The Ongoing Data Revolution

In early 2006, I wrote a post titled "The next generation web, scaling and data mining will matter."  In it, I highlighted some thoughts on the future:

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.

Ok, clickstream data and data mining sound kind of geeky, but with every one of our calls, clicks, and purchases being tracked and logged it is an important topic.  My friend Scott Yara, co-founder and President of Greenplum (full disclosure-my fund is an investor), wrote an interesting post the other day which is more mainstream calling this ongoing revolution the "Your Data" revolution.  

The point here is that data can be a wonderful thing if used the right way and if controlled by us.  For example, Scott points out;

Your Data can lead you home with turn-by-turn directions on Mapquest. It can find you love by sorting through the profiles of 20 million other lonely hearts on eHarmony. It brings you up-to-the-second stock prices, sports scores, and flight delay alerts. It helps doctors fight diseases and engineers design safer cars. It gives environmentalists the power to track the movements of endangered animals and biologists the tools to map the structure of our genes.

Your Data, in short, is transforming everything.

However, with all of this data comes great responsibility and opportunity.  As Scott points out:

We also need to make sure we can use all the information we're collecting. That means better schools that will turn out kids who are able to cope with the age of Your Data. And we need better, cheaper technologies to enable companies of all sizes, as well as organizations and individuals, to get all the information they want and do something useful with it.

Knowledge is power, and we know more than any previous generation could even conceive. We're moving into a world of infinite information. The challenge we face is turning all that information into insights, conclusions, and revelations — in other words, turning that knowledge into wisdom, without letting it be turned against us. We need to make sure Your Data doesn't oppress us, but serves us. And we need to do that fast, because the revolution is well underway.

From a VC and entrepreneurial perspective, what excites me is that we are just scratching the surface of what to do with all of this data and how to turn it into actionable, meaningful insight.  In order to make data and insight more accessible to everyone we first need the back-end technology that makes data storage and analysis better, faster, cheaper (enter companies like Greenplum-ok, shameless plug 🙂 ).  We then need great entrepreneurs to continue to build new services that help end users seamlessly and implicitly help everyone make better decisions, discover new things, and empower and motivate us to do more.  In addition, we also need to consider cultural factors.  For example while privacy still needs to be at the forefront of the Your Data revolution, we also need the ability and power to choose what we want to share and when with the world.  Little did we know that four years ago, more people than ever would be willing to share their whereabouts through services like Loopt or Foursquare or Twitter and their every thought through Facebook or even their credit card purchasing data through new services like Blippy.  It is clear that the once sacred walls between private and public information are increasingly disintegrating based on these cultural factors. While we clearly have to be careful not to extrapolate too much from early successes like Blippy and Foursquare, we also cannot underestimate the power of these cultural factors as once young start-ups like Facebook and Twitter have exploded in growth.  The question is who will create the next great back-end technologies and new web services that drive a whole new conversation and new way of thinking about what we do with the data that is around everywhere.

Is it a feature or product?

During the last month I have spent more time looking at Angel investments as I believe it is a great time to start a business.  However, one key question I keep asking myself after meeting with entrepreneur after entrepreneur is whether or not what they have is just a feature of a larger product offering, a standalone product in and of itself, or a business for the long term with multiple products.  Each path provides a unique risk reward perspective for both investors and entrepreneurs.

To be honest with you, many of the companies I have met with seem like features of a broader product offering.  That is not bad in and of itself as focus is key when starting a company and going to market. As a start-up, you always want to be the innovative player with the new easy to use technology.  However, just being the mobile version of what is already existing in the market is a cause for concern as it doesn't take much for a larger competitor to replicate that effort and use its marketing muscle and existing customer base to freeze a start-up out.  Sure, you may get some customers early on as you are the only one, but in the long run you need to think about what broader feature set you will offer to be a true standalone product. 

A product is typically a couple key features tied together to solve a problem for a customer.  This means that you can provide more value to your customer and consequently extract more dollars from your end-user.  The opportunity for many companies that are just features is a quick flip, but the risk is if that doesn't happen the large player may just develop the feature in-house leaving no exit for you.  The more seasoned entrepreneurs know that starting out with a killer feature is just a launching pad to bigger and greater things.  They know it is just a go-to-market strategy that is part of a larger vision and a step towards a broader offering down the line.  These entrepreneurs know that they may never get there, but also understand that without this they have a limited market and return opportunity.  yes, I know start-ups are inherently uncertain and many times it is difficult to even calibrate how big the market is, but don't forget to lay out the broader vision beyond the initial killer feature when building your company.

On the flip side, what I don't advocate is coming out of the gate as a complete and whole product solution.  This brings you right into the crosshairs of large, incumbent players and makes your life much more difficult as you have to sell against a much larger salesforce with significant marketing muscle.  While your goal may be to grow to that kind of solution, start highly focused, features are ok, but have a broader vision to show a path towards building a great company.

The Gartner Magic Quadrant – a necessary evil in IT

Lately, I feel as if I have been spending an inordinate amount of time with my companies talking about marketing.  Related to this, one of my portfolio companies recently received a number of nice emails from the board related to its new positioning in Gartner's Magic Quadrant.  We were all quite excited since we made demonstrable progress over the last 3 years from niche player to visionary and on the cusp of becoming a leader.  Yes, I know what you are thinking – this is all BS and how much did you pay them over the years.  And where there is smoke there is fire as those statements ring true but at the end of the day Gartner's Quadrant is important for anyone selling to IT professional because buyers of technology care about what Gartner has to say.  Technologists at corporations are not paid to take risks, but rather to not make mistakes, to make the safe choice.  And guess what, paying Gartner Group for an annual subscription to its content and for access to its analysts helps IT buyers make the safe choice.  Secondly, larger companies when looking to expand their product line or get better positioning in the market definitely do pay some attention to the start-ups on the quadrant. 

For those of you who are not familiar with the Quadrant, you can read more about it here.  In short, it is Gartner Group's proprietary methodology to rate IT vendors in a particular market based on Ability to Execute and Completeness of Vision.  Gartner-magic-quadrant1-530x485 In the end, every market is broken out into 4 quadrants, Leaders (top right), Challengers (top left), Niche Players (bottom left), and Visionaries (bottom right).  For the most part, Leaders and Ability to Execute comes down to number of customers and customer references that Gartner has done and the size of your company and ability to go to market.  Based on this criteria, you will never see startups in the Leaders quadrant on Day 1.  However, what you should expect from a startup is a visionary position meaning the company has some phenomenal technology that fits a market need and is leading the future of the industry but at the same time does not have the customer base or resources to go after the big boys today.  If you are in the niche category then good luck.

So how does a start-up navigate the Gartner waters?  First, I would read this overview from Gartner to understand how they think and rate vendors.   Secondly, I would contact the relevant analyst to set up a meeting to discuss further.  Given my experience, I must say that developing a relationship with the analyst is key to helping you improve your standing in the quadrant.  This means buying a subscription to Gartner and then hiring the analyst for some consulting.  As with any business, you will have some impressive analysts and others who are not as strong.  Regardless, I have found that by sharing your ideas and vision for the market with the analysts early on can help them synthesize their views of the market.  If you can have your Gartner analyst take your thoughts as his own then you know you have really done a great job in discussing the market.  What many companies don't know is that you also have to be proactive about the Magic Quadrant.  As you sign up new customers and partners, share them with Gartner so they can call every new customer and partner in advance.  Many times companies wait until the last second and inundate Gartner analysts with numerous calls and information and many times these analysts cannot process all of that info which means it will have to wait until the next release of the Quadrant.  So all in all, be proactive, don't be afraid to pay as you may learn something and it is a necessary evil, and build a relationship with your analyst.  I hope this is helpful and I would love to hear your thoughts and comments on this subject.

Market positioning for startups – focus, focus, focus

I was on a call yesterday with an inspired and talented management team.  As we walked through the deck, one point particularly struck me as I listened to their well-honed pitch.  The company was trying to boil the ocean and do everything for its customers.  While it was great that the team seemed to understand the market and the problem that their customers had, I must say that I started to lose interest by the fifth differentiating feature of the product/service.  One slide really highlighted the problem for me – it showed a feature list of 10 features and then showed 3 different competitors who were either already well established public companies or well funded startups that only offered 30% of what this angel-funded startup would offer.  In my mind I was wondering how an angel funded company could go-to-market against companies with billion dollar market caps or with $30mm of venture funding which were highly successful because they were incredibly focused on a subset of problems that this start-up was trying to solve. I know, I know, I always like entrepreneurs to think big but that must be balanced with how a startup goes to market.

You see, it is always hard for a startup to enter a market with an end-to-end product positioning as most customers expect large companies to cover this territory.  What most customers expect from startups is innovation and breakthrough offerings, not end-to-end solutions.  Going back to the call, my humble suggestion was for the management team to complete their beta test with their handful of customers and figure out which 2 or 3 features were the most compelling and differentiated offerings with respect to their competition and market.  They should then plan their go-to-market strategy with a more focused approach that emphasized a new and innovative offering instead of a "we do it all for you" approach.  In the long run, if successful, the startup could always add another feature or two as they grew their customer base but keeping the message simple early on is imperative to drive a successful product launch.

When to ramp sales

While 2009 was a tough year, I must say that it was nice to see a number of our portfolio companies have blow out 4th quarters for bookings and growth.  Despite that, I am still taking a cautiously optimistic approach to 2010.  There are still conflicting reports on the growth of the economy and it is unclear whether Q4 was the release of some pent-up demand of if it will be more indicative of sustainable new spending on technology.

Either way, I would like to caution those start-ups out there who are looking to aggressively ramp up their sales based on a great quarter (more on this from a post in 2006 on when to hire a vp of sales).  Yes, it is imperative to keep the momentum building but before you get too aggressive with your growth plans make sure you can answer all of these questions about your go-to-market strategy:

1. Do we have a clear value proposition and know which market we are selling into and who we are selling to in the organization?

2. Do we have the right product and are our customers satisfied? – selling is one thing but if the product has serious issues in production then ramping up sales could put a severe strain on the business moving forward

3. Are our sales repeatable or one-offs which means lots of customization of our product on every deal?

4. Is our quarter based on one or two lucky huge deals or based on a broader swath of customers?  Do we have a continually growing sales pipeline or did we run it dry for a big Q4?

5. Do we have a solid understanding of the full sales cycle from lead generation from marketing to the closing of the sale – it is important to get good metrics here to make sure that marketing is spending wisely and targeting the right areas of the market to build the pipeline.  You need to feel confident that if you spend more on marketing, you will get more leads which will lead to more sales.

6. How can we build a more leveraged sales model through resellers, partners, or OEM relationships – you can't do this without answering #1 above.  If you are solely reliant on direct sales then think long and hard about how to add more leverage to the model

In short, if you can answer these questions and the data and anecdotal evidence from the field points you in the right direction, then by all means ramp up your growth.  If you can't answer all of these questions in a highly positive light, then cautiously ramp your sales.  Too many times I have seen portfolio companies get overexcited about their growth prospects and then realize the product is not ready for primetime or that the pipeline has run dry and subsequently the startup overspends and needs to go through a layoff.  Overhiring and then cutting back can be quite negative for morale and can also be a huge cash drain and distraction for management.  Just remember to take a step back and do some analysis before you bet the company's future based on a good quarter or two.

Startups and financial models for SAAS companies

The other day I met with an entrepreneur I was advising as he prepared to raise his next round of funding.  In the meeting, he wanted me to narrow in and focus on his financial model.  Financial models for startups are important from a big picture perspective, but I never like to get mired in the full details as things always change in the early stages.  So first and foremost, I let him know that while it was nice to have a well thought out spreadsheet, that the most important thing was getting the product developed and the right team in place.  I don't invest based on detailed spreadsheet models – getting comfortable with the team, the problem being solved, and the market opportunity are more important in the early days.  Secondly, what is most important for me to understand is the expenses and what milestones will be achieved with this first round of funding and whether or not it would be suitable enough to raise the next round of financing.  Finally from a big picture perspective, I like to understand the unit economics of the business – can this really scale, is the company capital efficient, and are there high or low gross margins.  While the revenue model may change as well, I like to at least understand going into the investment that the entrepreneur's head is in the right place and that the economics work right from the start.

Given my experience with SAAS based companies like GoToMyPC (Citrix Online now) and LivePerson (Nasdaq: LPSN), we also spent some time discussing key financial metrics for SAAS businesses that he should pay attention to as he ramped up his business.  Once again, no startup spreadsheet is going to accurately predict the future, but it is imperative to understand some of the key variables that will drive your business so you can prepare early on to have the right people in place and the right focus.  In my mind some of these key variables include new bookings, growth of deferred revenue, churn rate, cost of acquiring new customers, and obviously cash.  New bookings are a better indicator of sales growth for a SAAS company because typically contracts are signed for 1 year or more and the revenue is recognized monthly as the service is delivered.  So if a SAAS company signed up $1.2mm in bookings for December, it may only recognize $120k each month.  The remainder would go into deferred revenue.  Another area that is quite important is churn rate.  If your company churns or loses 5% of customers every month, then during the course of the year the company will have to replace a significant number of customers just to maintain status quo.  What this tells a company is that they while focused on adding new customers, they also have to make sure customer satisfaction is up to snuff and that they keep their existing customers happy.  Also if your cost of acquiring a new customer is high and breakeven is longer than the contract length, then your company will never be financially stable if you cannot keep your customers on board.  Finally cash is an important metric for all startups – watching the burn rate and being proactive about it can keep you fighting through the lean times and prepared for growth.  While many SAAS companies may collect cash monthly or quarterly, some collect annual fees by offering discounts by paying upfront.  This is a great way for SAAS companies to keep the cash coming in earlier so they can use it to fuel growth.

Google acquires portfolio company Gizmo5

Congratulations to Michael Robertson and team at Gizmo5 for all of their hard work and perseverance!  Gizmo5-Google-mm There is not a lot I can tell you about the future plans for Google Voice, but I do believe it is important to look back to see how we got here.  We made our investment in Gizmo5 (aka as sipphone and gizmo project) in early 2006.  What Michael and I shared was a vision of openness for the VOIP and IM World.  As I wrote on a blog post in January 2006, consumers want what Google and Gizmo5 will hopefully provide in the near future:

At the end of the day consumers don't care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications.  What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity? 

Between 2006 we definitely had some ups and downs but through it all two big decisions helped us get here today.  First, we drastically cut the burn rate before the nuclear winter and decided to focus on getting to breakeven.  Being capital efficient and reliant on viral marketing certainly helped us grow our business and stay lean and mean.  Secondly, when Grand Central came out with their single phone number we decided to integrate Gizmo5 into their service.  Of course since both Grand Central (now Google Voice) and Gizmo5 were SIP compliant and based on open standards it certainly made that process quite trivial and easy. 

Fast forward 3 1/2 years to today, and all I can say is that I look forward to seeing what Google Voice will bring into the future and whether true openness can trump Skype's proprietary protocols.  It also seems like the vision of one number for PSTN, VOIP, or cell identity I wrote about long ago will become a reality.  One last thanks goes out to Maurice Werdegar and the team at Western Technology Investments (WTI) who provided Gizmo5 with venture debt and worked closely with us in the tough times to restructure our payments.  I would work with these guys any time.

The Googlization of IT

Today I took a sales team from a portfolio company to meet with a couple of senior IT executives at a major retail company.  Towards the end of the meeting, it started to become quite clear to me the effect that Google and the web has had on IT to date and where it was going. In an oversimplified way, it seems that there have been 3 distinct phases to how the web and Google have impacted the enterprise, first starting at the app layer and increasingly diving deeper into the core infrastructure.

Phase 1 – Consumerization of IT – all internal corporate users are consumers first and then employees second.  we have all seen how consumers have gotten used to using browsers and SAAS-based applications and how successful startups have been able to provide web-based applications that users can pull into the enterprise environment starting at a department level rather than having to go out and sell and push technology into enterprises.

Phase 2 – Rise of open source – I would call Phase 2 the rise of open source software over the last 10 years – most of which is hardcore infrastructure type software such as databases, virtualization software, and the like.  IT folks leveraged the web and Google not just for applications but also to download core software to help run their internal operations.

Phase 3 – Googlization of IT – have as much of your infrastructure as you can run like Google's – distributed, commodity-based, and in the cloud on a private basis.

Phase 1 and 2 are ongoing and Phase 3 is where I see a few of the more forward-thinking IT departments I have met with over the last few months going.  I am not just talking about Google Apps (like email, etc) but about how companies can run their infrastructure internally like Google.  If Google can deliver a number of highly scalable web-based apps by clustering commodity servers, then how can enterprises do the same for themselves.  This is not about getting sucked into buzzwords on the cloud but really understanding the cost savings and performance benefits a company can get from transitioning some of their infrastructure to a Google-like model. 

One company in my portfolio that is leading the charge in the data warehousing space is Greenplum.  A customer can buy our data warehouse, cluster commodity servers like Google, and get petabyte scale and much better performance for less than the cost of maintenance of many existing solutions on the market today.  In addition, large global companies can have these nodes accessible to anyone anywhere in what we call the Enterprise Data Cloud.  One of our large customers said that data was a strategic weapon and that he wanted to make the cost of a running a new query zero.  In today's world and without the enterprise data cloud initiative I can tell you that running new queries in a global organization is an expensive and time consuming task of replicating data, creating data marts, running the processes, etc that can take months to get going and days to run reports.  Another company in which I am an angel investor is called Eucalyptus Systems whose tagline is your hardware, your data, your cloud. Eucalyptus is an open-source system for implementing on-premise private and hybrid clouds using the hardware and software infrastructure that is in place, without modification.  Eucalyptus adds capabilities such as end-user customization, self-service provisioning, and legacy application support to data center virtualization features, making IT customer service easier, more fully featured, and less expensive.  Yes there are public clouds like Amazon EC2 which is now also offering virtualized private clouds.  But the reality is that many large IT organizations want to control their own data, find ways to make it more easily accessible to everyone, significantly reduce infrastructure costs, and be able to launch new apps or services quickly and cheaply.  This is where I believe many IT organizations will be headed in the next 5 to 10 years creating private and hybrid clouds for existing and new applications, a phase which I call the Googlization of IT.

Washers, dryers and secret sauce – why naming your technology is important

Our washer and dryer was on the fritz today, and as I started to do some research on large capacity stackable units I started to get overwhelmed with all of the new terminology and features.  After all, isn’t a washer a washer and a dryer a dryer.  How many different combinations and features could there be?  As I dug deeper I found myself thinking about these appliances less from a consumer’s viewpoint and more from a marketing one and appreciating how these various companies could make a commodity product sound so exciting and differentiated.  Sure, all of the competing products had to check off performance, speed, and low energy but what really struck me was the marketing terminology they used to differentiate themselves.  Rather than just sell a steam washer or dryer LG had TrueSteam technology while Electrolux offered PerfectSteam on their site.  These appliances didn’t just balance well but LG used TrueBalance AntiVibration System versus the Perfect Balance System from Electrolux.  Other features included the Direct Drive motor from LG for better performance while the Electrolux offered WaveTouch Controls.  What this really helped me think about was how these various companies prioritized the features for their given market and how they differentiated themselves through their proprietary technology or secret sauce.  And yes, I immediately began to think about how looking at marketing in the washer and dryer world would apply to startups.

Researching washers and dryers reminded me of several meetings I had years ago with a marketing expert named Richard Currier.  His big thing was to take a basic technology, break it out into a few parts, and to give them sexy names.  For example when Sybase the database company was on the market it was fighting with Oracle and others and ended up capturing a big chunk of the financial services market because it leveraged an innovation it called Two-Phase commit.  Every sales person would lead in with the benefits of Two-phase commit and while other competitors may have had something like it, if it wasn't Two-Phase commit it wasn't good enough.  What Sybase did was take one of its secret sauce technologies (innovative at the time, standard now), named it, and leveraged the crap out of it with its sales force.  While the technology performed as advertised, naming it definitely gave it some cache.  

Coming back full circle, I had a conversation this morning with an entrepreneur who was going after an interesting segment in the online video and marketing world.  The company had some nice revenue for a bootstrapped operation.  However I mentioned to the CEO that it seemed more like a one-off consulting or agency shop versus a scalable VC-backable market opportunity.  As we dug into his technology deeper and as I started to understand some of the magic behind his platform, I recommended to him that he think long and hard about figuring out what the secret sauce in the backend was and how to name it so he could better market his services and compete against others.  While naming it won't in and of itself help him land more customers, I can guarantee that it will help his company sound more exciting and innovative versus companies that do not.  And in the end whether the deal is closed the sales prospect will certainly remember and question how important TrueBalance Antivibration and WaveTouch controls are to his purchasing decision.

Future of television advertising (continued again!)

My first post about portfolio company Visible World and the future of television advertising was in October 2004 (see here).  In the post, I wrote about how television advertising needed to change and how the advertisers and those with inventory had to adapt to the rising online threat and offer new technology to make their ads more targeted and measurable.  Visible World has been pushing this vision for quite awhile and over the years it has built momentum through investments and relationships with Time Warner and Comcast. And just recently the company announced a deal with Google TV Ads to bring this to Google's automated auction system.

Google Inc. is teaming up with Visible World Inc., a well-known New York technology company that uses software to create multiple versions of a given ad, in its push to offer TV advertisers more targeting options.

Google will combine the technology with its Google TV Ads, an automated auction-based system for buying TV ads by choosing which shows best fit the advertised product or service. The idea of such "addressable advertising" is to send a TV ad promoting a sale on minivans to a household with children, for example, and the same basic ad with a promo for a sports sedan to a childless household.

Pioneering a new way of doing things is expensive and tough, but I am glad to see Visible World's efforts starting to pay off.  A lot of companies are starting to look at the hundreds of billions spent on television advertising, and I can bet that we will see as much innovation in the next couple of years as we have seen in the last ten years in this market.