicon Valley—it’s essential to insure that America has the best, most innovate communications infrastructure.

Both Jonathan and Michael are launching blogs to stay close to their community. What I find interesting about these blogs is that one chose to leave comments open and the other chose to not allow comments. As I have said before in an earlier post about Why I Blog as a VC, it is the 2-way interaction and instant user feedback that makes blogging so valuable for me. I am curious to see how Michael Powell handles the comments on his blog and to understand whether or not he is truly trying to create an “open dialogue” or if he is just blogging for PR value. As for Jonathan, I really believe he is missing out by not opening his blog for comments and allowing his readers to turn his post into living, breathing ones.

Now that high profile executives and politicians have bought into blogs, I am still waiting for product companies to use citizen’s media (blogs, RSS, etc.) as Jeff Jarvis calls it, to create true interaction with their customers. I am not just talking about using RSS to subscribe to a Top 10 list of products sold for the day or week or to update customers on an upcoming product release. What would be great is if product companies could figure out ways to use this new medium to build long-term relationships with its customers, to create ongoing focus groups for a product or service, and to collaborate with customers on product development. Another great way for product companies to leverage this medium would be by allowing me to create custom RSS feeds/stored searches on the fly for certain products or services. Sure, I can do that via email, but the interesting aspect is having it all aggregated in one place using an RSS reader. Rather than have my own custom newspaper like I do today via Bloglines, I create my personalized store, amalgamated from a number of different sites and covering different categories like automobiles, electronics, and even restaurants – basically anything I am in the market for today based on the parameters that I set whether it be price, type of product or service, available appointment, etc, That would be a pretty cool use of RSS.

UPDATE: Regarding product weblogs, check out the Skybox blog from Maytag (yes, Maytag) via Scobleizer. I applaud the folks on the Skybox team for doing this as they even say:

In fact, that’s a great segway into a question, or plea for help if you prefer. There are not a lot of companies who are leading the way with product weblogs. I’ve not found much in the way of examples for a company who is trying to evangelize and support a hardline product through a weblog. There are some great weblogs for software programs and online activities, but not a lot for products.

Thoughts on the enterprise software market


Everyone is talking about the slowdown of growth in the enterprise software sector as one of the main reasons driving consolidation talks at companies like Oracle/Peoplesoft and Microsoft/SAP. We all know that the enterprise software business characterized by large licenses and 20% annual maintenance revenue is lucrative but also hard as the big get bigger and the little guys disappear. Given the number of negative preannouncements this week from enterprise software companies, this Forrester graph from a CNET article summarizes the market quite well.

Looking at this graph, it is no surprise that companies are looking to consolidate. Given that maintenance revenue is such a large percentage of overall revenue and growing and given that it is also highly profitable, why shouldn’t some larger players in the market consolidate the industry, keep the maintenance revenue and cash flow, and stop everything else? With that backdrop, I find it quite interesting to learn that CA’s ex-CEO, Sanjay Kumar (the master of these deals), advised Oracle on their Peoplesoft acquisition. According to a New York Newsday article, here is what Sanjay had to say on Oracle’s strategy of buying Peoplesoft and gutting it:

At the same time, Phillips said Kumar advised “he would have the same plan post acquisition but just would not have said so up front. Everyone knows but you can’t say it and freak out the customers up front.”

As for which employees to keep and which to discard, Kumar, whose CA acquisitions were notorious for scuttling thousands of workers, offered clear advice.

“Don’t get rid of the presales folks; only the sales,” Phillips quoted him as saying. “The presales guys know the products and customers and they will get you easy add-on sales . . . and it would be crazy to forgo that revenue and those relationships . . . You don’t need the sales guy — those are for new account hunting.”

What does this mean for me from a venture perspective? Well, what I have believed for a long time is that it is hard for early stage companies to build direct sales models predicated on “elephant hunting” and going after huge deals. Each sale is incredibly long and expensive. In addition, as you can see from a number of large public software companies, revenue is lumpy and therefore less predictable as customers wait until the last day of the quarter to squeeze you for a larger discount. Despite this, we are still bullish on software companies selling to enterprises. In our mind it just requires a rethinking of what business models will work and why. Think seed and harvest – lower price points, more volume, lots of upsell over time. Think of software models with leverage – hosted software and modular software which can be resold, OEMed, and/or appliancized (if that is a word). So please read an earlier post for more detail.

Jamdat Mobile files for IPO

Russell Beattie has a thorough post on Jamdat Mobile’s IPO filing. This is significant because this is the first so-called “wireless application” play to hit the market. For those of you that don’t know, Jamdat is a provider of global wireless entertainment applications and enabling technologies that support multiple wireless platforms to wireless carriers, handset manufacturers, media companies, and independent content developers. Looking at Venturesource, I see that Jamdat was first funded in March 2000 precisely the time when VCs thought wireless was the next big thing. Many of these companies are no longer around, but it is nice to see Jamdat make it through such turbulent times, only with $33 million in VC funding.

As an investor, the difficult part of any consumer wireless play is that the wireless world is a walled garden and not an open network like the Internet. This means you are dependent on the carriers for deals and access. This is starting to change but even if you want to go to your own sites through your wireless phone, it is not easy. In addition, imagine the competition to get distribution from the carriers-there are lots of little guys knocking on the door. On the upside, if you are able to get the deals, you have an incredible ability to scale. Just look at Jamdat’s numbers: $90k revenue in 2001 with a $5mm loss and $7mm revenue in Q1 2004 with $740k profit which is an annualized revenue runrate of $28mm-not too bad in a few years. As Russell points out, I am sure a successful Jamdat offering will spur renewed interest in wireless companies. That being said, I just view wireless as another pipe, an increasingly important one that every software or web-based company will have to be aware of and leverage.

Speaking of wireless, there has been lots of talk about Time Warner launching its own branded wireless service over someone else’s wireless network. Not only does this make a ton of sense in terms of the phone company/cable bundle packaged wars but also from a content and programming distribution perspective. If you believe that wireless devices and phones will continue to become an increasingly important way for end users to access data and eventually music, photos, and video, then what better way to control the economics of distribution then by reselling your own service.