We are all starting to focus on energy conservation. So many of our power plants are powered by high priced natural gas and we are near $100 oil (per barrel). With these types of data points swirling around our checkbooks...we are constantly contemplating how we might save on the high cost of energy.
As an investment firm...we think about plausible immediate solutions that may lower the costs of conventional energy forms and thus leave more savings in the hands of consumers. Many of these happen to be centered on information technologies and how they may be used to better organize inventory flow, reduce theft, reduce operational risks...etc. Sometimes we get tangled in the endless search for the holy grail of technology which will take planet earth by storm. It is sometimes exhausting. It becomes easy to overlook simple solutions.
Over the weekend, I took my kids to the local nature observatory. It was there that I was forced by my kids to slow down and relearn some things that had last been taught to me in grade school...things that didn't matter to me then...but they matter to me now.
Transpiration - In my quixotic HG Wells endeavor for perpetual energy, I had forgotten much about the details of transpiration - this is the passing of moisture from the soil through the plant system into the atmosphere. Heat passes over tree leaves etc...drawing moisture from the leaves. The surrounding air is cooled as much as 9 degrees Fahrenheit but is typically between 5 and 6 degrees Fahrenheit. There are actually some pretty complex calculations to determine the cooling effects of different trees. For a three thousand square foot home covered by 35 foot trees (of average leaf size)...this is the equivalent of 5 tons of air conditioning running for about 20 hours per day. This makes me wonder if the placement of concrete on Planet Earth is partially responsible for global warming (i.e. many fewer trees that are cooling the atmosphere). So depending on how cool you want your house during the summer...we are potentially talking about a lot of money here. For example, a 10,000 BTU window AC unit needs to be fed an extra $5.00/month to cool one room in your house an extra 4 degrees Fahrenheit per month (est. room size is 300 sq ft.). In other words, planting a few trees to cover the sides and top of your house can add up to a few hundred dollars in power savings each year.
I am writing this for one simple reason. I am constantly running 100 miles per hour in the venture capital business and sometimes fail to see something so obviously in front of me (such as planting a tree to save money). But as I heard one time several years ago..."If you really want to make sure something stays hidden...hide it out in plain site."
Monday, November 12
Tuesday, October 23
The Difference between Number 1 and Number 2
I was talking with one of my co-investors last week. This is a person involved in venture business for nearly 20 years. He was pondering the difference between a technology company that ends up being number 2 in a space vs. number 1. There seem to be so many instances where the better technology ended up not crossing the finish line in first place.
So what is going on here? I've got two theories. One is based on the notion of perception which is a point my colleague was contemplating and the second is based on something completely out of left field but reflective (in my opinion) of the human condition.
So what is going on here? I've got two theories. One is based on the notion of perception which is a point my colleague was contemplating and the second is based on something completely out of left field but reflective (in my opinion) of the human condition.
- Theory 1 - The company that achieved the number 1 ranking figured out a way to convince its target market that it was going to be the eventual winner of that market. As a result...humans wanted to go with the winner and the overall market win sort of became a self-fulfilling prophecy. This proselytization occurred in a way as to not alienate the prospects in that target market. SAP did this very well in the energy sector. They convinced prospects that since their competitors had bought SAP...they too needed to buy SAP in order to keep up. In other words...the message was that SAP was going to be everywhere and that the prospect couldn't afford to be left behind. This implied that SAP was going to win the market...and it didn't tick people off.
- Theory 2 - The company that ended up number 2 had a better technology. Their beliefs about their technical competencies were worn on their sleeves in a way that became sort of a mark of arrogance. The arrogance was observed by sales prospects. Since buying technology is, in part, somewhat emotional...the affront of arrogance factored into the relationship DNA and killed many sales cycles. I have seen this many times...company has a big couple of quarters and then decides it knows what's what and is going to teach the customer this and that....then "pow!"...the customer says get lost. The company has then taken a step back at the most important point in its life. It must then apologetically change its ways. By then the hubris has poisoned its host.
Tuesday, October 16
Hey...I Think This Might be the Chasm..
There is a book called "Crossing the Chasm" by a guy named Geoffrey Moore. This book talks about the many issues associated with a technology company making its way out of start-up land and becoming a thriving company. It is a very very insightful read.
Mr. Moore fairly correctly identifies that the world as made up of four primary types of technology buyers (i.e. markets). A young company on its road to success will touch at least three of these types of buyers and it will occur in a very particular order (Early Adopter, Early Majority, Late Majority). The differences between the types of buyers requires that they be treated differently by technology companies hoping to sell them something.
The differences between the Early Adopter market and the Early Majority market require significant change of a young company and poses the most risk to its survival relative to other transitions it must navigate. Making it through this navigation successfully is what Moore calls...."Crossing the Chasm". The definition of Chasm is: a yawning fissure or deep cleft in the earth's surface; gorge. It does not appear to be a safe place to be. The following are some observations regarding my voyages around the Chasm.
Mr. Moore fairly correctly identifies that the world as made up of four primary types of technology buyers (i.e. markets). A young company on its road to success will touch at least three of these types of buyers and it will occur in a very particular order (Early Adopter, Early Majority, Late Majority). The differences between the types of buyers requires that they be treated differently by technology companies hoping to sell them something.
The differences between the Early Adopter market and the Early Majority market require significant change of a young company and poses the most risk to its survival relative to other transitions it must navigate. Making it through this navigation successfully is what Moore calls...."Crossing the Chasm". The definition of Chasm is: a yawning fissure or deep cleft in the earth's surface; gorge. It does not appear to be a safe place to be. The following are some observations regarding my voyages around the Chasm.
- Likely crossers tend to pick one vision for their solution and stick to it no matter what non-customers may say.
- Likely crossers generally don't have to discount their product price to sell it.
- Likely crossers generally don't need to offer money back guarantees.
- Likely crossers suddenly have tons of competition that previously they never saw in a sales cycle.
- The back side of the Early Adopter market sometime convinces those desiring to cross that they have entered into a market where their product is pulled by demand. That they are now entering the Early Majority. What is really happening is they are having to push less and this is confused for pull. This is a danger spot.
- New sales will stagnate for a period of time while the market tries to figure out from whom it should buy.
- Sales People will argue that the new sales stagnation is caused by competitors whom have made great leaps recently in product design which will be "our ruin.."
- Likely crossers will sometimes get a call back on a project they lost to a competitor whose deployment is a disaster.
- Likely crossers will wedge themselves into they final stages of a customer buy and win (even though the competition had been selling the prospect for months).
- Sometimes panic will overwhelm the navigator in the face of stagnating sales and he will start to make changes in pricing and product that confuse the customer and slit his own throat.
- No investor has fun crossing the chasm but it is better to have loved and lost than never loved at all (maybe).
Thursday, July 5
What does IT do?
We have an ongoing dialogue internally about the role of IT organizations within businesses, how that role is changing, and what it might look like in a decade given the continuous impact that developments in networking, hardware, and software have on the landscape. I would conjecture that in certain businesses, the total scope of the IT department is contracting. The strategic importance of IT continues to play an important role in remaining competitive, but skill-sets are shifting towards application architecture, integration, analytics and forecasting, and business processes.
The IT department, whose scope and purpose varies by organization, has traditionally had within its purview management computer networking, desktop hardware, server hardware, desktop applications, server applications, telecommunications, physical security, network security, integration of internal applications, integration with external applications, software selection, hardware selection, application monitoring, software development, compliance, strategy, and more. Developments in networking, hardware, and software have, bit by bit, chiseled away at the need for IT to provide many of these services. We find ourselves and our associates interacting less with internal IT departments and more with managed service and application providers.
Examples where technology-savvy service providers have emerged to motivate a shift in responsibility away from internal IT include:
Startups today can very quickly provision software, telephony, and other technologies, resulting in a more efficient expense structure. Existing businesses, when evaluating a refresh or adding additional technical capabilities, can rely more so on service providers than internal IT.
The IT department, whose scope and purpose varies by organization, has traditionally had within its purview management computer networking, desktop hardware, server hardware, desktop applications, server applications, telecommunications, physical security, network security, integration of internal applications, integration with external applications, software selection, hardware selection, application monitoring, software development, compliance, strategy, and more. Developments in networking, hardware, and software have, bit by bit, chiseled away at the need for IT to provide many of these services. We find ourselves and our associates interacting less with internal IT departments and more with managed service and application providers.
Examples where technology-savvy service providers have emerged to motivate a shift in responsibility away from internal IT include:
- Network management: managed network service providers take responsibility for monitoring connectivity and network performance while others provide remote application performance management.
- Network security monitoring: managed security providers handle remote monitoring of intrusion detection and computer virus outbreaks.
- Server management: managed hosting providers take responsibility for running, tuning, and scaling applications hosted outside the corporate firewall.
- Software application management: application service providers provide web-based software that reduces the need for internal IT to manage application software and the hardware running it.
- Telecommunications: trends towards “voice over internet protocol” (VoIP) provide opportunities for managed telephony providers, thus moving technical management of telephony outside the corporate walls.
- Desktop applications: the shift away from client-server to web-based computing reduces the support required of IT. Application service providers provide user support for their applications instead of IT.
- Facilities management: Connecting HVAC systems, access control, and building systems to IP networks provides opportunities for facilities and building management companies to add remote management, monitoring, and application development to their service offering.
Startups today can very quickly provision software, telephony, and other technologies, resulting in a more efficient expense structure. Existing businesses, when evaluating a refresh or adding additional technical capabilities, can rely more so on service providers than internal IT.
Thursday, June 28
We Just had a GREAT fourth Quarter!!!
In the upstream oil and gas industry so many of the larger oil companies seem to view their annual expenses budgets the same....."if we don't spend everything we've been allocated...we won't get it next year." I've seen this a number of times. As a result...there is an annual rush near year's end to spend what hasn't been spent. This reveals some interesting clues about those who sell "technology projects" (e.g. a software project) to the upstream oil and gas industry.
So...when a prospect company comes to you Mr. Investor and proudly declares they have just had the biggest fourth quarter in their history...(followed by..."would you like to invest at a super high price") be wary...they may have just sung their swan song.
- Scenario 1 - If most of your new business with the oil industry comes in the fourth quarter...chances are you are a budgetary after thought. You are a mechanism by which to keep the budget fat for next year. They might buy your software...and never actually implement it...you are known as "shelfware." If they do implement it...you are generally a services company for three quarters and a software company in the fourth quarter.
- Scenario 2- If most of your business comes in the third quarter and fourth quarter, you may be either increasing in importance or decreasing in importance. For example...if you were previously loaded to the fourth quarter and are now getting third quarter business....they are thinking about you sooner...you are not just about saving the budget.
- Scenario 3- If your new business is becoming spread over the second through third quarters....you just might be now mission critical. This is a good sign.
So...when a prospect company comes to you Mr. Investor and proudly declares they have just had the biggest fourth quarter in their history...(followed by..."would you like to invest at a super high price") be wary...they may have just sung their swan song.
Wednesday, June 13
Paperclip 2.0
On my desk right now is a pretty fantastic upgrade to one of my organizational resources...the Paperclip. A picture of the upgrade is located to the right and it is called Paperclip 2.0 The theme of this major upgrade is around interoperability. This isn't just a "patch" fix...it is a major step-function change around making the paperclip (as a general tool), hold more, store more and do more to make my life easier and more rewarding than it was before.
Based on the easily identifiable life improvements that I expect from Paperclip 2.0, I am willing to make sacrifices including accepting the obsolescence of my previous versions of paperclip. I know I will need to procure and deploy the supporting infrastructure resources for the upgrade but I am ok with that. One of the major life improvements I will derive is more time with my family. How? Better organization..means less time wasted which ensures more time options. My option will be to be with my family.
I also expect to use Paperclip 2.0 to bind together different types of media about me. This will allow others to understand more about me and the choices I make. These new human connections now available through Paperclip 2.0 will, in essence, make the world a flatter place and perhaps eradicate so many misperceptions that exist around the globe.
Paperclip 2.0 is also supported by a US-based 24/7 customer service center that helps you through any troubleshooting you may require for your first year of ownership.
We are just one group of users but, for our money, Paperclip 2.0 works as advertised and we recommend it to everyone.
Thursday, May 24
The Cell Phone Buffer Zone
So I was in my automobile stopped at a red light looking at the car next to me. I noticed the driver of the automobile next to mine had her head tilted slightly forward as if her gaze were fixed on a point near the bottom of her steering wheel. I have recently noticed a lot of driver heads tilting slightly forward...and this tilting seems to be growing as a percentage of total driver heads. It used to be that at most stop lights driver heads sort of gazed in a daydream at some object in the distance.
It then dawned on me that the driver heads were fiddling with their cell phones. There are many applications for cell phones and an increasing number of ways to spend your time with one...in addition to calls....you can email...text message...and cruise the Internet...all while driving. It also seems to me that this head tilting is causing traffic to move more slowly...drivers are distracted by their head tilting and tend to require more time to press on their accelerators when the traffic light changes from red to green. It also seems to me that the tilted head has a tendency while his car is in motion to keep his foot near or on the brake more frequently....providing a physical buffer zone between himself and other traffic.....while his head is tilted down...I am pretty sure this is happening...
So here is the theory....I feel like I am seeing fewer automotive accidents in my home town
(Houston) and that this trend may be connected to everyone driving around with a little buffer zone around them. The graphic below reflects the incidence of fatalities in Harris County between the period 2001 and 2005 (per 100,000 residents). Guess what....the population of residents is going up, the absolute number of traffic fatalities is going down...and thus the rate of fatalities per 100,000 residents is going down year after year.
Did we suddenly decide to become safer drivers...I doubt it...We Houstonians are not very defensive drivers. Are vehicles safer than they used to be?...Yes. Can this account for the repeated declines in fatalities since 2001? At least some of it...
Something is causing a sustained decrease in annual rate of automotive fatalities...the contrarian in me wonders if it has something to do with the cell-phone buffer zone. Wouldn't that be phenomenal?
Hey man...I need my space...
It then dawned on me that the driver heads were fiddling with their cell phones. There are many applications for cell phones and an increasing number of ways to spend your time with one...in addition to calls....you can email...text message...and cruise the Internet...all while driving. It also seems to me that this head tilting is causing traffic to move more slowly...drivers are distracted by their head tilting and tend to require more time to press on their accelerators when the traffic light changes from red to green. It also seems to me that the tilted head has a tendency while his car is in motion to keep his foot near or on the brake more frequently....providing a physical buffer zone between himself and other traffic.....while his head is tilted down...I am pretty sure this is happening...
So here is the theory....I feel like I am seeing fewer automotive accidents in my home town
(Houston) and that this trend may be connected to everyone driving around with a little buffer zone around them. The graphic below reflects the incidence of fatalities in Harris County between the period 2001 and 2005 (per 100,000 residents). Guess what....the population of residents is going up, the absolute number of traffic fatalities is going down...and thus the rate of fatalities per 100,000 residents is going down year after year.Did we suddenly decide to become safer drivers...I doubt it...We Houstonians are not very defensive drivers. Are vehicles safer than they used to be?...Yes. Can this account for the repeated declines in fatalities since 2001? At least some of it...
Something is causing a sustained decrease in annual rate of automotive fatalities...the contrarian in me wonders if it has something to do with the cell-phone buffer zone. Wouldn't that be phenomenal?
Hey man...I need my space...
Wednesday, April 18
How to Figure Out if You Want to Invest
Board Meetings for venture-backed companies are built around powerpoint presentations. In the very early stages of any investment cycle these presentations are filled with a lot of information about product development, market positioning, new initiatives, etc. It is a very wide range of information and it seems like every Company (no matter which one) likes to prepare a presentation with about forty pages. Creation of these slide decks must be very time consuming on their authors. Investors listen patiently as each page is reviewed.
As time passes, one of two things generally happens: (a) the presentations seem to stay around forty pages or (b) they shrink to around eleven pages. What is going on? What does this represent?
Several yeas ago I was attending graduation ceremonies of a prominent Virginia University. We were outdoors at a post-ceremony picnic and I was standing among several academics. A young girl with a bread basket offered bread sticks to attendees and each of us declined. She took on a very sad facial expression. In reaction, I had a puzzled look on my face which prompted one of the academics to comment (he was an economics professor)…”In a capitalist society we pride ourselves on our ability to sell…she is sad because she had no takers…” This young lady was about 8 years old and had already been infected with the trappings of the US version of the free market system…..yikes. This obviously stayed with me.
Once sales start to take off at an early-stage company…the slide deck starts to shrink…sales is all we (venture investors) want to talk about. If you show me a forty-page Board presentation (and hide the sales figures) I have a pretty good idea of where this company stands. If you tell me how many forty-page presentations in a row the Board has seen…I have a good sense of what my anxiety level should be given the current length of my investment…I start to get queasy when I see too many of these.…...We all want the eleven-page presentation that rarely speaks of anything other than current bookings, pipeline, sales process, territorial expansion, new customers, new markets, etc. This type of Board meeting lasts about forty-five minutes.
So next time you are trying to figure out if you are wanting to invest in a venture fund…ask the general partner what the average number of pages is in Board Presentations across his existing portfolio…this should tell you how he is doing…if the average is “thirty-eight” and the fund is several years old…run away…
As time passes, one of two things generally happens: (a) the presentations seem to stay around forty pages or (b) they shrink to around eleven pages. What is going on? What does this represent?
Several yeas ago I was attending graduation ceremonies of a prominent Virginia University. We were outdoors at a post-ceremony picnic and I was standing among several academics. A young girl with a bread basket offered bread sticks to attendees and each of us declined. She took on a very sad facial expression. In reaction, I had a puzzled look on my face which prompted one of the academics to comment (he was an economics professor)…”In a capitalist society we pride ourselves on our ability to sell…she is sad because she had no takers…” This young lady was about 8 years old and had already been infected with the trappings of the US version of the free market system…..yikes. This obviously stayed with me.
Once sales start to take off at an early-stage company…the slide deck starts to shrink…sales is all we (venture investors) want to talk about. If you show me a forty-page Board presentation (and hide the sales figures) I have a pretty good idea of where this company stands. If you tell me how many forty-page presentations in a row the Board has seen…I have a good sense of what my anxiety level should be given the current length of my investment…I start to get queasy when I see too many of these.…...We all want the eleven-page presentation that rarely speaks of anything other than current bookings, pipeline, sales process, territorial expansion, new customers, new markets, etc. This type of Board meeting lasts about forty-five minutes.
So next time you are trying to figure out if you are wanting to invest in a venture fund…ask the general partner what the average number of pages is in Board Presentations across his existing portfolio…this should tell you how he is doing…if the average is “thirty-eight” and the fund is several years old…run away…
Thursday, March 29
A Surprisingly Effective Analogy
Back in my early days at this firm (I started in 1991) I went to my employers and suggested that we should install this thing called a Novell Network. It was not an inexpensive proposition and the powers that be made me perform a cost/benefit analysis before they would write a check. The benefits I contemplated were (i) eliminating redundancy in printers, (ii) a solution for file back-up., (iii) buying less expensive desktops by perhaps pushing vast storage requirements etc to a central/shared location, etc., etc.
I am not sure I could perform an adequate cost/benefit analysis of a telephone but if I told you that you had to run your business without one...you would say I was nuts. About the same standard now applies to office networks...I am not sure what my office would do without one....we would not be geared to do business with the rest of the world.
The first application we put on top of our own network was email. We have evolved to use it as an access device to the Internet, to share files, to co-manage projects together, to control distribution of software including upgrades. The Internet connectivity allows us to access new types of software applications that operate somewhere out in cyberspace...those applications out in cyberspace are constructed to help us work together inside the company as well as with any trading partners outside the company. It is fairly amazing how connectivity has caused us to change the way we do things in terms of speed, clarity, and accuracy.
When looking at the prospects of any new form of data network...whether it is field automation, power grid control, or for drilling project management I go back to our own experience with our own network and contemplate our own evolution. Those engaging in new forms network connectivity will develop complex uses of them (if you don't believe me...go stare at the user interface of your cell phone). But for now...they are, as the analogy goes, just getting started with email. As investors...one doesn't have to be brilliant to understand this...just somewhat knowledgeable of history and human behavior.
I am not sure I could perform an adequate cost/benefit analysis of a telephone but if I told you that you had to run your business without one...you would say I was nuts. About the same standard now applies to office networks...I am not sure what my office would do without one....we would not be geared to do business with the rest of the world.
The first application we put on top of our own network was email. We have evolved to use it as an access device to the Internet, to share files, to co-manage projects together, to control distribution of software including upgrades. The Internet connectivity allows us to access new types of software applications that operate somewhere out in cyberspace...those applications out in cyberspace are constructed to help us work together inside the company as well as with any trading partners outside the company. It is fairly amazing how connectivity has caused us to change the way we do things in terms of speed, clarity, and accuracy.
When looking at the prospects of any new form of data network...whether it is field automation, power grid control, or for drilling project management I go back to our own experience with our own network and contemplate our own evolution. Those engaging in new forms network connectivity will develop complex uses of them (if you don't believe me...go stare at the user interface of your cell phone). But for now...they are, as the analogy goes, just getting started with email. As investors...one doesn't have to be brilliant to understand this...just somewhat knowledgeable of history and human behavior.
Thursday, March 15
Buying software the new way, and what it could mean for software companies
By Tyson Weihs
Before the Internet exploded, software came in shrink-wrapped boxes that our IT staff or consultants would install on shiny new Compaq servers sitting in amidst a rats nest of servers and cables in the office “server closet”. If you’re Blue Cross and Blue Shield, that software probably was installed by vendors, EDS, or Accenture consultants on large IBM servers in a giant basement filled with of every make and model backup system, power supply, switch, router, database server, and operating system on the market.
The first time I walked through a Blue Cross and Blue Shield data center I saw gear that ranged from giant swing-arm tape backup arrays to the latest and greatest IBM mainframes. Hundreds of applications were running on all these servers and they were all supported by millions of dollars of other “life supporting” hardware. Something interesting I noticed was a lot of empty space. What was once filled with large banks of servers was now occupied by air. The increased presence of air, I think, is a function of some important industry and technical developments that are changing the way we consume and use software.
Instead of buying shrink-wrapped boxes of software and installing it on local servers, business users can now fire up their browser, input credit card information, and immediately obtain access to sophisticated, scalable business applications without having to buy anything else. We refer to this as “self-provisioning”. That is, a user can browse the web, find software that meets a need, buy access to it, and not have to talk to IT, buy hardware, or make go through the pain of installing and configuring. Even our operation as self-provisioned its own applications, including online data rooms, business process diagramming tools, email, and collaboration applications - all without having to install anything on our local computer networks.
Software you can buy via the web and begin using immediately through your browser is what the industry has termed “Software as a Service”, or SaaS for short. Salesforce.com, which you may have heard of, makes its sales management software available through a browser that users can pay for by the drink. It simply means you can, using a web browser, buy and use software today and pay for more capacity or users as needed.
Many software companies are making a run at delivering their software as a service. The pace at which they are doing this is increasing because the tools for building applications are improving and technical improvements are driving down the investment required to build a very scalable application. Lower development and production costs means lower barriers to entry and less required investment. Lower barriers to entry means more competitors will make a run at building substitute products that compete with software delivered the old way.
Two innovations that I think will keep driving down the costs of building and deploying software as a service applications are what are called “compute clouds” and “storage clouds”. Amazon has developed a set of each. Their compute cloud is called “Amazon EC2”, and their storage cloud is called “Amazon Simple Storage Service (S3)”. Remember that space in the data center I referred to earlier - these new services mean that software developers don’t need to buy computers to run their applications or store their data. They simply ask the cloud for more compute power or more storage space. Amazon gives you more of both at a very low cost.
With these clouds, a developer simply says “Amazon, I need two more servers”. Amazon responds with two more servers and charges you $0.10 per hour of time the server is online. Instead of needing to figure out where your next 100 gigabytes of storage will come from, the developer simply says “Amazon, I need 100 GB of storage”. Amazon gives you more storage and only charges you $0.15 per GB stored. No more thinking about what processor you need or which storage solution you should purchase.
The point of all this rambling is that the price of developing and deploying applications continues to drop; more business users are comfortable whipping out a credit card, buying access to software, and accessing that software through a web browser; the IT department is becoming less influential in the decision making process; and competitors can launch scalable alternatives to existing software with a smaller capital investment. Therefore, business application software companies need to be mindful of the cost advantages of these emerging technologies, the potential for competitors to launch quickly and efficiently with a product customers can try today, and the acceptance of web-based business software by business users. As investors, we have to be mindful of these developments, because an investment in a company building software the old way may find itself pitching against a company who’s software can be purchased today, online, and without anyone worrying about how many servers they need to buy to get it running.
Before the Internet exploded, software came in shrink-wrapped boxes that our IT staff or consultants would install on shiny new Compaq servers sitting in amidst a rats nest of servers and cables in the office “server closet”. If you’re Blue Cross and Blue Shield, that software probably was installed by vendors, EDS, or Accenture consultants on large IBM servers in a giant basement filled with of every make and model backup system, power supply, switch, router, database server, and operating system on the market.
The first time I walked through a Blue Cross and Blue Shield data center I saw gear that ranged from giant swing-arm tape backup arrays to the latest and greatest IBM mainframes. Hundreds of applications were running on all these servers and they were all supported by millions of dollars of other “life supporting” hardware. Something interesting I noticed was a lot of empty space. What was once filled with large banks of servers was now occupied by air. The increased presence of air, I think, is a function of some important industry and technical developments that are changing the way we consume and use software.
Instead of buying shrink-wrapped boxes of software and installing it on local servers, business users can now fire up their browser, input credit card information, and immediately obtain access to sophisticated, scalable business applications without having to buy anything else. We refer to this as “self-provisioning”. That is, a user can browse the web, find software that meets a need, buy access to it, and not have to talk to IT, buy hardware, or make go through the pain of installing and configuring. Even our operation as self-provisioned its own applications, including online data rooms, business process diagramming tools, email, and collaboration applications - all without having to install anything on our local computer networks.
Software you can buy via the web and begin using immediately through your browser is what the industry has termed “Software as a Service”, or SaaS for short. Salesforce.com, which you may have heard of, makes its sales management software available through a browser that users can pay for by the drink. It simply means you can, using a web browser, buy and use software today and pay for more capacity or users as needed.
Many software companies are making a run at delivering their software as a service. The pace at which they are doing this is increasing because the tools for building applications are improving and technical improvements are driving down the investment required to build a very scalable application. Lower development and production costs means lower barriers to entry and less required investment. Lower barriers to entry means more competitors will make a run at building substitute products that compete with software delivered the old way.
Two innovations that I think will keep driving down the costs of building and deploying software as a service applications are what are called “compute clouds” and “storage clouds”. Amazon has developed a set of each. Their compute cloud is called “Amazon EC2”, and their storage cloud is called “Amazon Simple Storage Service (S3)”. Remember that space in the data center I referred to earlier - these new services mean that software developers don’t need to buy computers to run their applications or store their data. They simply ask the cloud for more compute power or more storage space. Amazon gives you more of both at a very low cost.
With these clouds, a developer simply says “Amazon, I need two more servers”. Amazon responds with two more servers and charges you $0.10 per hour of time the server is online. Instead of needing to figure out where your next 100 gigabytes of storage will come from, the developer simply says “Amazon, I need 100 GB of storage”. Amazon gives you more storage and only charges you $0.15 per GB stored. No more thinking about what processor you need or which storage solution you should purchase.
The point of all this rambling is that the price of developing and deploying applications continues to drop; more business users are comfortable whipping out a credit card, buying access to software, and accessing that software through a web browser; the IT department is becoming less influential in the decision making process; and competitors can launch scalable alternatives to existing software with a smaller capital investment. Therefore, business application software companies need to be mindful of the cost advantages of these emerging technologies, the potential for competitors to launch quickly and efficiently with a product customers can try today, and the acceptance of web-based business software by business users. As investors, we have to be mindful of these developments, because an investment in a company building software the old way may find itself pitching against a company who’s software can be purchased today, online, and without anyone worrying about how many servers they need to buy to get it running.
Friday, February 16
Karl Marx and the Rise of YouTube
Essay One - Celebrity as Capital
We covet only that which we can see. We covet what we see.
In one of his many publications, Karl Marx suggested that industrialization has a tendency to reduce skilled workers to a form of commodity. The more competency built into the industrial machine the less skill is required of the human. The human becomes a form of appendage to the machine. The more productive the machine becomes...the lower the wages of the human appendage.
He continues by saying that those who own these ever evolving machines amass more and more economic capital and the economic gap between them and those who service their machines (i.e. the human appendages) becomes greater and greater. It becomes increasingly difficult for the appendage to amass economic capital of his own. The machine owners then seek to build a political and social system meant to preserve the economic gap.
In the past 150 years...industrialization has resulted in more scientific and technological advancement than the sum of all previous centuries combined. Consequently the gap between the rich and the poor has arguably widened (according to Marxist theory). In addition, Western Civilization has developed a complex system of politics and set of laws meant to preserve the economic gains of those whom have amassed economic capital.
Marx would argue is that it is inevitable that the machine workers would seek to overthrow the machine owners and establish a political system of their own meant to dissolve the wide economic gap. This is theorized to happen because the machine owners require an ever-enlarging workforce that ultimately can't help (due to their conspicuous plight) but react to their collective negative economic inertia. He further suggests that this is most likely after period of overproduction resulting in depression and weakening of the parties who control the current political system.
As stated above, one could argue that currently we are more scientifically and technologically advanced than any point in the history of mankind. Our system of laws and politics are more protective than they have ever been. As a result, the hurdles to be overcome by the ever-enlarging workforce to amass traditional economic capital are higher than they have ever been. I am being repetitive. As a result.....the humans are seeking alternative forms of capital accumulation...
Impact of the Information Age
I would argue that the evolution of the information age into its "always-
on" current state has driven the humans to believe that "visibility or celebrity" in this always-on world is an enviable form of capital. WE COVET WHAT WE SEE. It may be an alternative to economic capital. A way to measure one's value.
I would further argue that a mechanism such as YouTube may be seen by the machine workers as a means to become visible and amass capital in the form of acknowledgment and potentially celebrity. The pre-exisiting economic gap between owners and workers and the attendant system of laws and politics don't stand in the "worker's" way in his attempt to amass this form of alternative capital. He perceives himself as free from the old bonds. He can pursue it with realistic hopes.
This is partly why I believe YouTube is climbed in popularity so vigorously. As a side note, it is ironic that Marx states that true economic wealth is built on the back and dreams of the workers. The investors in YouTube have done just that via the dreams of the workers who provide content for no guaranteed wages.....
*************************************************************************************
Essay Two - Pattern Recognition
Marx was a pattern recognition specialist. He observed that first there was a "feudal system" whereby lords amassed land and title. Commerce and labor was formed around a "guild" system whereby one hoped to be accepted into an apprenticeship through which a craft was developed. Those succeeding in developing their craft usually joined a "guild" - a collective of similarly skilled craftsmen. It was by this pathway that some folks could "rise above" and earn a favorable living.
As industrialization evolved some of the craftsmen came to expand their output through certain types of technology. They automated many things that were previously proprietary skills of their craft and their guild. Their co-craftsmen later became employees of these industrialists. The co-craftsmen became observers of output rather than sources. These "machine owners" then came to amass capital and displace the feudal lords. The lower working class then had a new set of masters.
Marx then goes on to observe that historically the lower working class having been put in the position of being unable to amass any economic capital will strive to overthrow the machine owners to create equity.
An analogy:
Some of the craftsmen who new about content distribution got behind something known as the Internet. It enabled distribution without reliance of the Feudal Lords. The Feudal Lords were weakened. This enabled Serfs to hone their craft without any form of apprenticeship nor participation in any guild system. Interestingly though...the Serfs were not revolting against the Feudal Lords per se as Marx may have expected nor the Machine Owners. They were trying to be discovered by the Feudal Lords thus breaking the Guild System. They want to be taken in by the Feudal Lords. Thus YouTube may be a mechanism by which to circumvent the Guild.
Investment Premise
The evolution of the information age causes us to covet many things. Remember when it seemed like everyone wanted to become a rapper...WE COVET WHAT WE SEE. The advent of social networking (Myspace, YouTube) becomes a looking glass through which to estimate what may be coveted en mass. As of today...it seems the focus of the population is to be the primary subject matter of the information flow...what is the information age going to cause the population to covet next...??
One more thing...as far as YouTube and the like...I don't believe they will provide any meaningful level of capital accumulation for those whom have latched onto them as any means for capital accumulation....as a result...the people's revolution will turn elsewhere....it always keeps running....
We covet only that which we can see. We covet what we see.
In one of his many publications, Karl Marx suggested that industrialization has a tendency to reduce skilled workers to a form of commodity. The more competency built into the industrial machine the less skill is required of the human. The human becomes a form of appendage to the machine. The more productive the machine becomes...the lower the wages of the human appendage.
He continues by saying that those who own these ever evolving machines amass more and more economic capital and the economic gap between them and those who service their machines (i.e. the human appendages) becomes greater and greater. It becomes increasingly difficult for the appendage to amass economic capital of his own. The machine owners then seek to build a political and social system meant to preserve the economic gap.
In the past 150 years...industrialization has resulted in more scientific and technological advancement than the sum of all previous centuries combined. Consequently the gap between the rich and the poor has arguably widened (according to Marxist theory). In addition, Western Civilization has developed a complex system of politics and set of laws meant to preserve the economic gains of those whom have amassed economic capital.
Marx would argue is that it is inevitable that the machine workers would seek to overthrow the machine owners and establish a political system of their own meant to dissolve the wide economic gap. This is theorized to happen because the machine owners require an ever-enlarging workforce that ultimately can't help (due to their conspicuous plight) but react to their collective negative economic inertia. He further suggests that this is most likely after period of overproduction resulting in depression and weakening of the parties who control the current political system.
As stated above, one could argue that currently we are more scientifically and technologically advanced than any point in the history of mankind. Our system of laws and politics are more protective than they have ever been. As a result, the hurdles to be overcome by the ever-enlarging workforce to amass traditional economic capital are higher than they have ever been. I am being repetitive. As a result.....the humans are seeking alternative forms of capital accumulation...
Impact of the Information Age
I would argue that the evolution of the information age into its "always-
on" current state has driven the humans to believe that "visibility or celebrity" in this always-on world is an enviable form of capital. WE COVET WHAT WE SEE. It may be an alternative to economic capital. A way to measure one's value.
I would further argue that a mechanism such as YouTube may be seen by the machine workers as a means to become visible and amass capital in the form of acknowledgment and potentially celebrity. The pre-exisiting economic gap between owners and workers and the attendant system of laws and politics don't stand in the "worker's" way in his attempt to amass this form of alternative capital. He perceives himself as free from the old bonds. He can pursue it with realistic hopes.
This is partly why I believe YouTube is climbed in popularity so vigorously. As a side note, it is ironic that Marx states that true economic wealth is built on the back and dreams of the workers. The investors in YouTube have done just that via the dreams of the workers who provide content for no guaranteed wages.....
*************************************************************************************
Essay Two - Pattern Recognition
Marx was a pattern recognition specialist. He observed that first there was a "feudal system" whereby lords amassed land and title. Commerce and labor was formed around a "guild" system whereby one hoped to be accepted into an apprenticeship through which a craft was developed. Those succeeding in developing their craft usually joined a "guild" - a collective of similarly skilled craftsmen. It was by this pathway that some folks could "rise above" and earn a favorable living.
As industrialization evolved some of the craftsmen came to expand their output through certain types of technology. They automated many things that were previously proprietary skills of their craft and their guild. Their co-craftsmen later became employees of these industrialists. The co-craftsmen became observers of output rather than sources. These "machine owners" then came to amass capital and displace the feudal lords. The lower working class then had a new set of masters.
Marx then goes on to observe that historically the lower working class having been put in the position of being unable to amass any economic capital will strive to overthrow the machine owners to create equity.
An analogy:
- Feudal Lords - TV Networks (FOX, ABC, etc.)
- Guild System - Famous Actors ("Screen Actors Guild")
- Machine Owners - Financial backers of YouTube
- Serfs - You and Me.
Some of the craftsmen who new about content distribution got behind something known as the Internet. It enabled distribution without reliance of the Feudal Lords. The Feudal Lords were weakened. This enabled Serfs to hone their craft without any form of apprenticeship nor participation in any guild system. Interestingly though...the Serfs were not revolting against the Feudal Lords per se as Marx may have expected nor the Machine Owners. They were trying to be discovered by the Feudal Lords thus breaking the Guild System. They want to be taken in by the Feudal Lords. Thus YouTube may be a mechanism by which to circumvent the Guild.
Investment Premise
The evolution of the information age causes us to covet many things. Remember when it seemed like everyone wanted to become a rapper...WE COVET WHAT WE SEE. The advent of social networking (Myspace, YouTube) becomes a looking glass through which to estimate what may be coveted en mass. As of today...it seems the focus of the population is to be the primary subject matter of the information flow...what is the information age going to cause the population to covet next...??
One more thing...as far as YouTube and the like...I don't believe they will provide any meaningful level of capital accumulation for those whom have latched onto them as any means for capital accumulation....as a result...the people's revolution will turn elsewhere....it always keeps running....
Sunday, January 14
Battle of the Buzzwords
With the dot.com craze came a new language for Internet-based selling. The big concepts to watch were "disintermediation" and "transparency." One of my favorites was "eTailing." Suddenly everyone was using these terms and I remember feeling somewhat bothered that these words didn't roll off my toungue with the tenor of confidence projected by others.
We have an investment in an Internet-based retailer. It sells products manufactured and branded by others. Many of these products are available at your local Home Depot. This company has several Internet-based competitors.
I had the opportunity to get a glimpse of a close competitor ("Competitor A") and compare it to our portfolio company. This company is substantially larger (3X in revenues) than "portfolio company" and has been around a lot longer. This company carries very many of the same products from the same manufacturers.
A close comparison of the two companies reveals something pretty interesting. Our portfolio company realizes gross margins in the 33% range (plus) while those of Competitor A are right at 20%.....This is an exceptionally large difference in gross margin between two competitors selling nearly identical products provided by the same manufacturers.... This would suggest that portfolio company is selling its products at prices substantially higher than those of Competitor A. The premise of "Transparency" would suggest that the Competitor A would run us out of business...BUT just the opposite is happening............ HOW CAN THIS BE?
A review of the posted selling prices of Competitor A suggests that customers can buy from them at prices approximately 10% lower than from our portfolio company. At our average product selling price of $150, the 10% price differential accounts for 8 points of the 13 point margin differential (33% - 20%). So if price were otherwise held equal, portfolio company would still have a 5 point gross margin advantage over Competitor A . Why?
We have spun thus around many different ways and there is only one conclusion we were able to draw. Portfolio Company's gross margins are significantly better because it is buying product at a cheaper price..How does it do this if it is so much smaller than Competitor A?
Secret Sauce
Portfolio company's investment thesis is that it helps manufacturers solve specific types of problems (can't reveal these problems and solutions exactly but they deal channel issues and other sellers of the products - perhaps like Home Depot or Competitor A) In a way Portfolio Company is "disintermediating" these other sellers with purposeful benefit to the manufacturer). I believe that Competitor A's investment thesis is that it provides products to customers at low prices with wide selection. This is sort of like Amazon's focus. Competitor A is sort of a customer to the manufacturer more than a problem solver for the manufacturer and its principal aim is those who buy its products. Competitor A thus has a model built around "transparency."
So...it may not be a perfect conclusion but a plausible one that disintermediation plays result in more profitable companies than transparency plays. In other words...helping the supply side -manufacturers appears to result in higher profitability than helping the demand side-customers (which may result in more volume as thus more profits but at lower margin levels). This may be countered by the notion that suppliers may be more anxious to help problems solvers and thus provide more supply to them. Thus would result in lower volumes to Competitor A. Ironic...that the high volume strategy could result in lower volume...
I suspect my conclusions here are lightyears behind...but at least they provide some empirical context for issues thrown out there years ago...
- Disintermediation refers to the notion that Internet-based selling was going to displace pre-existing distributors or conventional retailers (where applicable) due to certain operating attributes innate to the Internet world rendering intermediaries less than necessary. Some manufacturers would go direct to end-users of products. Disintermediation was supposed to help manufacturers.
- Transparency referred to the notion that the Internet would empower consumers to easily compare prices of sellers for like items. Transparency would make price the focus of consumers for many types of products they wished to purchase at the best possible prices. Transparency was supposed to help customers.
We have an investment in an Internet-based retailer. It sells products manufactured and branded by others. Many of these products are available at your local Home Depot. This company has several Internet-based competitors.
I had the opportunity to get a glimpse of a close competitor ("Competitor A") and compare it to our portfolio company. This company is substantially larger (3X in revenues) than "portfolio company" and has been around a lot longer. This company carries very many of the same products from the same manufacturers.
A close comparison of the two companies reveals something pretty interesting. Our portfolio company realizes gross margins in the 33% range (plus) while those of Competitor A are right at 20%.....This is an exceptionally large difference in gross margin between two competitors selling nearly identical products provided by the same manufacturers.... This would suggest that portfolio company is selling its products at prices substantially higher than those of Competitor A. The premise of "Transparency" would suggest that the Competitor A would run us out of business...BUT just the opposite is happening............ HOW CAN THIS BE?
A review of the posted selling prices of Competitor A suggests that customers can buy from them at prices approximately 10% lower than from our portfolio company. At our average product selling price of $150, the 10% price differential accounts for 8 points of the 13 point margin differential (33% - 20%). So if price were otherwise held equal, portfolio company would still have a 5 point gross margin advantage over Competitor A . Why?
We have spun thus around many different ways and there is only one conclusion we were able to draw. Portfolio Company's gross margins are significantly better because it is buying product at a cheaper price..How does it do this if it is so much smaller than Competitor A?
Secret Sauce
Portfolio company's investment thesis is that it helps manufacturers solve specific types of problems (can't reveal these problems and solutions exactly but they deal channel issues and other sellers of the products - perhaps like Home Depot or Competitor A) In a way Portfolio Company is "disintermediating" these other sellers with purposeful benefit to the manufacturer). I believe that Competitor A's investment thesis is that it provides products to customers at low prices with wide selection. This is sort of like Amazon's focus. Competitor A is sort of a customer to the manufacturer more than a problem solver for the manufacturer and its principal aim is those who buy its products. Competitor A thus has a model built around "transparency."
So...it may not be a perfect conclusion but a plausible one that disintermediation plays result in more profitable companies than transparency plays. In other words...helping the supply side -manufacturers appears to result in higher profitability than helping the demand side-customers (which may result in more volume as thus more profits but at lower margin levels). This may be countered by the notion that suppliers may be more anxious to help problems solvers and thus provide more supply to them. Thus would result in lower volumes to Competitor A. Ironic...that the high volume strategy could result in lower volume...
I suspect my conclusions here are lightyears behind...but at least they provide some empirical context for issues thrown out there years ago...
Subscribe to:
Posts (Atom)
