It's the Content Dummy

I remember in the late 90's the recurring theme among many "Internet-oriented" companies - the stated strategic ambition of "creating content". Many fledgling companies that came to us for funding insisted on the "content focus" but something regularly did not seem quite right: it was that much of the content that they proposed to produce for their target market was hurried and forced. Many times they published something that might seem to be appealing but was instinctively not quite on target. Popularity of content was measured in "hits" and "click-through". The frequency and momentum of this data activity was the basis of "getting funded" and "potential economic value". Many of these funding candidates were funded but with capital from others.

We kept an eye on these "content companies". We noted that while some flourished most died. This death was measured in the "peaking" of their hits and click-through followed by a slow decline thereof. What happened? Was the content losing its relevance? Why did so many die?

Part of the answer lies in choices. As the Internet grew in popularity the amount of content available exploded. The available supply of content outpaced incremental growth in Internet users wanting content and the time available users had available to sift through the increasing mounds of content. This meant fewer clicks available per capita for the mass of Internet content as a whole.

As a further result, content was required to become more specialized to be appealing. This meant that these content companies had to develop a deeper relationship with a smaller number of users. Obviously this is why search engines became so popular. They could point to that content that pertained to a particular subject matter. Content companies became beholden to the technologies that searchers used to get to what was relevant.

Users then decided that they wanted ways to organize subject matters in which they had a persistent interest. Bookmarks helped but content aggregation took the lead. These were in essence search engines that compiled data on particular subject matters or areas of interest and presented it in a way appealing to interested parties. These aggregation sites in part decreased the import of generic search engines.

So yes....we all have either consciously or unconsciously witnessed the evolution and importance of content specialization with regard to survival and prosperity of many "Internet companies." So what is this saying? What did this mean? How can we look at this?

What is interesting is what was going on in the background and it is this: one part of the Internet was increasing in value and another part was decreasing in value. Remember the great fortunes that were developed in Internet Access as the nascent Internet was evolving. These were the foundation companies that were hooking users up to this new information resource (Earthlink, Covad, AOL, PSInet, etc. etc. etc.). Where did they go?

Well they still exist but for the most part they lost their distinguishable import in the "information supply chain". In other words..."what good is electricity if you don't have any light bulbs?" They didn't provide light...only the means to make light possible and many others strted developing the commercial means to make light possible. AT&T, Time-Warner, Hughes, Sprint, Verizon...and the list goes on.

These companies managed to take market share from the pioneers of Internet access. At first is was primarily because they could bundle Internet access with other services they provided and lower overall cost to the customer and increase convenience by presenting a single bill for this bundle of services. But as these companies started to compete with each other with bundled offerings they needed to compete on something other than price. And what they had in mind was..."you guessed it....content." AT&T hooked up with Apple computer and developed an exclusive relationship for the iPhone. While one may look at this as a physical device it is actually content - it is a desired form of relationship with the Internet. They also developed a relationship with Yahoo. Through this they offered services that enabled users to organize content (i.e. content aggregation) d/b/a My Yahoo - AT&T Uverse. As a result, they are taking market share at a very fast clip from those with lower value content offerings.

So what is the history lesson here? It is this: If you are a network services provider.....you had better get on your horse and develop a strategy for layering content on top of your basic network service or else you will find yourself a distant memory in the supply chain of the Internet. This natural law applies to networks of all sorts now matter what their initial market focus. To do this...they must understand what the common ground among their users may be...why are they on this particular network access system? Is it a common industry focus? Is it a common service these users may in turn provide to their own customers? Is is a common set of problems they might share? Answer these questions carefully and you will find your network content strategy. Ignore these questions at your own peril.

And Now for Something Totally Different

I was doing some calculating. The math exercise in which I was engaged contemplated the intersection of gasoline consumption, people, and the "green" movement.

When I think of a "green planet", my mind's eye sees a pasture, farmland, trees, etc. It does not see New York City. It does not see Houston, Texas. I think most people share an imagery consistent with mine when contemplating "green." I also think that when most people think of "un-green" they think of hydrocarbons. Using something other than oil as an energy source is generally referred to as "green."

Ok...so what we have established here is that cities are not the image of "green" relatively speaking and hydrocarbon burning is a root cause of "un-green". If you want to be green and more a part of the green movement like our farmland dwelling cousins, then burn fewer hydrocarbons. It is pretty simple.

So here is the math exercise. I mapped out the population density of each state in the union based on inhabitants per square mile. I then obtained the per capita gasoline consumption for each of those states and here is what it showed:

• The per capita gasoline consumption of Alaska dwarfs that of New York. It's not even close by a factor of something like 2x. In other words, the data very very clearly showed that the higher the population density..the less the per capita consumption of gasoline.
  

So...it might be said that...if we define "green" geographies on the notion of per capita hydrocarbon avoidance, then the "greenest" place in the United States is New York City. Said another way, if we want to reduced hydrocarbon emissions around the globe, one method could be for all of us earthlings to move to what may otherwise be perceived as the least green place on the planet....the "concrete jungle."

An Observation About Service Companies

I have heard many times in my investing career the expression.."Sounds like a service company." The comment is meant to be somewhat derogatory reflecting an investor's preference to invest in "technology development" rather than service companies built on technology developed by others. I am thinking about this in the context of data network mngt. These companies typically manage a system made from components created by others. The person making the comment "sounds like a service company" would rather invest in the company that creates the components. There is a lot of merit to this view.

Here is another view. Service companies reflect not only a form of competency but also a culture that may be more conspicuous to the customer than that of the component manufacturer. The word "service" implies a human interaction in some sense. The persistence of the service interaction only further calls out the visibility of the corporate culture behind the service provider.

So let's say for a second that each human is different than the next and excellence among humans is less common than it is more common. It is possible then to conclude that one leader's culture machine will be different than another's and it is less common rather than more common to create one that is excellent. In fact...in a way it may be much more complicated to create excellence in the service company world than it is the product product company world.

The reason I ponder this point is that we have invested in just such a company which I believe is "winning" partly because of its positive culture which is observed by the customers and partly because of the ngeative culture of a primary competitor which the customers also observe. The service offering is not that different. BUT the attitude is different. And I think as a result of this attitude...huge financial gains are being made by this portfolio company.

Now I can't really develop and rely upon an investment thesis centered purely on culture...I can only observe (and to a degree speculate)...that one can create huge competitive advance in this area for a company that is selling something not far from "plain vanilla."

Where is the Money Coming From?

Early-stage software company investors are regularly trying to calculate velocity and change in velocity of their portfolio company investments. Is this getting harder? Is this getting easier? Is the market opening up? Is it flat-lining? What? What? What?

In Geoffrey Moore's "Crossing the Chasm"...the author identifies the period in time during which companies and markets expand into what he calls "Majority Markets" The period of transition into the Majority Market is where investors learn that they are (a) going to do well, (b) going to go broke, or (c) somewhere between (a) and (c). This period of time can be excruciating. A pretty good clue one may use in answering these questions is derived by asking another question: "Where is the money coming from?"

Lets say for example your company makes virtual sponge-covered chocolates ("VSCC's"):

• Later Stage - If your portfolio company is approached by a prospect that has a line-item budgeted amount for VSCC's and you see this with some frequency then you may be on the road to investment glory. The reason is that the prospect is educated enough in the market to have internally thought about and lobby for a budgeted amount for your item - he knows he needs it. Many many times the budgeted dollars are from within the IT department.

• Middle Stage - If your portfolio company is getting money from a combination of operations and IT budgets - this is a little earlier stage endeavor but you are on the right path. In this context..operations has recognized that it needs to do something better and has been allocated a "do something better" budget. Some of this is then pushed over to IT if it is deemed that a software solution can help the "do something better" project.

• Earlier Stage - If your portfolio company is, on average, getting money from operations only and IT is not really allocated money and thus responsibility, it generally means that operations is test driving the "do something better" software solution and hasn't started pounding the table for IT to get involved - maybe. This is a tougher spot to be in because your portfolio company is trying to sell something that operations is not yet sure it needs. Operations is speculating and allocating money to support speculation is hard to do and generally comes in fairly small buckets.

The net of the migration from the earlier-stage scenario to the later-stage scenario is that sales and marketing costs as a percent of software license revenue should begin to decline materially. If you are in the stage where money is coming from a line-item budget and sales and marketing spend is one dollar (+) for every one dollar of license revenue (bookings not GAAP)- you may be in the middle of an investment nightmare. Otherwise you've got something that may be economically scalable and an investment money maker.

Thank God We Just Missed Our Revenue Projection

"If you are lucky your high-growth software company will one day miss its revenue projections by a long shot." After you have read this statement.......you will likely conclude that the author is crazy...and you might be right...BUT...I have seen supporting evidence for this sentiment many times over....let me explain.


After a period of sustained revenue growth...all the investors are smiling..." we are going to be rich again" they say. Near the end of the fiscal year...we clamour for next year's financial forecast....how much bigger is this thing going to be and how much richer might I become? The forecast is then produced...it is presented to the board and is spectacular...it makes perfect sense...in fact it even looks conservative. At this point, we are very smart.



The something unexpected happens. The first quarter comes in a little under budget and the second quarter comes in way under budget. Deals seems to get delayed and smaller...prospects are asking a lot more questions...and getting calls returned by them seems to take forever. The prospects then let you know that they are looking at several alternatives and are trying to figure out if yours is right for them. This all sounds so new for a company that seemed to have such clear sailing for the past two years.

Investors become concerned. A mild panic surfaces in the Board meetings..."What is going on here?" However...what looks like trouble is really a clue that investors are entering the playing field they dream of.

What has happened is, in a word, "competition.." Once the market becomes confused it is generally a sign that competition is increasing and thus that others see market potential for a technical solution. It means that this subject is becoming important to a large number of people. The good news is that if you have been in the market for a couple of years before this heating process occurs...then you likely have a great leg up on this competition from a competency perspective and your job then is to show the customer why his needs will eventually require the maturity of your solution. You just have to have enough antacid medication to endure the revenue speed bump for which you didn't predict the timing.

If the revenue speed bump doesn't happen...it is likely, in my experience, that your company will not become a big thing...so....bless the speed bump and don't curse it...