Platform Wars, battle for startup mindshare

Have we been through this discussion before?  Remember the eWeek article from last year titled "Is .Net failing to draw VC loyalty?" and the corresponding discussion in the blogosphere, including my post?  Well, it seems that SAP is taking a page out of the old Java venture fund camp to seed companies and help them build on a Netweaver platform.  As I mentioned before, I do not fund a company based on what platform they build on but if they choose one that is not open source then there better be a go-to-market reason for it.  Being at the Microsoft Summit last week, I kept asking myself why one of my portfolio companies would want to deploy its software on a Microsoft Sofware as a Service platform if it could do the same thing using open source technology and not have to pay additional license fees?  It comes down to tradeoffs.  If there is a clear path to customer opportunities and market adoption then it may very well be worth it to lock yourself into one vendors’s technology platform even though a majority of the customer dollars may not go to you.  From a VC perspective, I want to reiterate to not focus on what platform you have built on but on what customer problem you are solving, what market you are going after, and how you plan on ramping up your customer base.  If the opportunity is large enough (the problem is that many specific .Net-based or Netweaver-based companies are nice businesses but pretty nichey) and the market you are going after maps well with one of the big platform vendors, then it may make sense to align your company closely with theirs.  In the case of SAP and Netweaver it will be interesting to see how the market reacts to their investment plans.  Clearly, having big exits will spur some entrepreneurs to make a bet with Netweaver.  Sap’s Virsa and Frictionless Commerce acquisitions are steps in the right direction to get everyone’s attention.

I look forward to hearing more about this topic from Jeff Nolan (we are grabbing dinner Monday night) as he is blogging from Sapphire now.

Update: this discussion is enterprise focused, not a consumer one

Microsoft VC Summit

I had the opportunity to attend my third Microsoft VC Summit in California on Thursday.  It was a great opportunity for VCs to network with Microsoft’s top executives.  This year’s focus was on Unified Communications, Saas, and Windows Live (includes MSN).  While I won’t go into excruciating detail on the sessions, one of the highlights wass having Steve Ballmer give a frank discussion on how VCs and startups can work with Microsoft.  He made it very clear that the pace of acquisitions has increased, rising from 9 the prior year to 22 this past year.  And of course, his Corp Dev team has told Steve that they have the biggest pipeline of deals they have seen in years.  For those who care, the sweet spot for Microsoft is to buy a more engineering and technology focused company versus a sales and marketing oriented one.  In terms of price, I thought I heard acquisitions in the $50mm – 200mm range but Don Dodge of Microsoft (I suggest reading his post on the acquisitions) seemed to hear differently.  Anyway, the point is that there will be plenty of opportunities for VC-backed companies and startups to find a home in Microsoft.  Interestingly enough, of the 22 companies that were bought this past year 1/3 of them were not venture-backed.  This was surprising to Steve and also may be indicative of how many of the tech players have been snapping up interesting engineering teams and products before they really get to market.

One of the interesting questions posed by a VC was how Microsoft valued technology and engineering assets versus companies with lots of customers and revenues.  In short, Steve had a simple answer in that Microsoft knows how much a technology asset or new product is worth to Microsoft and then they can compare that to what the value would be using more traditional financial metrics.  In the end, Steve rightly said that it comes down to a negotiation since revenue ratios, etc. really do not apply to a bunch of engineers and it comes down to what the VC needs in terms of multiples and what the founders need to get the deal done.  I suggest keeping an eye out for Microsoft as it feels like they may even do more than the 22 acquisitions they did this past year.  As far as opportunities and trends are concerned, Steve pointed out the usual suspects:

  • Consumer market drives enterprise expectations
  • Open source – more pragmatism coming to the market, not just a religion but needs to deliver real value
  • SaaS – it works, it will grow, but there are still some opportunities like no higher level platform in the cloud – for example, how do you make presence work from site to site
  • Office 2007 – biggest area of innovation for Microsoft, think of Office as a client to all data, front end to SAP as an example.  Also will include Office Communicator in Office 2007 with Word, Excel, etc. highlighting how important communications and collaboration will be.  Btw, Office Communicator is SIP-based.
  • Mobility – Steve believes the hype was higher a couple years ago and that the reality is bigger today as we have smarter more intelligent devices at cheaper prices running over faster networks.  There will be a need for software to help intelligent devices in the cloud to talk to each other.

I have to admit I was pretty impressed by the openness of the Microsoft executives and the sheer amount of new technology they will be bringing to market in 2007.  My favorite technology which I saw in action was Windows Presentation Foundation (WPF, formerly called Avalon) and WPF/E (cross platform subset of WPF).  The demos that I saw really showed me what the next generation of rich, web-based interfaces could look like beyond today’s AJAX and Flash.  While WPF is great for applications, the fact that WPF/e is cross platform really opened my eyes to this being a potential Flash killer.  That being said, since WPF/e is programmed using XAML and Javascript, a couple of the demos I saw were web pages with some flash elements included as well.  For more detail on WPF/e, I suggest reading Ben Galbraith’s blog post on Ajaxian (excerpt below):

  1. WPF/E allows a subset of XAML to be rendered in a browser on IE and Firefox on Windows and Safari (Firefox?) on OS X (Linux and Solaris support uncertain).
  2. This subset consists of a pretty impressive set of functionality, including: 2D vector graphics, advanced text rendering, audio/video playback, imaging, animation, and advanced composition of graphical elements. In short, all of the pretty eye-candy coming in the new WinFX APIs with the exception of 3D graphics and the Metro document rendering (i.e., MSFT’s PDF killer; my my, they are really going after Adobe, aren’t they?).

Given the rich, interactive functionality that WPF and WPF/e offers end users and the productivity improvements it provides for developers and designers, I do believe that this will be one technology that will gain traction in the years ahead.