Remember Long Term Capital?

In 1994, the smartest guys in the financial trading and academic world got together to start Long Term Capital.  John Meriwether from Liar’s Poker fame assembled a stellar group from Wall Street and academia including Myron Scholes (one of the creators of the Black-Scholes option pricing model) and Robert Merton who together shared the Nobel Prize in Economics in 1997.  They raised $1.25b in an instant and that giant sucking sound you heard on Wall Street was LTC hiring the best and brightest minds to its hedge fund.  LTC prided itself on hiring PhDs and other brilliant talent to add to the mystique of the group.  And the hedge fund performed spectacularly.  It used proprietary computer driven models (think sexy algorithms) to find miniscule misprincings in markets and would use leverage and derivatives to exploit those mispricings.  At one point in time, $5b of equity was levered up to a $130b of total assets or bets outstanding. While I won’t go into the specifics of the trading model (think high leverage or vacuuming nickels from a train track, it works for awhile but the train will get you one day), they crashed, burned and died in 1998 almost bringing down the global financial markets. The bigger it got, the more risk it had to take on to deliver higher returns.  In other words, it is harder to drive significant percantage based returns on a huge capital base. What also set LTC apart was its culture.  It was one of incredible hubris and arrogance.  Their models were designed by Noble Prize winners and it was unbelievable for them to think that mere mortasl could even understand their models.  They didn’t even share their investment trading strategy with their investors.

So what does this have to do with my blog?  I was having lunch with a friend recently who was telling me about some of his dealings with Google over the last year.  As an ex-Wall Street guy, it struck him that some of the meetings he had with Google were like the ones he had at Long Term Capital years ago.  Even when LTC was about to crater, he remembers going to their offices, being sequestered into an off-campus conference room, and not being able to get any information out of them to even help bail them out.  In addition, people would show up and leave during the meeting, take notes, and not even introduce themselves.  Well, it turns out that his meetings with Google over the last year were pretty similar.  While the Google employees were clearly bright and technical, my friend was not sure who the decision maker was and what they actually wanted to do with the company.  In addition, he felt pretty uncomfortable showing up to Google and having to sign an NDA on the spot, and then going into a meeting where people would walk in and out, sit on their laptop and take notes, and not even introduce themselves.  Hmmm-it really does sound like Long Term Capital.  There are other parallels-Google has an appetite for hiring PhDs. is driven by an incredible proprietary algorithm, and is by far the best web company on the street and performing like a rock star.  Like LTC, the bigger and bigger Google gets, the harder it will be for them to drive significant percentage based growth.  In addition, the culture, since it is one driven by engineers, can also be driven by a NIH or not invented here syndrome.  Ultimately, since history always does repeat itself, I hope that Google understands that self-confidence is imperative but hubris and arrogance can kill.  Look at Long Term Capital and the chronicles of its short lived performance in a book so aptly titled, When Genius Failed.  Hell, Microsoft was the same way in the mid-to-late 90s and as time goes by I hear that they are becoming a bit friendlier to startups and partners.  I guess that is what happens when you get your ass whooped by a newcomer.  Hopefully, Microsoft hasn’t learned its lesson too late.  And I hope that Google remembers its mantra of Do No Evil as they are going to need partners to continue to grow their business and build great product.

Grid 2.0

The hype cycle for grid computing started many years ago, and today it is mostly relegated to uses in bioinformatics, financial services, and 3d modeling (think crash testing, oil discovery, etc.).  With yesterday’s announcement, Sun is making this grid infrastructure available to anyone, anytime, and on demand at  As Jonathan Schwartz points out, consumer plays have been driving the surge behind massively scalable web services.  Think Google, Yahoo, eBay.  On the enterprise side think about any dozen of SaaS vendors like Salesforce, LivePerson and Rightnow.  Rather than building your own infrastructure, imagine being able to create your app or service and deploy it with no wires to pull, no datacenter or storage infrastructure to manage, and all with the frictionless use of a credit card or PayPal?  Pretty interesting thought?  I haven’t done the ROI analysis of $1 per CPU/hr (would love to see someone’s rough cut at this including operating overhead) but this certainly levels the playing field for scalable backends.  Imagine if you are a startup and can’t get VC funding but have a killer app to deploy.  Without any upfront capital expenditure, why not throw your service on the grid, pay per use, and build from there.  That is a big concept, if it works. I believe this is the beginning, the very early beginning, of on-demand utility computing.  With Microsoft moving behind software as a service, I see them deploying their own grid on their own stack on a rent per use basis.  IBM will too.  Competition will breed even better pricing and more opportunities for startups to focus on their apps and product and less about the back-end. I don’t see startups rushing to deploy their whole infrastructure on the Sun grid right away, but it certainly is worth looking at and monitoring over time.  What has changed from 10 years ago is that the focus is not on corporate computing (those guys still want their own grids) but as Jonathan so aptly points out, the long tail-the renegade departments who don’t want to wait, the many startups that have new web services, etc.  Ironically it was Sun that printed money from the VCs and startup community during the bubble-our checks went to a startup and they bought a Sun, Oracle, EMC backend.  Well today the open source wave has killed that business and maybe this is another take for Sun to get at this capital.  So how about that ROI analysis? 

Eat when dinner is served

There is an article in the Wall Street Journal (sorry-requires subscription) today on pre-emptive financings or financings that happen when a company is not actually looking for capital.  It is common wisdom amongst the investment community for entrepreneurs to "eat when dinner is being served."  In other words, companies should take cash even if they don’t really need it because you never know when the next meal will be served.  This can be great for a company because it can provide a nice cash cushion for the operations, allow a company to spend real time with a potential investor, and help them avoid spending too many cycles on financing down the road. The article also points out that this is a new trend not unlike one that happened during the bubble period.  To be honest with you, I don’t see this as a new trend and a negative thing for VCs to do.  It is a VC’s job to find the best investment opportunities which means being proactive about generating deal flow and not sitting back waiting for new deals to come to us.  Being proactive about new deals means spending time with entrepreneurs before they need money, staying in dialogue with them as they grow their business, and helping lead discussions on the next round of financing.

Being an early stage investor, I have played on both sides of the fence.  I have been on boards where we have been approached preemptively by other investors.  In those cases, it is helpful to think about two points:

1. Valuation isn’t everything – sure, you want to take cash at a good price but if you take too much cash at too high a price too early, it builds unrealistic expectations for you, your company, your existing investor, and your new investors.  You may end up chasing too many different opportunities, losing focus, and having a fractured board because of these lofty expectations.
2. Having too much cash can be a curse and not a blessing – speaks for itself (see my last post)

On the other side of the fence, it is important for us proactive VCs to maintain our discipline, value the opportunity fairly, and really understand and work with the company to determine how the money will be used.  In addition, we need to be careful about helping our companies use their bullets on the right opportunities and not every opportunity.  Let’s not forget the lessons learned during the bubble where companies with too much cash just crashed, burned, and died faster and more spectacularly than ones with less cash.  In general, pre-emptive financings can be a great thing for both VCs and entrepreneurs, but we must be careful about managing expectations and staying focused.

Advisory Boards

I can’t tell you how many companies come in and present and inevitably, somewhere in the deck, is a list of advisors.  Of course, as I dig in to understand what these advisors actually do for the company, 9 times out of 10 they are just high profile names that are thrown on a list to give a company a stamp of approval.  Trust me, I am all for advisory boards.  In fact, many of my portfolio companies have them.  Many entrepreneurs or management team put together advisory boards to get real expertise on product direction, the market, and to expand their network to reach new customers and partners.  Advisory boards can be especially great because the typical relationship is usually noncash and compensation is based on options which vest over a period of time.  So the cash-hungry startup can add talent and help without breaking the bank. However, like any business relationship, it is important to figure out what you want from each advisor, what their time commitment and interest level really is, and then structure the appropriate role and responsibilities. I, like most VCs, am more impressed with companies that have advisory boards that are structured and actually do real work for the company versus seeing just another list of names.

The next generation web, scaling and data mining will matter

We are all enjoying the benefits that come with the commoditization of existing hardware and software infrastructure.  It is true that it costs exponentially less to launch a business today versus five years ago.  We are all smarter, broadband penetration is reaching critical mass, and open source and commodity hardware have become reliable alternatives to proprietary architectures and closed systems.  As we all move forward with our web-based operations, it is clear that scaling the back-end infrastructure still remains a formidable challenge.  There have been many an instance of popular services going down – remember Typepad,, and as a few examples.  With scaling the backend also comes a need to learn more about your users and their interactions.  Data mining and analysis is becoming a big thing to not only help companies create better services but also to generate more revenue per user.  In addition, for many web companies extreme data driven applications are the core of their services.  Think about Zillow, Technorati, and services like Indeed which are dynamically driven services based on aggregating, crawling, and filtering millions of pieces of data.  However, the fast growth of many a web-based operations combined with the need to mine the data leaves a big hole in the revolution of the cheap.  Web-based operations need an open source way and cheaper option to scale their database needs, move to a data warehousing architecture without breaking the bank, and scale with user growth leveraging commodity infrastructure.  Enter Greenplum (full disclosure-Greenplum is a portfolio company and I am on the board) which just released its GA product Bizgres MPP for data warehousing leveraging the best of the open source PostgreSQL database.  We have been working on the code for the past 18 months, and I am quite proud of the team for having delivered the release.  Greenplum is taking the best of the open source database PostgreSQL and rebuilding some of the core functions like the query optimization, execution, and interconnect.  We are allowing anyone to build a shared nothing architecture ala Google to scale their backend to multiterabyte sized systems leveraging cheap hardware. It is free to run on a single machine but if you want to run a massively parallel option we charge a fee per CPU.

Dana Blankenhorn from ZDNet gets it:

This is a problem a lot of Web 2.0 start-ups like Technorati, Bloglines and Flickr are facing, and projects like Drupal will face soon. They were built with open source tools, but then find they need to "graduate" to something like a data warehouse.  And there’s old Oracle, telling them there’s nothing from an open source supplier that can deliver what they need. Share with us, they say, you don’t have any choice.

Well, now there is a choice. Greenplum CTO Luke Lonergan said that O’Reilly Media, one of Greenplum’s early customers, graduated from mySQL to PostgreSQL with Greenplum and got a 100% 100 times improvement in database access speed across a 500 Gigabyte database. Other Web 2.0 start-ups, and projects, can do the same thing.

"The price of conversion is where the pain is," said Yara, "but look at how fast some of these projects grow."  While mySQL was smart in building on a lightweight Web base, more and more users and projects will find the need to graduate, and face proprietary FUD from major vendors saying they have to pay the "monopoly tax" in order to grow.

I truly believe the next battleground will be based on scaling the back end and more importantly mining all of that clickstream data to offer a better service to users.  Those that can do it cheaply and effectively will win.  The tools are getting more sophisticated, the data sizes are growing exponentially, and companies don’t want to break the bank nor wait for Godot to deliver results.  Given these trends, I suggest downloading Greenplum’s Bizgres MPP and let me know what you think.

Having too much money can be a curse, not a blessing

Trust me, I love having well capitalized companies.  However, having too much money can be a curse, not a blessing.  More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce.  To many executives, money does solve all problems.  And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing.  On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem.  Sales are not ramping up quickly enough so let’s hire more sales people.  Marketing is not generating enough leads so let’s spend more money on lead generation.  Engineering keeps missing its product release date so let’s hire more engineers.  And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources.  In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy. 

On the flip side, I have seen many an entrepreneur create successful businesses who some could argue were slightly cash-starved.  I am not arguing for entrepreneurs to starve their companies of the resources they need, but what I am suggesting is that having too much money can make one lose their creativity in terms of allocating scarce resources to grow a business.  This is especially quite important during the early stages of company development.  An entrepreneur needs to experiment with various ways to reach his target market, generate revenue, and develop product.  An entrepreneur also needs to stay focused, disciplined, and make hard decisions in terms of where to focus company resources.  Too much capital can kill this need.  Throwing too much money at the wrong strategy or too many different areas only adds fuel to the fire.  While money can really help an entrepreneur scale a business, having too much can be a curse.