Why we invested in Sipphone, developers of Gizmo Project

Dawntreader Ventures has just led a $6mm round of financing in Sipphone, its first outside round of capital.  We look forward to working with Michael Robertson and Jason Droege to fuel continued growth in the Sipphone and Gizmo Project service and to roll out new features and functionality.  As you can see from Michael Robertson’s blog, the basic premise of the company is to provide SIP-based dial tone to any software or hardware device.  For those of you who don’t know, SIP is a standard protocol for voice and video. 

Gizmo Project voice calling and IM is booming on Macintosh, Microsoft Windows, and Linux computers because Gizmo Project works well and connects with every type of device like WiFi phones, other VOIP and IM directories like GoogleTalk and even the popular open source Asterisk PBX software. I think people are beginning to understand the difference between Skype who walls their customers in and won’t play nicely with anyone and SIPphone who connects to everyone making it possible to have just one address. Next week SIPphone will announce closing of a major venture capital deal which will help the company grow even faster.

As you can read in an earlier post, I, like Michael, am a believer in the growth of open standards. We want to provide consumers with the ability to have one address and connect to anyone on any network.  We want to expose our APIs to allow anyone or any company to easily integrate our VOIP/IM service into any application or device.  In addition, we want to make it extremely easy for consumers to bridge the Internet and traditional PSTN by extending the SIP functionality to non-PC devices such as routers, wifi devices, adapters, and dual mode cell phones.

While there are a number of factors that go into an investment decision, these are the key highlights for us.  Sipphone has a strong team led by Michael Robertson (founder of MP3.com) and Jason Droege (founder of Scour.net, first video search engine).  They know how to develop and market great consumer products and services on the web.  The market is huge as only a tiny fraction of overall global voice traffic is VOIP-based on the end-consumer side.  This is not a zero sum game between other VOIP/IM players but between the incumbents driving analog telephony and the new players driving digital subscriber growth.  Sipphone has demonstrated it has a winning product that can grow its user base and upgrade free users into paying customers for value added services and features.  The cost of sales and marketing is zero as Sipphone is a frictionless sale, especially when compared to a Vonage.  Finally, I believe that consumers are smart and demand interoperability and that open standards will win.

What are the key drivers of your business?

Scott Maxwell has another excellent post on his blog.  This time it is on a company’s need to measure and monitor their business.  In an early stage business, I typically see two types of companies.  There are those companies that do not measure and monitor much and instead drive their business by a "seat of the pants" decision making process.  Other companies manage and monitor everything.  The key is not to get stuck in the weeds and get paralyzed by analyzing too much data. For all of my portfolio companies, I like to know what the 4-5 key drivers of the business are.  I like to know what leading indicators are most likely to show an increase or decrease in sales 1-2 quarters ahead and what the company is doing to improve those measures. 

For example, when I was reviewing a financial model with a portfolio company which generated revenue through advertising it was clear that while traffic was a huge ingredient in revenue generation, RPM was an even stronger metric as each change in RPM significantly drove sales.  Over the next month, we experimented with a number of changes (of course we measured and monitored each change against the benchmark) to determine how to finetune RPM.  Why spend more dollars on getting more traffic to our site when we were not effectively monetizing in the first place?  Finetuning our RPM is an ongoing process but now for each dollar we spend on generating traffic, I am confident that it will return much more than a dollar in revenue to the company.  Metrics matter and understanding what inputs have significant leverage on your operating model is the key.

Yes, I know it is hard for early stage companies to accurately predict their revenue.  But from my perspective, the financial model is not as important for accurate revenue prediction as it is for understanding how the economics of your business works.  Does each new customer make money or lose money for you?  In any financial model there are usually a handful of inputs that drive the overall sales and cost equation.  Make sure you know what they are, how sensitive your revenue and costs are to that input (in the earlier example, traffic was a key input but RPM had a more direct impact on sales), and measure, monitor, and finetune your company based on these important pieces of data.

I was at a board meeting the other day and while we were pleased with the results for the quarter, we were struggling to understand why we were not getting more customers if we were winning a majority of our proof of concepts (POCs).  As we dug through the data we discovered that while we did convert a majority of our POCs, 50% of POCs ended up in no decision.  In other words, we wasted half of our sales engineering resources on sales that would never happen.  The key was to go after the low hanging fruit first – only do POCs that can convert into a sale.  So what have we done to correct this?  We now require a more detailed checklist before a sales rep can request a POC for a customer.  Even if we are able to reduce the no decision rate from 50% to 35% this means more sales.  Clearly this does not mean we need to hire more sales engineering bodies as we can better utilize who we already have.

It doesn’t matter if you are an enterprise, web 2.0, or old economy company because everyone must understand the key drivers of their business, measure them, and finetune their operations to run as efficiently as possible!

Google – look at the bigger picture

As we all know, Google got whacked because it missed Wall Street’s projections.  Sure, investor expectations are quite high for Google especially when they are paying 90x earnings.  However, the reality is that the company is still performing quite well.  From my perspective, when investors pay such high multiples for these companies, the inevitable correction in market price will happen.  That being said, let’s focus on the numbers that really matter, revenue and profits. Google still did deliver $372mm in earnings on $1.92b of revenue up from $204mm in earnings the year before. 

Sometimes we all focus on the short-term at the expense of looking at the long term.  Sure Google is overvalued now but the company is delivering some impressive results.  Remember the First Law of Technology:

"A consistent pattern in our response is to new technologies is we simultaneously overestimate the short-term impact and underestimate the long-term impact."

Well, we did that starting in 1995 when Netscape went public and are doing it again today. And remember Scott McNealy touting "the network is the computer" years ago. Somewhere lost in the translation was this comment from Eric Schmidt when asked about Google’s entry into consumer electronics (thanks to David Jackson who runs the Internet Stock Blog and has been posting transcripts of investor calls):

There’s an awful lot of speculation about Google playing in those markets. The Google PC, those kinds of things. To me, most of those are people projecting the last one, not the next opportunity on us. And from my perspective, those are not very interesting business opportunities; they’re well covered in the market, we partner with many of the players and we would much prefer to deepen our partnership with them than to go into competition with them.

We are relentlessly focused on this new end-user experience, which is multi-platform and based on the internet and that’s where our future is. That’s where the growth is, that’s where the revenue and monetization is. And, as I mentioned earlier, it’s so large, it makes no sense to divert our resources to these other and somewhat smaller opportunities.

Sound familiar?  The network is the computer, the web is a platform, the browser is the OS, services will live in the cloud, and we will access information from anywhere, anytime, and any place.  Once again, sometimes we overestimate the short-term impact of new technologies and underestimate the long-term impact.  This is why I am so excited to be investing now because if you believe services will live in the cloud and anything that can be digitized will be digitized (media, voice, etc.)then I am sure you will agree with me that we are just in the second inning.  And this is not just a consumer-driven change, this will affect enterprises as well.  So Google missing its incredibly high expectations is not all that bad because when looking at the bigger picture, Google is still delivering some spectacular results and causing the old guard to get with it and respond to the changing times.

BTW, it doesn’t mean I would buy the stock at these valuation numbers and nor do I own it now but the point is that there is still plenty of significant opportunities for startups to create value in the years ahead, especially since Google will not and cannot do everything.