BeyondVC

Globalization and the world economy

I remember 2 years ago the brouhaha over globalization and how every startup needed to adapt or it would die.  I truly am a fervent believer in globalization and how offshoring some development work can make a ton of sense from a cost and time advantage (24x7).  As I look across our portfolio, what is interesting is that while the comparative advantage of developing in say, India, was once 4 to 1 it is looking like it is more 2:1 or lower as you factor in costs like management overhead, travel, etc.  In addition, the companies that actually took advantage of offshore development and were successful were the ones that opened their own wholly-owned Indian subsidiaries.  Not only did these companies have their own subsidiaries in India, but they also sent a core team of engineers from the US to open the office, train the staff, manage the team, and provide real incentives like stock options.  The portfolio companies that did not fare so well were the ones that had offshore development shops work for them and while the output was fine, it was quite disruptive as the turnover of personnel was quite high.  In the end, all I can say is that offshore development for your company is not a panacea, and that you should only do it if it makes sense for your company (read an earlier post for more).

Given that I am quite interested in globalization, I wanted to share with you a few graphs that I saw this week that were pretty impactful for me.  First, I recently discovered this piece that Mike Milken wrote for the Wall Street Journal a couple of days ago.  I found it on Greg Mankiw's blog, an economics professor at Harvard and also the Chairman of the Council of Economic Advisors (he is also a former Professor of mine). 

Like Greg, I want to highlight Michael 's thoughts on the graph.

"China and India combined to produce nearly half the world's economic output in 1820 compared to just 1.8% for the U.S.  Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets."

In addition, here are two other graphs from this week's Economist that summarize what the world may look like in the future.  I encourage you to read the in-depth survey as it provides some great historical context as well as trends we should watch in the future.

Tying into Michael Milken's graph of the world economy in the past is this Goldman Sachs one showing who the economic leaders will be in the future - notice China as #1 and India as #3 by 2040. You can already see from Michael's graph above that from 1973 to 2001 the US share was diminishing as India and China were growing rapidly.

The last graph is quite interesting as it relates to us technology folks.  We have always thought of India and China as places to offshore low-level development work.  Yes, alot of that has already been done but what is alarming is what may happen in the future as the comparative advantage that India and China have over us in terms  of college graduates in science and math is overwhelming.  Not every one of those graduates according to the McKinsey Global Institute is up to par with the standards that we have in the U.S. (10% in China and 25% in India) but that is clearly changing.

So what does this mean for us.  I am still processing this and would love to hear your thoughts.  In my humble opinion, I believe it means that first and foremost, we should continue to fight and compete by stressing education.  We cannot fall behind here as it is one of our most important assets.  Secondly, I always like to say that the trend is your friend so be on the outlook for how to leverage this labor and talent pool in your current company.  It could mean offshoring work (only if you and your team can handle it) or creating new companies that enable global labor arbitrage and collaboration leveraging the Internet (wiki opportunities, open source plays, communications like Gizmo Project, one of our investments). Finally, personally and professionally, pay attention to investment opportunities.  There are no secrets why alot of VCs are starting funds in India and China because as these emerging economies grow, income levels rise and with that comes more disposable cash to buy products and services.  Like I mention above, it could also mean finding opportunities that leverage the Internet and take advantage of the global talent pool (Logoworks - not one of mine but a great company).  From a personal perspective, I have  been building a nice allocation in an emerging markets index fund for the last 3 years.  Trust me, it is not for the faint of heart and it will be quite a bumpy and volatile ride but looking ahead it is hard to argue with the economic growth in the emerging markets.

Live homework help for your kids

Congratulations to George Cigale and his Tutor.com (full disclosure - portfolio company and my partner Dan DeWolf is on the board) team for the launch of their direct-to consumer service which offers live homework help and online tutoring.  This is the culmination of a mission that George set out to realize over 8 years ago.  What is most impressive to me is that while George's initial focus when he launched the service in 2000 was to go after the consumer market, he quickly recognized that consumers did not have the bandwidth (5% broadband penetration vs. 45% today) and the comfort level to purchase online tutoring sessions.  So like any smart entrepreneur, George did an analysis and went to the where the money was, providing a service to state and local libraries to offer to their constituency. George's patience and foresight helped Tutor.com weather the nuclear storm and build a real business behind the scenes.  Of course, timing is everything and George and his team have been waiting for the right time (TODAY) to offer a direct-to-consumer service which provides live homework help for students.  As George says:

You may know that over the past five years, we have focused on working with libraries across the nation to help kids connect with a real live tutor for one-to-one help.  We'll serve over 1 million students this year through our Live Homework Help programs in over 1,500 libraries in 40+ states, and we will continue working closely with libraries as we expand our offerings.  94% of students say they got the help they needed and would recommend the service to a friend, and lots of great news coverage about those programs at Tutor's Press Page.

Today we launched Tutor.com Direct (the right side of Tutor.com).  Students and parents everywhere can now get live one-to-one help from expert tutors at the moment a child needs help.

No more waiting for your tutoring session next week or driving your child to a tutoring center.  Tutor.com Direct allows a child to get the help they need every day, before small difficulties turn into significant learning problems.

I hope you'll try it, have your kids try it, and share it with friends and colleagues.  You can use the code "GCLAUNCH1" to get your first two hours for $5.  Plus a third hour free if you call us at 800-411-1970 and give us your feedback after trying the service.

Hidden in this promotion for you to try this service are some nuggets of wisdom, the most important of which is that as a startup you must be flexible, flexible enough to know when your go-to-market strategy is not working and that sometimes you have to change, change your business model, your product, or your pricing strategy in order to be successful.

Getting too big too fast

I encourage you to read what Evan Williams has to say (courtesy of Gigaom) about some of the mistakes he made at Odeo.  Evan is one of the founders of Blogger which he sold to Google and is also founder and CEO of Odeo, a podcasting company.  He goes on to outline a number of mistakes that he has made as an entrepreneur such as not understanding who his customer was and wanted, starting off with too broad a market focus, and raising too much money too fast.  It takes alot of guts to publicly tell the world that you screwed up and how you screwed up.  More importantly, it seems that Evan has narrowed the company's focus and cut down some excess management to rightsize his business.  As I have mentioned in a previous post, having too much money can be a curse and not a blessing.  If you don't know who your customer is and what your customer wants and how you uniquely deliver that, no amount of money will help you answer those questions.  As you know, the more money you raise, the bigger the expectations are for your business.  If you raise too much too soon, you may feel extremely pressured to go big and broad too fast without really getting the basics down first.  I am sure Evan is not the only CEO to have felt this pressure to run fast, even if he didn't ultimately know in which direction he was going.  My only advice is that in the early days as your are experimenting and understanding your market and customer base, a smaller first round of capital may be a better bet for you as it forces you and your team to be resourceful and focused while better aligning investor expectations.

Podcast with Heather Green of Businessweek

I recently had the opportunity to do a podcast with Heather Green of BusinessWeek and Blogspotting.  If you have a desire to hear about some of the areas I find interesting and to learn about pitfalls to avoid for startups, I suggest that you download the show.  My only regret is that we did not get to use Gizmo Project, one of my portfolio companies, to do the podcast.  After all, isn't important for VCs and entrepreneurs to eat their own dog food?

Add Startup Review to your blogroll

Nisan Gabbay of Sierra Ventures recently contacted me with respect to his new blog, Startup Review.  According to Nisan:

Startup Review will be a blog that profiles successful Internet start-ups in a case study format. The case studies will analyze the key factors that made the companies successful, with an emphasis on strategy and product decisions. Each case study will also have sections discussing launch strategy, exit analysis, and links to other good analysis on the company.

I don’t think that there is a good forum where people can discuss what made certain companies successful, particularly the less publicized success stories. Sure there are whole books written on companies like Google and eBay, but what about the more modest success stories in the $10M - $2B range? My goal is to highlight lessons learned from companies like Rent.com, HotorNot.com, or Greenfield Online.

I took a look at his site and he has some great posts on companies like MySpace.  If you are interested in going more in-depth to understand how certain companies got off the ground and made it, I suggest subscribing to his site.  As for my two cents, it would also be interesting for Nisan to dive deeper into some more high profile failures in the market so others can understand the many things that can go wrong in a business.  I have found that digging into your failures and doing a post mortem on why your company lost a sale or a customer, partner, or employee can be more illuminating than just understanding why you succeed.

Take care of the little things

As an entrepreneur, you are most likely spending most of your time building your product and getting it to market.  in other words, you are focusing on the big picture which is what you should be doing.  I do want to share with you a couple of anecdotes about not forgetting to take care of the little things - little things like keeping proper files and records.  It is quite simple to overlook this aspect of your business but taking care of your company and keeping your house in order is easy to do, especially if you start from Day 1.  Make sure your basic finances are in order and that all customer contracts, employment-related documents, financing paperwork, etc. is all stored properly and securely.  Sure we have electronic copies of many of these items but real signatures are quite important. 

1. Example #1: Your company is about to be sold and as the acquirer is doing due diligence it wants to make sure that there are no outstanding claims to the intellectual property of your company.  In other words, the acquirer does not want to have an ex-employee or founder come after them once the transaction is completed.  Well, this is easy to take care of, right?  Typically most companies have their employees and particularly technical personnel sign an assignment of inventions and confidentiality contract where any product or patent developed while working for your company is owned by the company.  So in order to satisfy the acquirer's needs, all your company has to do is find the signed documents for the key technical founders.  Well, guess what - if you didn't keep proper records and don't have the signature, there are two options - the acquirer may walk or you have to go back and get another signature from an ex-employee.  Good luck with that.
2. You are about to sell your company.  5 years ago, you and a technical co-founder conceived of the idea and launched the service.  However, your technical co-founder decided to work full-time at another company and ended up just consulting with your startup post-funding.  While this person may have signed an assignment of inventions agreement with you, he also signed one with his current employer.  When you closed your first round of funding years ago, the lead investor did his diligence and found out that the technical co-founder's existing employer may have a right or may even own the startup's technology.  After much debate, you secure a release from the technical co-founder's company stating that they have no claims to the technology.  Fast forward 5 years - you are about to sell your company, you have switched lawyers twice, and the acquirer needs this release.  You can't find the signature page.  Guess what, you are going to have to go back to the technical co-founder's employer and get another release.  I can pretty much guarantee you that it will cost you to make this happen.

The net net is to not forget about the little boring things like record keeping when you start your business because it may come back to bite you in the ass and cost you real dollars when you need a document or signature most.

Facebook and product development

While reading the Wall Street Journal this morning, the Facebook story caught my eye.  Facebook has clearly built a huge community and is one of the leading social networks on the web.  However, I was mystified about the backlash the company received about its new service allowing users to better keep track of their friends and what they are doing.  On the surface it seems like the company was trying to make it easier for their users to keep track of their friends' whereabouts and online activities.  However, it seems that there is a huge privacy backlash online (according to USA Today already 500k of 9.5mm members are against this) - I guess part of the lure of the Facebook that it was more of a closed network than MySpace.  All that being said, I am mystified because I wonder what level of customer feedback the company solicited in rolling out its new service.  Sure, the larger your audience is, the harder it is to make everyone happy.  In addition, there are many factors that go into the release of a new product that includes fixing bugs, soliciting customer feedback, responding to competition, and adding new features that will maintain a company's technological lead in the market.  According to the Wall Street Journal article today:

Ms. Deitch said Facebook's feedback from users comes in the form of emails to its customer-service email address, which the company's product-development team reviews weekly. But the company typically doesn't solicit feedback by showing features to users before launching them.

Facebook held an emergency meeting yesterday to plan its response to the backlash. Ms. Deitch said that the new features are "here to stay" but that staffers are discussing possible tweaks to appease users. She wouldn't say what those changes might be.

While you cannot solely develop based on what existing customers want because you may miss the next big opportunity, I thought the benefit of web-based software was that you could test and tweak very easily.  If what Facebook's spokesperson says is true ("But the company typically doesn't solicit feedback by showing features to users before launching them"), I would suggest that they build some new release practices to maybe roll out a new feature to a subset of the population and gather feedback before having to deal with this maelstrom of negative publicity.  Isn't that what a lot of the best web-based businesses already do?  To be fair, Mark Zuckerberg has responded admirably and promptly to his community.  However, he could have avoided this all in the first place if he tested the implementation of the new features with a small subset of his community and I am sure that he would have learned that balancing privacy may have been more important for his users than raw functionality.  My advice to many startups (particularly web-based ones) - after internal QA, try testing new features with a small sample set to further refine and tweak before GA. 

Hiring great talent (continued)

As you know, talent is the lifeblood of any company.  Given that, I have written a number of posts on hiring (see here and here).  I recently saw Joel Sposky's (Joel on Software) post on hiring great developers and thought that I would share it with you.  He makes a number of great points and I have extracted a few pearls of wisdom for you:

1. "The great software developers, indeed, the best people in every field, are quite simply never on the market."
2. "Numerically, great people are pretty rare, and they’re never on the job market, while incompetent people, even though they are just as rare, apply to thousands of jobs throughout their career."

Like any important process, hiring great people means that you and your company need to make it a priority and stay incredibly focused.  In fact, hiring great people reminds me alot of finding great deals as a VC.  At the end of the day, being proactive is key and leveraging your network to generate targeted and filtered deals or resumes will always create a higher yield than sitting back and waiting for the masses to come to you.

Google and enterprise SAAS

There has been lots of discussion about Google going after Microsoft with a focus on collaborative office tools vs. siloed, desktop-oriented ones.  I can definitely see a need for some of what Google has to offer particularly with the ease of use of unlocking data and analysis and sharing it with others.  All that being said, I have a hard time viewing their offering as a replacement for Microsoft office.  What I have always thought, however, is what Charlie Wood mentioned in his blog - that a partnership between Google and Salesforce.com could make sense .  For more background, I suggest reading a recent Red Herring article and one of my posts from Oct 2004 about goffice and specifically about a Google/Salesforce partnership.  My thinking has evolved over the last two years and while there may or may not be a partnership, I certainly envision a time in the future where Google offers an even lower end offering -think free, ad-supported hosted CRM and other simple ERP related apps for the SMB market.  This would allow Google to leverage its strength - online distribution and a huge user community.  Of course, customers and users will have to get over the data privacy issue but free and easy can be quite compelling.  In addition as more users sign up, I could see Google offering APIs so that its own users could build custom templates for certain verticals ala Salesforce's community approach.  As the widgetization of the web happens, think how easy it could be for a SMB to have a hosted web portal that is password protected and a number of widgets like a sales pipeline, presence and one click communication for the employees, and certain financials embedded in the page with a few simple clicks.  All of the enterprise portal infrastructure like Epicentric that used to cost boatloads of money and take months to integrate can now be used by many a SMB as we move towards a one-click world.  I am not saying that free and ad-supported SAAS apps will take over the world but Google will eventually do it and it will be interesting to see how the market reacts to it.  Ok-enough said on that.