Having met with a number of NYC entrepreneurs recently, I am refreshed to see that many of them are utilizing offshore resources to develop their products. Yes, this is not a new phenomenon, but in a city that lacks hard core developers willing to work for options instead of cash like the Wall Streeters, it is significant. New York has always been known as a strong new media capital and not known for development of real hard core software. New York is also known to have one of the greatest customer bases in the world. Combine access to customers with an ability to manage and use offshore resources effectively and you really get a good opportunity to build some interesting companies in New York.
As everyone knows, Linux has grown dramatically in the server market capturing 20+% market share in a few years. Many of you also know that there have been a number of attempts to bring Linux to the desktop. Eazel founded in 2000 wanted to make a Linux GUI as easy to use as a Mac. While many of these attempts failed, I believe we are ready for another wave to bring Linux back to the desktop for the following reasons:
1. Success of Linux in server market causing enterprises to evaluate Linux on desktop;
2. Pricing-Microsoft changed its pricing model forcing enterprises to upgrade every 2 years;
3. Security-tired of those MSFT patch updates yet;
4. Functionality-it has gotten way better and easier to use and install, even office apps work on Linux;
5. Performance-do not have to upgrade hardware with software;
6. Browser becoming a platform in and of itself-more and more applications are being run in the browser as we get more and more connected to the Internet.
As time passes, Linux is increasingly becoming a viable alterntive to Windows. That being said, it will not be for everyone like power Office users. However, I feel that in 2004 we will see some large corporations go with Linux on the desktop. Many corporations are already looking at how to segment its users and figure out who really needs Windows and Office and who can get by without it. Microsoft is already countering by saying the Total Cost of Ownership is much higher with Linux. What’s needed are management tools so that a system administrator can easily manage a multi-OS environment. If Linux on the desktop is going to be successful in the corporate market it will have to coexist with Windows. Of course, that is a different story on the international front where many countries are moving to Linux outright. Either way, it will be interesting to track this development over the next couple of years.
If you can’t beat ’em, join ’em. On an earlier post, I commented on the return of the ASP model. It looks like Siebel is jumpstarting its efforts on the ASP side with its purchase of Upshot for $50mm + $20mm of earnout for 2003 and 2004. For an industry-changing hosted CRM play, that does not seem to be a hefty price. Let’s see what happens with Salesforce.com when and if it goes public next year. Word has it that Salesforce.com is expecting to do $100mm of revenue in 2003 while being profitable for the last 2 quarters.
Speaking of CRM, it is interesting to look at 2 other eCRM players, Kana, an enterprise vendor, and LivePerson, an ASP. At one point in time, Kana was worth $5b to LivePerson’s $300mm market cap. Today Kana is worth $105mm and LivePerson is at $135mm. The consensus analyst estimates have Kana losing ($0.54) this year and ($0.01) next year while LivePerson is forecasted to have EPS of $0.01 this year and $0.10 next year. It looks like profitability and operating leverage finally count. The luster of the ASP model seems to have returned to the public markets.
I recently spoke with Richard Adams, founder of Referral Networks, which was later sold to Peopleclick. He has started a new venture, RipDigital, which does the dirty work of converting CD collections into MP3 libraries. Basically all you have to do is place an order on the website and the company ships a box to you, you pack your CDs into the box, RipDigital does the conversion, and then ships your new library on either a DVD or portable hard drive along with your CDs. It is truly frictionless commerce. While interesting, this is not the only project that Richard is working on these days.
I have also been staying in touch with Owen Davis who co-founded Sonata (Thinking Media) with Vid Jain. Owen and Vid are back at it again with a new company, Petal Computing. Petal, according to its website, provides software that allows a dedicated group of PCs to operate like an enterprise server or mainframe. Its solutions are further optimized for the high performance needs of the financial world, including modeling, cash management, risk analysis and pricing. In other words, Owen and Vid have created cluster computing software which is highly specific and focused on the financial sector. While the cluster computing space is a competitive market with some established players, I like their approach to building the business. They have actually been working on the software for the last 2 years.
In fact, many NYC 2.0 entrepreneurs (those NYC veterans on their second venture-I hesitate to use the word Silicon Alley since that leaves a bad taste in many people’s mouths) are starting companies with a new philosophy to build businesses that uniquely solve a real customer problem. Embedded in the new way of starting companies is strong financial and product discipline. In other words, NYC 2.0 entrepreneurs have learned to keep the burnrate low until they have a great product they can sell repeatedly with feedback from living, breathing beta customers. With this philosophy, these entrepreneurs just may have a better opportunity to create some real businesses that will generate meaningful cash flow.
BTW, I placed my order with RipDigital today for 250 CDs today and will report on the finished product at a later date.
I have been helping a friend of mine who is moving into town get access to local resources such as carpenters, painters, and restaurants. An email I received from him today had the standard list of questions on utilities but the one that surprised me most was, “Who is your cable provider and do they offer VOIP?” This was a surprise since he is not the most bleeding-edge technical guy. In my mind VOIP really hit the mainstream this week with this email, Thursday’s Wall Street Journal (unfortunately subscription required) article about VOIP’s threat to the Bell companies, and today’s New York Times front page coverage in the Money and Business section.
While programs like Skype offer free P2P telephony over computers, services like Optimum voice offered through Cablevision and Vonage are the true groundbreakers that are bringing VOIP to the mainstream. Mainstream users do not want to be tied to their desks with computer headsets. With these services, customers can simply plug their phone into an adapter which converts analog signals to digital. There is no need to buy new equipment or even change how you use the telephone. Vonage claims to already have 55,000 lines. Since there is no competitive advantage technically in the VOIP service business, it will be interesting to see how cable companies, startups, and Bells compete with each other on marketing services and pricing. The great news is that consumers will only reap more benefits as VOIP continues to gain market share.
Do you remember the name Jonathan Cohen? Jonathan, who was negative on Internet stocks in the late ’90s, was replaced by none other than Henry Blodget at Merrill Lynch. Henry’s $400 call on Amazon.com put him well on his way towards equity research fame or infamy. As I was catching up on my reading and looking at top performing funds for Q3, it was great to see Johnathan Cohen’s Royce Technology Fund top the charts. He did it by building positions in technology value stocks which sounds like an oxymoron but made a ton of sense if you began buying in early 2002. Many of these stocks like Maxtor were trading at or near cash at some point in time during the last 2 years.
I had breakfast with a friend the other day, and he was in the process of a bankruptcy filing for his startup. We started talking about why his wireless company had failed and one of the main reasons he cited was that the price was too high. Many of you may ask why is that a problem. Isn’t getting a high price a great thing? The term sheet that the company signed was led by a strategic investor and contingent on finding another VC as a co-lead. While he had some strong interest, no other VC or purely financially driven investor was willing to step up at that price. The only other term sheet he had was at a much lower valuation but in his mind a little too onerous. He was willing and ready to take the term sheet, but he had made a promise to his team of 10 that he would make sure they got some backpay as part of the deal. While it was a hard decision, I applaud him for sticking to his deal with his team. Consequently, the company had no other choice but to shut down since it was not at a stage to generate meaningful revenue. So what can other entrepreneurs learn from this?
1. Price isn’t everything-sometimes too high of a price can cripple your company. Other investors may not want to fund the company, and you may set unrealistic expectations for you, your employees, and your investors.
2. VCs like sweat equity. Don’t hire people that expect to get paid back salary. Isn’t the whole point of working at a startup to build real value through equity? If your employees want backpay then you probably have the wrong people for your stage of company. It is a tough proposition for us to fund a $3mm round and have $500k get paid out as salary. This is easy for me to say as a VC, and it may sound self-serving, but it is true.
In this fast-paced world, I have to admit that having dinner with my family is sacred time. During dinnertime, the last thing we want is a seemingly endless, annoying barrage of telemarketing calls. We never really had a problem until we moved from the city to the suburbs and got on every credit card list known to man due to our new mortgage. Our name and phone number spread like a bad computer virus. We got 3-4 calls a night for the first few months. The worst calls were the computer-dialed ones which left long-winded messages on our answering machine. So when www.donotcall.gov became available, we were one of the first to sign up. 51 million numbers have been registered since then.
The Telemarketing Services Association is claiming that the registry is a violation of their free speech. I say screw their free speech. The telemarketers’ calls are an obvious invasion of our privacy. I am glad that the judges had the sense to rule in favor of our personal privacy over the telemarketers’ economic interests. Yes, there are exclusions as to who can call, but shouldn’t everyone have the right to a sacred family dinner? Who knows what will happen in the appeal by the telemarketers, but it is satisfying to know that one day in the not too distant future, there just may be no more annoying calls. Now how about that anti-spam list?
It feels like 1999 again when the ASP (application service provider) business model was all the rage. Why is Siebel trying this again when their most recent foray was a complete disaster? Bottom line: Salesforce.com is eating their lunch. Siebel’s enterprise license revenue model is coming under real pressure as large enterprises are getting tired of spending millions of dollars upfront with no real ROI.
Could this be the return of the ASP model? In the old days, the promise and hype of many ASPs were as high as their burn rates. A number of these companies poured tens of millions of dollars into infrastructures that only had a handful of customers. The end result for most was disastrous. Despite the many failures, I am conjecturing that the ASP will be back in a BIG WAY for the following reasons: tight budgets, increased comfort level of customers to have data offsite, broadband connections allow for always-on access, and vendors with right-sized business models designed to make a profit. When and if the capital markets return, let’s see how these companies perform.