BeyondVC

Web as platform

There has been lots of discussion about Tim O'Reilly's Web2MemeMap.

This is a nice graphical representation of what is happening in this next wave of the Internet.  As an add-on to this, I thought I would compare and contrast some differences, all quite obvious, with the first euphoric Internet wave.  I have shared many of these thoughts in earlier posts like "The web-based platform" last October and "Web-based businesses circa 2004."

	Web 1999/2000	Web 2005
Critical Mass	12.8m	209m
GoToMarket Philosophy	If you build it, they will come	Release early and release often
Tech platform	Sun, Oracle, EMC=   Big $$$	LAMP, open source, Intel, clusters, JBOD
Philosophy	Closed	Open, APIs and data sharing
Customer acquisition	Spend $$$, advertising	Spend nothing, word of mouth rules
Milestone for VC Funding	No users, great idea	Lots of users and rich interaction
$ used for	Building product, marketing $ to acquire users	Scaling back end, adding more features/functionality
First Round Funding	VC - $5-10mm	Angels - $0-2mm
Second Round Funding	VC - $10-20mm	VC - $5 or trade sale
Business Models	Unproven	Proven

So as you can see, there are more sophisticated users, it costs significantly less to launch a new service/product, and many of the business models are proven to reach profitability.  In other words, these business models are quite capital efficient.  It is no wonder why VCs are quite excited about next generation web companies.  All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble.  As you see from Tim's map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.  What this really means is that building a sustainable competitive advantage in this new open world means leveraging network effects to foster loyalty, community, and collaboration. In most cases this will be enough to create lots of value.  In other cases like Friendster vs.MySpace it shows that this network effect can also be fleeting.

One other point to consider with all of this is the significant changes ahead in the enterprise.  Many of the points in the map above fit consumer-facing services.  With the proliferation of broadband and the thought that the consumer is also an enterprise user, we must be cognizant of the many opportunities for web-based services to be brought into the corporation from the ground-up. Everything we did in Windows and Office and other enterprise apps 5 years ago can be done through a browser/web with Salesforce.com, Skype, and web-based email and calendaring.  We are clearly not there yet, but this will happen.  In addition, as enterprises move to a world where they must support multiple users and devices on-demand, they will need to buy new software and infrastructure to manage this new complexity.  So as you can tell, I am quite excited about the opportunities as the web becomes a more robust platform and a gateway to deliver rich applications, but at the same time I express caution because I do not want to want to make the same mistakes we did in years past.

Venture Capital and Hedge Funds

Well, there is clearly lots of money sloshing around in alternative assets like hedge funds, private equity, and venture capital.  That being said, I still believe there are plenty of great investment opportunities.  In an earlier post titled, "Go Early, Go Late, or Go Home," I shared some of my thoughts on what company stages of development looked attractive for investing.  In addition, I highlighted the blurring of hedge funds and private equity.  As hedge funds receive more dollars and the markets, therefore, become more efficient, hedge funds need to find new ways to generate returns.  Increasingly, hedge funds are moving just from private equity and now more aggressively into venture capital.  Barron's highlights this trend in an article from this past week's edition.

Investors had better take notice. As hedge funds search for new strategies to produce the holy grail of "alpha," or outsized returns relative to risk, private-equity investments of all stripes are suddenly turning up in the industry's portfolios.

The holdings -- ranging from modest positions in startup companies to multibillion dollar corporate buyouts to a variety of more esoteric instruments, like subordinated debt -- already amount to $65 billion, or 7% of hedge-fund investments, according to estimates by Freeman & Co., a New York-based financial boutique. That tally, the firm believes, could swell to $100 billion by next year.

Today's Wall Street Journal has an article (can't find online source but in Marketplace B3C) on hedge funds entering the venture capital market.  It is no secret that hedge funds took flyers on early stage tech companies during the bubble.  However, what's different this time is that hedge funds are looking to create separate vehicles to make venture capital investments with a longer time frame to withdraw capital.  As the article states, the big concern is if hedge funds can be patient enough to generate the needed returns.  Instead of worrying about the tick, hedge funds need to understand that VC is a 5 year game plan.  The other area of concern for me is the idea of even more money plowing into early stage deals.  I can vividly remember during the boom being priced out of a few deals from some hedge funds who were willing to give money at a higher valuation with less oversight to eager entrepreneurs.  All this being said, this trend is just starting but one to which we should pay close attention.  I just do not want all of this capital to end up badly in the next bubble.

Let the VOIP Infrastructure Wars Begin

Much focus has been put on the VOIP service market where you have the likes of Vonage and SunRocket (just announced another big funding round today) who want to replace your landline and the non-traditional players like Skype and now Google, AOL, and Microsoft.  However, what is more interesting to watch for me is the battle between the incumbent phone equipment players and the new upstarts.  This war reached another milestone 2 days ago with Avaya's purchase of Nimcat Networks, a serverless VOIP infrastructure player.

Let me set the stage for you as it is a microcosm of what is happening in other IT markets.  Currently you have the incumbents like Cisco, Avaya, and Nortel which are dominating industry roll-outs across enterprises.  Some of these companies are next-generation players as they have replaced the old-school PBX systems of other competitors or even their own legacy systems.  While the market is still early in development, the new IP PBX guys are playing the same sales and marketing game as the old school PBX players.  Enter the next area of the market, the open source players like Digium with Asterisk and Pingtel with SIPFoundry.  Both of these companies are employing the open source model of letting customers download the product and upselling support and maintenance.  The core value proposition is similar to many open source companies - commoditize the old closed system with off-the-shelf hardware and let customers avoid vendor lock-in with a pure, open system saving on their TCO.  There are definitely some technical differentiations between Asterisk and SIPFoundry, but nonetheless, the approaches to market are pretty similar.  Finally, you have the disruptive players like Nimcat Networks and Popular Telephony (Peerio) who are promoting a serverless, peer-to-peer architecture.  With intelligence embedded in the edge, these companies promise even more ease of use (just plug a phone into your LAN and you are ready to go) and lower TCO than the other vendors.  Of course there are many issues with privacy and security when you start talking about P2P but this is still quite an interesting technology which will find its market. 

Fast forward back to Avaya buying Nimcat.  For an early stage company, promoting a new standard and new architecture is huge, uphill battle.  On the other hand, incumbents like Avaya must continue to analyze their competitive threats and move quickly to protect market share, even if they have to cannabalize their own sales.  This move by Avaya is brilliant and I look forward to seeing how it will embed Nimcat intelligence in its products and to see if a giant like this can make a disruptive technology a standard.

All this being said, I believe the real battle is not about VOIP or telephones but the real-time enterprise.  Who will control the central nervous system and lifeline of the enterprise?  If you believe we will move to a world where real-time communication (voice, video, IM with presence) will be embedded in every device, not just telephones, and every application, then you can't ignore SIP.  Microsoft is one big player using SIP or its own version of SIP to promote its vision of the world.  Microsoft's launch of the Live Communication Server 2005 with integration into Windows and Office is the first step.  The other vendor to consider as we move in this direction is the open source company, Pingtel, which is managing the SIPFoundry project and will provide an alternative to Microsoft lock-in.  This battleground is about software and not devices which is why I believe companies entering this market from a telephone-centric view of the world will miss out on a big opportunity.

Skype, Siebel and frictionless sales

What is clear to me is that companies that get it use the Internet in a big way as a sales and marketing channel and even a delivery mechanism for their products.  Companies that don't miss a huge opportunity.  Siebel does not get it, Salesforce.com does.  Skype gets it while Vonage does not.  What I am talking about is reducing friction in your sales and implementation process.  The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow.  Software as a service is the epitome of this-easy to sell, easy to deliver, and easy to use.  Of course, the one concern is the easier it is to implement a technology or service, the easier it is to rip it out. 

Whether it be consumer or enterprise, all companies should think about how they can utilize the Internet for delivering their product.  The more you do over the web (market, sell, deliver product, run your service) the more you can scale your business with incredible efficiency.  After all it only took Skype 2.5 years and $20mm of capital to create $2.5-4b of value while it took Siebel a whole heck of a lot more capital, effort, and time to do the same.  While Vonage is doing quite well with its growth, it still requires an incredible deployment of capital and it still requires users to wait for hardware to be shipped to their house before using it.  There is more friction in using the Vonage service as compared to Skype.  And obviously there is more friction to implementing Siebel than Salesforce.com.  In this day and age we are all use to instant gratification and demand fulfillment.  Salesforce.com and Skype provide that for its customers.

Of course, if you are selling an enterprise product with a high ticket price you have to be extremely cautious.  It will only work if your product is easy to deliver (download, SaaS, etc.), install, and use.  In theory, it sounds great to be able to generate great customer leads and revenue by offering your product over the web.  However, this means that you will most likely be selling a product/service with a low ticket price which means you either need to have high volume to generate significant revenue or have an upselling machine which enables you to seed your customers with a lower price version and harvest them to get lots of repeat business from your initial sale.  So as you are in your next strategy session thinking about how to get better leads and scale your business efficiently and quickly, do not forget to think about how you can leverage the web even more than you already do to market, sell, and deliver your product.  You may not be able to do it all over the web but it is certainly worth taking an aggressive approach because if you don't do it, someone else may.

Missing an engineering release date can be a symptom of a larger problem

I was in a board meeting last week reviewing a product release schedule for the next year.  I was extremely concerned that we missed the last release, and as we dug in deeper what we saw were a few features scattered throughout the schedule tied to deals that were just closed.  Now this would not be a big deal if these requirements were market-driven features that were necessary for a number of customers.  However, the big concern was that most of these requirements were one-off features for specific customers that were just closed in the earlier quarter.  So while engineering missed the release date for the product and should be held accountable, this analysis points to a much deeper issue and is a great example of how all of the various groups and functions in a company need to work together as a team.

My first thought was that if we continued on this path we would never have a product that met market needs.  There would be no way that the engineering team could execute against its development schedule with a number of one-off requests.  So we asked management to analyze the problem and report back to the board.  The first place to look was product management to determine whether these customer requirements were one-off adjustments or features that were significant market needs that product management did not identify.  The other place to look was sales to determine if sales reps were selling what we didn't have and promising the world to close deals.  As you may know, a healthy tension between sales and product management will always exist.  Sales will always want any and every feature to close that big deal and product management should only want features that will address broader market needs.

After a week, management reported back to the board and determined that the problem eminated from sales.  More specifically, it was pretty clear that the sales reps were not properly trained or equipped to sell the product.  When not armed with the knowledge and sales tools to properly sell, it was quite easy for the reps to get derailed during sales presentations, flail when addressing customer objections to the product, and agree to add one-off features to close a deal.  To address this problem, management presented a plan to get the sales reps properly trained, equipped, and managed.  In addition, management would have to play an ongoing role stressing the importance of closing the right deals and walking away from the wrong deals.  So the next time engineering misses a release date, make sure you understand why because most likely it is a symptom of a much larger problem.