Sundance and a movie about a web pioneer you may have never heard of

My brother-in-law, composer and recent Emmy winner, Ben Decter, is kicking it this week in Sundance while two of his movies Heart of Stone and We Live in Public make the rounds. This summer he and I spoke about We Live in Public and Josh Harris.  It took me a few minutes to remember who he was and meeting him more than a few times while he was out raising capital for one of his many projects, Pseudo.com.

Josh started Jupiter Communications which during the mid-90s was the go-to research firm for market growth numbers for every startup business plan.  As a VC, you couldn't believe them, but it didn't stop every entrepreneur from using the hockey stick projections in their business plans.  Anyway, he went to start Pseudo.com, one of the first production companies for webisodes and streaming media.  In an old New York Magazine article from 1999 Josh proclaimed that ""The potential for a company like Pseudo is to start from a Website and replicate the success of ABC, NBC, or CBS — a long shot but an enormous payoff." He then went on to wire his house with heat sensing cameras so that his and his girlfriend's every move would be streamed live over the Internet."  Anyway, Pseudo.com went under in 2000 and Josh subsequently disappeared in isolation for quite awhile. 

As the writeup for the movie mentions, Josh "proved how in the not-so-distant future of life online, we will willingly trade our privacy for the connection and recognition we all deeply desire.  Through his experiments, including a six-month stint living under 24-hour live surveillance online which led him to mental collapse, he demonstrated the price we will all pay for living in public."  While his predictions were dead on in many respects, it is also quite tragic to see the pain that it inflicts on his own life. Who would have thought how quickly our private lives have become public as we leave a digital trail of ourselves, our loaction, our videos and pictures, and our thoughts all over the web, social networks, and Twitter.  The question we should all ask is where will all of this connectedness leave us 10 years from now.  I hope you enjoy the trailer and more importantly my brother-in-law's music 🙂

Going old school – how to reach people effectively

I had lunch with a friend last week when we were talking about the days years and years ago where it was cool to have an email address on your business card.  In fact, I remember picking attorneys to work on our venture deals in the mid-90s not only based on cost and experience but also based on how digital they were – no AOL email addresses please and if you use IM, then great.  Now I can honestly say that I can be overburdened at times dealing with my email, IMs, sms messages, phone calls, LinkedIn and Facebook messages.  So I must say it was quite refreshing last week when I received a hand delivered note from Robert Samet who runs Madison Search Partners, a well respected boutique search firm for senior level sales searches in the digital media and software sectors.  He, of course, had sent me a few emails before that and also followed up with an email afterwards.  Robert went old school with snail mail and physical communcations and with that got my attention.  Yes this is an old marketing trick but one that sometimes gets lost in the shuffle of digital communcation.  I, of course, had to take his call and when we spoke I asked him how his campaign went.  His hit rate was quite high and given his creativity, he is definitely a guy I want to use in the future for a search.  So in this day of constant and immediate communication, physical mail and snail mail can sometimes leave a lasting impression.  As for myself, I actually got some personal stationary last year to send note cards to friends and business contacts when I want to make sure that I deliver a more effective message.

Is 2009 the year of mobile computing?

 As I look around post-holiday season, I am seeing more and more regular, non-technical friends and family get connected on their mobile devices.  What does that mean? A great example is that of my father-in-law who got rid of his old Motorola Startac and exchanged it for an iPhone.  Yes, he got an iPhone, and then days later I got a message to get connected to him on Facebook.  Ever since, he has been using the phone to take pictures nonstop, send emails and SMS messages, stay connected to Facebook, and surf the web looking for the latest news or directions. I last wrote about the iPhone in November 2007 when my wife and her friends started getting iPhones.  Clearly that was just the beginning of a longer term trend for mobile devices to get more powerful, easier to use, and more widely deployed into the market.  Since then, we have the new Google phone, a better Palm device, Blackberrys for consumers, and numerous other devices from Samsung and HTC.

So is this the year that mobile computing becomes mainstream and that mobile software/service companies become a household name?  More importantly, will there be any grand slam venture capital opportunities in wireless?  Through various forms I have been involved from an investment perspective in wireless-related companies since 1996 when I made an investment in a company called AirMedia.  It was way ahead of its time in the sense that it had a hardware device that connected to a paging network to deliver email alerts, stock quotes, and breaking news.  From a business model perspective we had it nailed…or so we thought…buy the hardware device at cost and we would make money back by selling a monthly subscription service.  It raised an additional $30mm of venture capital after we invested and subsequently was long on buzz but short on customer adoption.  I learned a lot from that investment.  The first lesson I learned is that "pioneers get arrows in their backs."  In other words, we were way ahead of the market and were bleeding edge.  Wireless was thought of as the next big thing, but we were way too early and also had to get people to adopt a new device-virtually impossible!  Secondly, I learned that you can't invest in a technology in search of a problem to solve.  It was surely cool stuff but no one really cared and in order to get people to care you had to spend lots of money to define not only a new product but also a new category – the wireless Internet connected device.

Here we are 13 years later and I have seen very few successful wireless pure play software/service related companies.  I wonder if 2009 is the year that some wireless startups breakthrough.  Trust me, I am a big believer in being connected anywhere and anytime but at the same time I am skeptical of how these startups plan to make money.  What is different in 2009 versus 1996 is that we do have a user base, we have some awesome devices that are cheap, powerful, and easy to use, and we have all you can eat service plans with unlimited data.  However the same fundamental challenges still remain as it is still difficult for wireless startups to get their products to the market.  You can either go on-deck through the carrier channel and their walled gardens or off-deck through the web where you will need to have an incredibly viral product or spend lots of money on marketing.  You can also reach users through handset manufacturers like the iPhone marketplace or through Nokia (one of my portfolio companies Gizmo5 is also distributed through Nokia) but in these cases you are either still under one company's complete contrl (Apple) or have to spend incredible amounts of time negotiating with a large company like Nokia.

So even with a huge user base of wireless devices and users, the odds are still stacked against pure-play wireless startups.  If anything, I see wireless as just a natural extension of any web-based product or service.  Take Cisco's Webex as an example.  Even though their users have wanted a mobile app for awhile, they just launched an iPhone app that let's users schedule and join Webex conferences from their device.  Why do we need a pure-play wireless conferencing play if the big guys can easily extend their functionality? So while we read about increased wireless usage it is clear to me that either many folks are still using the lowest common denominator on their devices (taking pictures, sending SMS messages, doing a simple web search) or mostly using the large incumbents' technology like Google Maps or GMail or Yahoo on the Go or Microsoft Search or Facebook.  This is a tough market for startups to break into and while we may see some products get strong adoption out of the gate like a flatulance app on the iPhone, this doesn't mean that these are real businesses.The bottom line is that as more apps become delivered over the cloud, the delineation between a desktop play and wireless one diminishes rapidly unless you are a mobile only location-based service.  Wireless is just a technology and 2009 will be a year where wireless and desktop continue to blur as people only care about what web service they use and always expect to get it from any device over any network.

Cloud computing for SMBs

Cloud this, Cloud that – the word cloud is clearly an overhyped word and reminds me of the beginning of the hype around hosted models and ASPs (application service providers) in the late 90s and the term SAAS today.  Anyway, as I look at announcement after announcement released about cloud computing platforms, one thing is pretty clear to me from an investment perspective.  First, I am not going to invest in the next hot cloud computing infrastructure service that will compete against Amazon, Rackspace, Microsoft, and every other large tech vendor in the world.  This is suicide and far from capital efficient.  Secondly, while everyone looks in the consumer space, I want to look at how software companies can deploy new enterprise-based applications in the cloud, particularly for small/medium sized businesses.  In other words, show me the arms merchants with a recurring revenue model and frictionless sale and I will definitely be interested.

Some of the companies that fit this parameter include Rightscale (founded by Thorsten von Eicken, a cofounder of former portfolio company GoToMyPC) and one that I am looking at in the email archiving and compliance space which has a number of OEM partners reselling its service. Rightscale is an on-ramp to Amazon EC2 and other clouds and provides automate systems management.  It kind of reminds me of a next generation Tivoli or Openview.  The beauty is that the whole sales cycle is quite frictionless and all web-based which means an oppotunity to scale quickly.  There are a number of other recent players I have seen including one for BI in the cloud (not exactly sure what the killer app here is yet) and many others.  Of course the trick here is not to get enamored with the word "cloud" but to really understand the business problem that is being solved and why leveraging a cloud computing platform offers better economics, scale, and competitive advantages.  As I dig deeper into some of these companies, it is clear to me that software purpose-built from the ground up to live in a cloud has a huge advantage since it is hard to retrofit off-the-shelf software to leverage all of the benefits offered by Amazon, Rackspace, and the like.  Secondly, many of the better companies have built some slick tools and services to solve difficult problems like how to make customers feel like they have their own privated, dedicated systems while still keeping costs low.  Finally, from a go-to-market perspective, a number of the companies I have spoken with have not gotten the question of whether or not they could scale as they quickly point to their backend provider and move to the next objection.  So, if you have an application targeted at the SMB market that is taking advantage of cloud economics, please feel free to contact me.

More reasons to watch your burn

Despite these tough times, there are still some bullheaded companies who think they can grow their way out of this mess or find the right M&A partner to bail them out.  I can guarantee you that this is a recipe for disaster.  I was on the phone today with the CEO of one our portfolio companies, and we were joking that we were in unprecedented times since we have been approached by a number of bankers about buying companies that are much larger than us.  So if these bigger private companies are hawking themselves looking for a deal, where does that leave a small startup?

It goes back to my one of my themes about building a business – focus on what you can control and don't try to find a savior by looking at external forces.  What this means is figure out what your core business is and take a scalpel and lop off the areas where you do not see an immediate return on investment.  If you believe you will find a strategic partner to buy you, forget about it because every other private company that has been funded during the last 5 years is trying to do the same.  In addition, I can also promise you that any large or small company looking to buy a startup does not also want to pick up a large burn rate.  Even on a private-private merger, most of these VC-backed companies will do nothing unless the deal is cash flow positive on Day 1.  Do yourself a favor, build an expense line where getting profitable can happen with the cash that you have.  This way you can control your own destiny and also even make yourself a more attractive strategic partner to any company in the future.  One other point for all of those advertising related startups-go find some other revenue streams like becoming a platform for partners via cobranding or hosting fees which scale with usage or find some other premium model because the ad market is drying up and the dollars will flow to some of the larger, more established platforms.

A ray of light in this environment?

I did an interview with Rich Maguire of Datamation last week which he just posted yesterday.  While the markets seemed to get excited for a day about the bank bailout, attention is turning toward an even bigger problem for startups, a potential recession.  The consumer no longer has that ATM called their house and confidence and spending to boot are down.  So what's an entrepreneur to do these days and are there any pockets of opportunity?  Trust me, I am not going to give the party line that it is great to start a company now because, you know what, it really is hard to go out and do that.  However, if you are brave and bold enough to do so, I will tell you that you could be well positioned 18 months from now when the economy does get back into gear.  This market will truly separate out those who are just in it for the money, and those who are out their to build an insanely great product or service.  As for the article from yesterday, here is an excerpt and hope you enjoy.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that spectrum as well.”

Be prudent but don't panic!

The alarm bells are ringing in Silicon Valley and start-up land today with Sequoia Capital and Ron Conway telling companies to prepare for the economic meltdown and to raise cash by cutting their burn.  This is not new news as being in New York we started to feel the real economic impact in mid-September as Lehman melted down and as Merrill Lynch was bailed out by Bank of America.  This is all prescient advice and something I have been espousing to my portfolio companies for awhile – see my last post from mid-September on Doing More with Less, a mantra that all startups should live by.  All that being said, it is not time to hit the panic button.  Don’t go out and fire everyone wholesale and skinny down just because everyone else is. Do it because it is right for your business and because all of your leading indicators tell you to do so.  Do it the right way by not making a 20% cut across the board but by thoughtfully thinking about your business, your priorities, and where you need to focus your capital and resources to grow your revenue but conserve cash.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before.  As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related.  It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality.  For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses.  Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market.  Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

Delivering on Q3 forecasts!

I received some incredible news last night from two portfolio company CEOs updating me on our Q3 numbers.  They not only hit their respective forecasts set early in the year, but they beat them.  Normally I expect our portfolio companies to hit their numbers, but I am ecstatic because we delivered in the midst of the largest financial crisis we have ever seen.  While much news on the technology world is of doom and gloom, and while I too have been advising portfolio companies to conserve cash, it is nice to see that companies are still willing to spend if you deliver a strong value proposition.  More importantly these numbers speak to the commitment of the respective teams to do anything possible to deliver on the Q3 forecasts.  In each company, sales reps and executives flew out to key prospects and knocked off obstacle upon obstacle until they walked away with an order.  Ok, it is not as dramatic as it sounds as there were numerous meetings and technology proof of concepts before getting a sale, but the point remains that the companies that delivered did not wait for the orders but went out and got them.  There were a number of stories of sacrifices that were made including one sales rep who was expecting his third child yesterday but was at a prospect getting the contract inked and another one of a sales rep and sales engineer who camped out at a client’s office all day and wouldn’t leave until they had a signed contract.  Extraordinary times require extraordinary measures, and I hope that stories like these inspire you to keep fighting the good fight and to go out and make things happen.  Startups need to be scrappy and tough to survive!

Doing more with less

Being in New York, it is hard to escape the realities of the ailing financial sector.  When I took the train into the city this morning I could see the somber look in people’s eyes knowing what had just happened to Lehman Brothers and the uncertainty of the financial markets and economy.  Given this state of play, it is clear that capital is becoming scarcer by the minute and that we don’t know when we may come out of this mess.  The mantra for most businesses is to just wait and see rather than make any real decisions, especially when that requires a commitment of capital.  Then I get an email from Bill Morrison at ThinkEquity today outlining his views that we are in Phase II of a Media Recession:

In our experience, media recessions typically develop in three phases. First, marketers reduce spot market activity and eliminate quarterly budget flushes. Then, marketers begin canceling "up-front" commitments and previously signed advertising contracts. Lastly, marketers begin to rationalize/reduce budgets for future years. Our research suggests that we entered phase two of the current media recession during 3Q. Our recent conversations with online publishers revealed a significant number of advertisers that have cancelled contracts or significantly reduced commitments for the second half of 2008. The majority of industry contacts we spoke with this quarter said fundamentals weakened from 2Q to 3Q.

Trust me, I am not a doom and gloom guy and on the contrary believe that now is a great time to invest and build for the future.  That being said, it is also time to be smart and highly efficient. It is a great time to look internally and think about your priorities, your processes and whether or not you can do things better. 

In this backdrop, I had a couple of board meetings last week and as you might have guessed, one of the recurring themes was needing more resources.  While the companies were quite different, I seemed to be in the same meeting with each department head giving an overview and goal tracking from the previous quarter and each presentation ending with, "I need more resources."  It’s not that I am against hiring more people for portfolio companies, since I am all for it.  My only point for all entrepreneurs and managers is that when you put together the hiring plan to make sure you think about the fact that you should always be under resourced and have more things to do than can get done.  What this really means is that you have to do an incredible job of prioritizing your goals. Always ask yourself how you can do more with less and you will find that you and your team will become incredibly resourceful and stretch your dollars a lot farther than anticipated. 

Speaking from experience, I have repeatedly seen situations where managers ask for additional hires, we tell them to wait a quarter, and then they miraculously are able to manage for the quarter. In fact, I was joking at one meeting the other day saying that it was incredible that we had half the staff from a year ago and have more revenue today that we did before.  If we cut in half again, I mused, perhaps we could grow even more.  OK-that is quite extreme, and we did agree to end up hiring a few more resources in various departments.  What really struck me was the fact that when we hit the wall over a year ago everyone thought we weren’t going to be able to make it and grow our business.  What changed was that management became maniacally focused in prioritizing opportunities, not chasing every customer, being ruthless about how they spend their time, and consequently reengineering a number of their internal processes.  We are now a much healthier company with a better operational platform that merits more investment.  While I am not advocating that you starve your business and recognize that every company is different, I am suggesting that doing more with less is a mantra that you should subscribe to regardless of the economic environment and that in the long run it will yield tremendous results for you.

Selling to large enterprises costs big dollars no matter how frictionless your sale is

I have written a number of times about frictionless sales and how on-demand companies have a huge opportunity to reduce their sales and marketing costs and subsequently scale their business more efficiently.  Here is an excerpt from a prior post:

Frictionless sales means reducing the pain for customers to adopt and use a service/product and consequently reducing the cost of sales and marketing to get a customer and generate revenue.  As I mention in an earlier post, "The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow." The lowest friction sale can be a user clicking on a web page and the content owner getting paid for it.  The highest friction sale is spending lots of money on marketing and trade shows and having a large, direct sales force of expensive reps pounding the pavement for months trying to close a large deal with an enterprise customer.  Follow that with a 3 month implementation process to get the customer happy.  There are various grades of friction between these two extreme points like open source business models, software as a service, and reseller/OEM-type models as other forms of packaging and delivering a product/service.  And of course, each of these models requires a different methodology and way of marketing and selling to a customer. Ultimately what you want is sales leverage where every $1 you spend on sales and marketing equals multiples of that in terms of revenue.

The perception that it is much easier to scale definitely holds true if you are selling to consumers, small businesses, and workgroups within large organizations.  However, it seems that many public on-demand vendors are feeling the pressure to deliver growth and ultimately need to feed the revenue machine by going after larger customers.  And what many companies are learning is that no matter how on-demand your software is, if you are selling to huge enterprises you are going to have to spend huge dollars in sales and marketing.  Sales cycles are long no matter how you slice it and even if there is no massive hardware and software installation, many large companies want to have their service customized and integrated, even lightly, with other systems.  in other words, many of these high flying on-demand vendors are starting to look more like the old software companies they are trying to replace.  As per a Wall Street Journal article today, it seems that many of these public on-demand companies are finding out the hard way that no matter how frictionless your sales process is, the bigger the company you sell to, the more it is going to cost you. 

There is nothing to install, so workers can start using online software without the aid of the tech department. That makes it easier for companies that sell online software to get into a business than their on-premises competitors.

Seizing on this, investors bought into online-software companies in a big way. During the first 10 months of 2007, shares of 15 online-software companies tracked by Thomas Weisel Partners increased in value 61%. Since then, however, these companies have lost about a third of their value.

Wall Street has realized that it isn’t enough to simply offer online software—you have to have a sales strategy that can make your offering a corporate standard. It is possible to get individuals, project teams or small businesses to buy online software through word-of-mouth marketing, but it is hard to make money from these groups—at least the kind of money necessary to become a billion-dollar company.

In order to get there, they can’t operate like an Internet start-up, letting their technology spread virally as end users hear about it. They need to sell to the same executives and information-technology professionals who made purchasing decisions before online software was an option. Businesses have a lot riding on the decision to use one product or another. And while having pockets of workers advocate for a particular piece of software is a plus, the execs who sign the big checks still want to see demos, vet the seller and do all the things they have always done when they buy software.

So if you are an on-demand vendor, either stick to your focus of scaling with SMBs and consumers which requires a completely different sales and marketing approach more rooted in traditional online budgets and telesales or be prepared to spend some real dollars if you truly want to go after the big guys.