I have had this continuing concern for human isolationism. I observe with so much frequency the noses of us all buried in our iPhones sending and receiving messages to and from anyplace but here. We are physically in the same room but our minds and souls are elsewhere.
I have so many times adjudged our iPhones to be the tipping device that has sent us to a place far away from the way we should be-connected in the flesh. I have wondered why we have suddenly embarked into adjacency and what the magic of the iPhone device may have been.
And then it dawned on me: this device did not cause any sudden metamorphis - we were aleady trying to achieve escape velocity. It is very difficult to change human behavior much less do it en masse. The great popularity of iPhone isolationism can thus only suggest to me that the device did not change human character but rather revealed it. Behavior and the human tendency is magnified. It was something people were already doing but wanted to do better, to do more deeply.
This raises an interesting frame for investment thesis-find things that tap into deep social trends and unleash them. So in a way we [venture investors] would not be technology investors but rather social psychologists that tempt our vices. This actually sounds like it could be a good business.
Sunday, May 9
Thursday, April 22
iPad in Between
I have been fiddling with an iPad for about two weeks now and my initial judgment is that it lies someone between an iPhone and a notebook computer and it replaces neither. It overcomes some of my "wouldn't it be great" wish list for my iPhone such as screen and keyboard size (are too small) and does the same for my notebook such as (I wish it were smaller and I don't want to lug around a mouse).
The interesting thing to me about the iPad is not so much the device itself but the strategic aspects of the device in the context of overall positioning of Apple in the market. When I heard the early rumors of the coming iPad I sort of supposed that it would diminish the role of the iPhone. I have also wondered about the likely impact of Google's cell-phone-based operating systems (android) and the pressure it would apply to the iPhone market stature. Then came the iPad.
I think that Apple employees would not be offended by my initial judgment of the iPad (between iPhone and Notebook). I think that Apple purposefully left applicability of the device to the eye of the beholder rather than saying it is a this or it is a that and thus, would not be uncomfortable with my descriptive latitude. The reason Apple can avoid defining the Product (without confusing the customer) is that the device already has a large developer community behind it via the iPhone. The applications produced by the developer community makes the device serve many different roles.
So here is where we get to the strategic implications of the iPad (work with me here): The iPad has range because it has a large embedded developer community which stems from the iPhone. Applications enable the device to do many different things. If I am a developer, the more markets I have for my products the happier I am. Since the iPad and iPhone application development frameworks are close I can basically take the same application into both markets. The result of the iPad is that the developer community sees more life than before (the iPad) in a relationship with Apple products. He thinks to himself, "Hey...I can keep selling my products for years to come!". This in turn is good for the iPhone because (a) the developer community doesn't abandon the iPhone and, (b) the community will actually grow as more persons are willing to dedicate themselves to developing on apple products. And the final result is this: the iPhone's position is strengthened relative to anything powered by Google. So I am making the argument here that the iPad may have negatively impacted Google's cell-phone ambitions.
Here is the other thing: I think touch computing now actually has a chance. With the iPad, I can actually touch the screen and compute. This is going to require that application development think differently. That application development submits to the notion that meaningful things can be done at the press or touch of a "button". How many times before over the past ten years have we tried something other than a mouse and a keyboard and found these "alternatives" falling short of the star trek version of computing? Big ignition, no rocket lift off.
I really think we are seeing the dawn of something new. Something that will, in fact, stay with us. I have never observed so much hope in a single device during my investment career. Folks seeing me with this device asking me what the experience is like. Everyone wants to know and their instants are right. This may be it.
The interesting thing to me about the iPad is not so much the device itself but the strategic aspects of the device in the context of overall positioning of Apple in the market. When I heard the early rumors of the coming iPad I sort of supposed that it would diminish the role of the iPhone. I have also wondered about the likely impact of Google's cell-phone-based operating systems (android) and the pressure it would apply to the iPhone market stature. Then came the iPad.
I think that Apple employees would not be offended by my initial judgment of the iPad (between iPhone and Notebook). I think that Apple purposefully left applicability of the device to the eye of the beholder rather than saying it is a this or it is a that and thus, would not be uncomfortable with my descriptive latitude. The reason Apple can avoid defining the Product (without confusing the customer) is that the device already has a large developer community behind it via the iPhone. The applications produced by the developer community makes the device serve many different roles.
So here is where we get to the strategic implications of the iPad (work with me here): The iPad has range because it has a large embedded developer community which stems from the iPhone. Applications enable the device to do many different things. If I am a developer, the more markets I have for my products the happier I am. Since the iPad and iPhone application development frameworks are close I can basically take the same application into both markets. The result of the iPad is that the developer community sees more life than before (the iPad) in a relationship with Apple products. He thinks to himself, "Hey...I can keep selling my products for years to come!". This in turn is good for the iPhone because (a) the developer community doesn't abandon the iPhone and, (b) the community will actually grow as more persons are willing to dedicate themselves to developing on apple products. And the final result is this: the iPhone's position is strengthened relative to anything powered by Google. So I am making the argument here that the iPad may have negatively impacted Google's cell-phone ambitions.
Here is the other thing: I think touch computing now actually has a chance. With the iPad, I can actually touch the screen and compute. This is going to require that application development think differently. That application development submits to the notion that meaningful things can be done at the press or touch of a "button". How many times before over the past ten years have we tried something other than a mouse and a keyboard and found these "alternatives" falling short of the star trek version of computing? Big ignition, no rocket lift off.
I really think we are seeing the dawn of something new. Something that will, in fact, stay with us. I have never observed so much hope in a single device during my investment career. Folks seeing me with this device asking me what the experience is like. Everyone wants to know and their instants are right. This may be it.
Friday, March 26
Energy Supply Chain
The energy supply chain is unique. It is unique in that it can not be well timed, it can not be automated, and it is comprised mainly of people who do things rather than parts.
Because it involves mainly people who do things it is difficult to mathematically identify elements of the chain that can be reengineered to improve the process. The human process is so variable that process improvement opportunities do not reveal themselves to the casual eye.
It is difficult enough to get employees of the same company to reorganIze in such a way as to improve what they are doing much less get employees of multiple companies working in such a way as to improve. Where is the incentive to improve the whole? It is not there. Who gets paid if they work together better? No one. Each party is trying to grab their piece of the pie. The cyclicality of the industry is too great to fuel focus on collaboration improvement. This is the history of the industry. So what are we to do? Where one man sees problems another sees opportunity.
Because it involves mainly people who do things it is difficult to mathematically identify elements of the chain that can be reengineered to improve the process. The human process is so variable that process improvement opportunities do not reveal themselves to the casual eye.
It is difficult enough to get employees of the same company to reorganIze in such a way as to improve what they are doing much less get employees of multiple companies working in such a way as to improve. Where is the incentive to improve the whole? It is not there. Who gets paid if they work together better? No one. Each party is trying to grab their piece of the pie. The cyclicality of the industry is too great to fuel focus on collaboration improvement. This is the history of the industry. So what are we to do? Where one man sees problems another sees opportunity.
Sunday, March 21
Healthcare Reform
This morning I am watching Face The Nation and the topic is healthcare reform. When I think of healthcare reform I think of three primary points of focus: access, quality, and price. This posting is regarding the issue of price.
We have an investment in a telemedicine company. The company provides primary and specialty care medical services. It contracts directly with corporations and uses the telemedicine model so that its doctors can be in several places at once. The standard of care is high, the patients are happy, and the price is right.
In this model, the patients get all the doctor attention they need for a fixed price (paid by their employer) and the doctors are not limited to what tests they can run or plans they can implement. The billing process is extremely simple: one employer, one bill with one line item, no insurance company.
In this model employers are buying healthcare directly. The employers are paying the doctors. Now the employees don't have the freedom of choice they do under conventional plans but for no cost to them (paid by employer 100%) they are not arguing. And by the way, this cost the employers about half what they would otherwise pay via the insurance model.
Here is the other part: in this new model, the doctors make money, the employers make money (via huge savings), and investors make money. The only party not making money is the insurance company. Now certainly insurance companies prevent abuse in billing but it seems to me the complexities created by the insurance companies have run past the benefits of their original charter. So maybe what we are really talking about is "Billing Reform". This would suggest that the problem is not in healthcare practice but rather how the money moves around.
I am certain an insurance executive would have a myriad of counter arguments but it is difficult to argue with the actual results in the field of our own services provider.
Before we involved ourselves in this investment, we spent two years studying a larger version of the company which had been operating for more than ten years. The larger version was the University of Texas' Correctional Managed Care operation which provided all-inclusive health services to the State of Texas prison inmate population. This population was 119,000 patient lives and the daily fee of $8 per inmate per day covered everything. By everything I mean doctors, surgeries, pharmaceuticals, dental, vision, disease management (HIV, diabetes, etc), psychiatric, autopsy, burial....everything. The quality of care exceeded what most insured Americans receive and the operation made money. All on $8 per day and costs have not risen in seven years. The difference here as compared to the conventional model is that the provider is trying to save money and the person trying to save money is trying to provide the best care. This leads me back to the same conclusion because only thing missing was an insurance company.
We have an investment in a telemedicine company. The company provides primary and specialty care medical services. It contracts directly with corporations and uses the telemedicine model so that its doctors can be in several places at once. The standard of care is high, the patients are happy, and the price is right.
In this model, the patients get all the doctor attention they need for a fixed price (paid by their employer) and the doctors are not limited to what tests they can run or plans they can implement. The billing process is extremely simple: one employer, one bill with one line item, no insurance company.
In this model employers are buying healthcare directly. The employers are paying the doctors. Now the employees don't have the freedom of choice they do under conventional plans but for no cost to them (paid by employer 100%) they are not arguing. And by the way, this cost the employers about half what they would otherwise pay via the insurance model.
Here is the other part: in this new model, the doctors make money, the employers make money (via huge savings), and investors make money. The only party not making money is the insurance company. Now certainly insurance companies prevent abuse in billing but it seems to me the complexities created by the insurance companies have run past the benefits of their original charter. So maybe what we are really talking about is "Billing Reform". This would suggest that the problem is not in healthcare practice but rather how the money moves around.
I am certain an insurance executive would have a myriad of counter arguments but it is difficult to argue with the actual results in the field of our own services provider.
Before we involved ourselves in this investment, we spent two years studying a larger version of the company which had been operating for more than ten years. The larger version was the University of Texas' Correctional Managed Care operation which provided all-inclusive health services to the State of Texas prison inmate population. This population was 119,000 patient lives and the daily fee of $8 per inmate per day covered everything. By everything I mean doctors, surgeries, pharmaceuticals, dental, vision, disease management (HIV, diabetes, etc), psychiatric, autopsy, burial....everything. The quality of care exceeded what most insured Americans receive and the operation made money. All on $8 per day and costs have not risen in seven years. The difference here as compared to the conventional model is that the provider is trying to save money and the person trying to save money is trying to provide the best care. This leads me back to the same conclusion because only thing missing was an insurance company.
Saturday, March 13
V.I Lenin Slept Here
Many technology vendors regularly laud the solution they propose to bring to the market: "We have this solution and that solution and you should see our solution that solves stuff using our solutions approach".
In early stage investing I think it is in error to believe that technology vendors are selling solutions. For there to be a solution, there must first be a problem. Many times a prospective customer does not even know he has a problem (and many times he actually doesn't). The point I am making here is that early stage companies generally must convince the market that there is, in fact, a problem. The attributes of the problem must include that its resolution is meaningfully beneficial and that resolution is possible. This process of "selling the problem" to the prospect is fraught with many points of potential failure. Let me explain.
As humans, we long for personal security. The process of automation generally depreciates human relevance and value around the process automated. The human is increasingly commoditized by automation and, as a result, and his wage rate is made to decrease. He becomes a form of appendage to the revised, automated process. Thusly his, "I feel secure barometer" reveals lower-than-normal pressure.
When the eager "solutions" vendor appears at the doorstep of the would-be affected labor pool, this labor pool perceives that something perilous is afoot. "We are about to be commoditized by the machines", they chant and they withdraw inward into problem avoidance. The labor pool is knowledgeable in this regard because it has its own history of dislocating some predecessor process and labor pool in some prior revolution where a now deceased labor pool put up its own fight.
Extrapolated to a larger scale this is the same type of "revolutionary" dynamic that has permeated history disguised as political change - the war between the old ways of making money vs. the new ways. Lenin knew all about this and would have likely been the all-time master of software sales.
As humans, we long for personal security. The process of automation generally depreciates human relevance and value around the process automated. The human is increasingly commoditized by automation and, as a result, and his wage rate is made to decrease. He becomes a form of appendage to the revised, automated process. Thusly his, "I feel secure barometer" reveals lower-than-normal pressure.
When the eager "solutions" vendor appears at the doorstep of the would-be affected labor pool, this labor pool perceives that something perilous is afoot. "We are about to be commoditized by the machines", they chant and they withdraw inward into problem avoidance. The labor pool is knowledgeable in this regard because it has its own history of dislocating some predecessor process and labor pool in some prior revolution where a now deceased labor pool put up its own fight.
Extrapolated to a larger scale this is the same type of "revolutionary" dynamic that has permeated history disguised as political change - the war between the old ways of making money vs. the new ways. Lenin knew all about this and would have likely been the all-time master of software sales.
Successful early-stage technology companies should many times be viewed NOT as technology companies per se but rather highly competent group psychologists. They are psychologists who can untangle problem avoidance and convert it into a purchase order. They can manage around the labor forces that might fearfully resist change. "Fire good, Trog like fire!" Once groups of people believe they have a problem and it is sucking income out of their wallets they generally will stampede to find a solution (sometimes they try and kill the solution and anything that may be a threat). The stampede runs fast and buying the solution happens in a hurry. On the other hand, selling the problem takes time. Studied through this lens my perception of what is in play at an early stage technology company is definitely altered.
Friday, February 12
I said "No Tomatoes Please"
It is very easy to get lost in the language of technology. It is easy to falsely believe that you understand the language of technology and its underlying subjects.
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Act II: Applying the Metaphor
It is easy for one to look at SMH Private Equity Group as a vehicle for "technology investing." It is not. It is actually a vehicle for investing in process improvement. We invest in things that modify conventional business practices making them less complicated and easier to understand. I used to think that the Energy Industry was this small thing. The amount of money it spends each year to keep the lights on is staggering. The amount of avoidable waste incurred in doing so is equally staggering.
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Act I: Supply Chain for Dummies
Yesterday I was standing in line at one of my favorite sandwich shops - Subway. Subway runs an assembly line form of sandwich making using three individuals to produce and one more to manage financial settlement.
My custom sandwich order required ten different components to be assembled over a stretch of approximately six feet of assembly line. I was asked many different questions during the process such as what bread I want, toasted or not, do I want pickles, do I want mayonnaise, is it to-go? I noticed that during assembly of my custom order, there was one manufacturing error and twice I was required to repeat the names of different desired components (so as to avoid more errors).
This process of component requisition and assembly can fairly be described as "supply chain." It is my sandwich supply chain where I am interacting to obtain different components in a particular order to a desired construct at an agreed-upon price. This is easy...I understand it...I think most people can derive from this a working concept of supply chain. There are a lot of moving pieces here and any of us who have walked the Subway assembly line have endured mistakes: one sandwich, six-feet of travel, four persons involved - regular mistakes.
This process of component requisition and assembly can fairly be described as "supply chain." It is my sandwich supply chain where I am interacting to obtain different components in a particular order to a desired construct at an agreed-upon price. This is easy...I understand it...I think most people can derive from this a working concept of supply chain. There are a lot of moving pieces here and any of us who have walked the Subway assembly line have endured mistakes: one sandwich, six-feet of travel, four persons involved - regular mistakes.
Act II: Applying the Metaphor
Now listen to a broad description of producing oil spoken in "sandwich metaphor". Sandwich design requires various scientists to agree on where and how to build a sandwich, the process of building a sandwich requires that all the ingredients be shipped to a place nobody has been to before, building a sandwich takes several months to years and requires hundreds of workers and tasks. Many times the workers have never worked together before. The chances of making a mistake here are very significant as are the costs.
What I am trying to do here is help the reader make the jump from an every-day supply chain encounter (Subway) to the complexities faced by those involved in the supply chain of the Energy Industry.
Act III (Dramatic Finish): "Big Deal...and So What?"
The big deal and so what is this....there are many ways to lower the cost of energy...(a) bring on more alternatives to fossil fuels., (b) improve the methods of locating and extracting fossil fuels lowering the overall cost to manufacture a unit of energy, (c) quit using error prone and inefficient methods for business and support processes around manufacturing a unit of energy.
The largest industry in the world still relies primarily on clipboards and isolated spreadsheets to complete one of the most complicated manufacturing processes in the world. This fascinates me. What we see is that the industry unnecessarily does things in ways that other industries ceased years ago. As a result, we see a lot of opportunity for process improvement (i.e. lowering costs). Simple things that the rest of the world did years ago - e.g. using telemedicine to take healthcare to the rigs instead of taking workers off the rig (pretty basic).
Fortunately for me (as a fund manager)...most people in the technology investing world believe the Energy Industry is a niche industry that happens somewhere in the Southwest United States to the east of El Paso, Texas. There are so many problems present in the Energy Industry's methods of getting work done that most experienced investors would view it as Sutter's Mill for investing in things that counter those problems.
What I am trying to do here is help the reader make the jump from an every-day supply chain encounter (Subway) to the complexities faced by those involved in the supply chain of the Energy Industry.
Act III (Dramatic Finish): "Big Deal...and So What?"
The big deal and so what is this....there are many ways to lower the cost of energy...(a) bring on more alternatives to fossil fuels., (b) improve the methods of locating and extracting fossil fuels lowering the overall cost to manufacture a unit of energy, (c) quit using error prone and inefficient methods for business and support processes around manufacturing a unit of energy.
The largest industry in the world still relies primarily on clipboards and isolated spreadsheets to complete one of the most complicated manufacturing processes in the world. This fascinates me. What we see is that the industry unnecessarily does things in ways that other industries ceased years ago. As a result, we see a lot of opportunity for process improvement (i.e. lowering costs). Simple things that the rest of the world did years ago - e.g. using telemedicine to take healthcare to the rigs instead of taking workers off the rig (pretty basic).
Fortunately for me (as a fund manager)...most people in the technology investing world believe the Energy Industry is a niche industry that happens somewhere in the Southwest United States to the east of El Paso, Texas. There are so many problems present in the Energy Industry's methods of getting work done that most experienced investors would view it as Sutter's Mill for investing in things that counter those problems.
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Epilogue:
It is easy for one to look at SMH Private Equity Group as a vehicle for "technology investing." It is not. It is actually a vehicle for investing in process improvement. We invest in things that modify conventional business practices making them less complicated and easier to understand. I used to think that the Energy Industry was this small thing. The amount of money it spends each year to keep the lights on is staggering. The amount of avoidable waste incurred in doing so is equally staggering.
Tuesday, January 5
Multicar Crash into the Wall on Turn Three
A fairly smart individual recently reminded me to consider the positive side of every negative. If one has the luxury of stepping back from the problems they bear (and contemplate their essence and consequence), there is a chance that opportunity might reveal itself. Maybe.
Currently the crowd is betting against venture capital and the crowd has good reason to do so. The venture industry has been overrun by cheap imitations and everyone is to blame. Nonetheless we find ourselves in a situation where many venture firms are dying and their limited partners have henceforth sworn off venture fund investment allocation. So what is the positive side of this negative?
In a phrase..."substantially less competition." And what happens when there is substantially less competition? Specifically:
Currently the crowd is betting against venture capital and the crowd has good reason to do so. The venture industry has been overrun by cheap imitations and everyone is to blame. Nonetheless we find ourselves in a situation where many venture firms are dying and their limited partners have henceforth sworn off venture fund investment allocation. So what is the positive side of this negative?
In a phrase..."substantially less competition." And what happens when there is substantially less competition? Specifically:
- Lower pre-money valuations;
- Better concentration of management teams (there are fewer places for them to work); and,
- Fewer "me too" competitors which reduces market confusion and shortens product sales cycles.
Less money to make higher returns sooner.
Companies that struggle to get one term sheet today would have received three term sheets back in 2005 (these are my own observations). The number of software deals completed each quarter in 2005 averaged 220. The number of software deals completed in the 3rd quarter of 2009 was 128 (per NVCA). This reflects a decline of 41.8%.
To put the decline rate into perspective...complete the following exercise with me: Look around your place of operation...see the people that cause the operation to move...now imagine that 4 out of each 10 of them simply vanish and are not available to the business. This is the magnitude of things underway in the venture industry. My sense is that we are now in the second half of an industry purge. My other sense is the magnitude of the pain incurred today can be proportional to the prosperity of tomorrow. To paraphrase a famous investor..."When other people get scared..you should get greedy."
To put the decline rate into perspective...complete the following exercise with me: Look around your place of operation...see the people that cause the operation to move...now imagine that 4 out of each 10 of them simply vanish and are not available to the business. This is the magnitude of things underway in the venture industry. My sense is that we are now in the second half of an industry purge. My other sense is the magnitude of the pain incurred today can be proportional to the prosperity of tomorrow. To paraphrase a famous investor..."When other people get scared..you should get greedy."
Tuesday, October 20
What is Technology Investing?
For the longest time I have been affected by a certain discomfort I've felt in my job. As a human I am regularly subject to all the discomforts and neuroses that plague mankind but I have one certain area that has distracted me for some time.
By way of background, my day job involves searching for and investing in certain types of "technology" companies. According to The New Oxford American Dictionary, technology is:
"the application of science for practical purposes."
By deduction, this would mean I invest in companies that transform science into products and services that have some practical and economic purpose. My problem with this deduction is; however, that I rarely (in fact never) perceive that our portfolio companies are in the business of converting science to its practical applications. In fact, when I step back and ponder "technology" companies in general [ in which I would consider an investment] , the word "science" nor mental images of "science" ever come to mind. Absolutely never.
When I think about "technology investing" I feel this unshakeable sense of being surrounded by urgency and "speed". When we talk of "technology" there is a subconscious assertion of things moving quickly. Isn't "technology" itself generally promising more time (or less time as the case may be) to its users and isn't this much of the basis from which new technology is sold or bought into?
When I think of technology companies I think of the need for several large things to happen quickly.
- Large Thing Number 1: Since technology itself has implicitly a brief half-life, its developers need to organize themselves quickly in order to provide plausible commercial life to a new technology. So Large Thing Number 1 is the act and effectiveness of organizing a group of people whom you are paying to do a thing.
- Large Thing Number 2: Since new technology generally displaces an old way of doing things, developers/marketers of new technology need to convince a meaningful number of consumers to CHANGE HUMAN BEHAVIOR. So Large Thing Number 2 is trying to convince a group of people to change its behavior and pay you to do so.
Try and recall the time that you needed to organize a group of people to do something, anything - say form and stay in a line. It wasn't that easy was it? You had to explain to the group that they needed to get in line, why they needed to get in line, and why they needed to do it exactly at that moment. Lots of explaining. Now layer on top of that memory the notion that you had to get people to pay you in order to be in that line. The value of what is on the other end of that line just came under serious scrutiny and the degree of difficulty just went up about 10x. This is pretty much how mob violence is triggered. Welcome to technology investing.
What accomplished venture investors are good at doing is this: Identifying and scoring pools of people capable of Large Thing Number 1 with a minimum degree of waste, and having a good sense if the positive results from Large Thing Number 1 are suited to cause Large Thing Number 2. Said another way they must be skilled in making assessments about pools of people more than anything else which would render them, in a way, more research sociologists than technologists per se.
Now...did I just produce the perfect working definition of "technology investing"? No. But I feel I am getting closer to a working definition of its essence. Technology is simply a medium around which certain role players may chose to organize. Many venture funds have fallen for the slight of hand caused by the shiny technology bauble (myself included) and too often think of ourselves as technology-centric Zen masters when in fact we are playing inside of a larger equation whose primary variables are group dynamics. It really makes me wonder what type of educational background is required to prosper in this business. One thing is for sure....one needs to have extremely good hearing.
Thursday, July 30
Discussion on Different Sources of Scale for Software Companies
There are many ways to determine "scalability" of a growth-stage software company. Scalability comes in several forms including the capacity of the company to sell a certain dollar amount of product per annum and repeatedly increase that amount in later periods. Increases in revenue can come from different places: (i) improvement in direct sales techniques, (ii) increased pull from the market, and (iii) price increases for products sold. I am focused here on the capacity of the firm to raise prices and hold those prices while depending primarily on a direct sales model.
The evolution of a software product/solution can take many shapes with many different results. Generally a company declares evolutionary leaps through something called a "version release". Version releases reflect some major change in the product significant enough for the vendor to say so. Version releases are the product vendor's periodic chance to justify to the market why old prices don't apply and new higher prices are justified. Some companies are extremely adept and well-known for developing hype around version releases (e.g. Apple, Microsoft). Most times media hype is software-speak for ("here comes the price increase"). The question becomes, “will the price increase fly or fall flat on its face?”
In software, there is a natural course for version releases divided between feature/functions and architecture. Early on, features and functions are the sales focus. "Our product can dig round holes relieving you from needing a shovel to do 1, 2 and 3." Later, architecture becomes economically relevant. Feature/function releases are designed generally to empower customers to do more. Architectural releases are mostly designed to empower customers to do more on their own: "With XWZ Product Version 7.0, our hole digger now runs on solar power so that you don't have to worry about the high price of oil."
In my experience the price-increase testing laboratory opens up after a company's first major architectural release. About 80% of what the market needs at that time is currently inside the function set and the vendor is now trying to get right with the IT department. Architectural releases many times are, in effect, a migration of their customers’ deployment services budget over to the product license budget – hopefully the release requires fewer resources to render useful. They should be oriented toward increasing a customer's independence (which is ironic because the increase in independence regularly causes the customer to "depend on this vendor for independence"). Many times the revenue line starts to lift dramatically (if there is really a market). The question is: "what happens next?"
Software companies that prosper are good at adding meaningful functional execution capabilities on top of initial core functions. You can track pricing momentum between version releases to see if creative genius and effective customer listening are occurring or if they have left the building. If a company has the ability to persistently raise prices for incremental version releases then you, as the investor, are on to something (manufacturers of high-end automobiles seem to be really good at this). Many times the starting point for all of this (the initial core functions) is hit or miss. In other words, the initial function set had to do something in a particular way in order to get the customers seeing and properly verbalizing additional functional requirements that lead to higher prices. Said another way, there is enough case history for the vendor to quantify value add, ROI etc...and communicate this in a way that sticks.
What makes this analysis particularly difficult is that most software deals over $300,000 are negotiated. As a result, comparing one deal to the next (enterprise vs. limited-use) for purposes of a finely-pointed pricing momentum analysis is complicate but it can be done.You really don’t have to know a lot about software to properly interpret the meaning of increasing price inelasticity. You just have to be aware that it is very indicative of the design and selling capabilities of a prospect company. Necessity will help you figure out what to do from there.
P.S. Once more selling comes from the channel, price can come down but the motive should be to increase volume. Therefore, the metrics watched should include volume variances per salesman.
Monday, July 13
It May be Just the Opposite
Being a good venture capitalist requires not only being able to see new technologies that have a meaningful commercial future but more importantly being able to see when that future may occur. Truth be told...it really is not so difficult to predict that some new software will develop into something commercially viable. You will know a venture capitalist is thinking along these lines when he mouths the following words, "hey...I think this makes a lot of sense" and starts nodding affirmatively. A lot of this just comes from keeping one's head in the technology game for a sufficient period.
The big rub is that so many of us get involved in start-up endeavors but incorrectly estimate timing on the respective company's market. I have my share of deals where I was too early and cash went to ZERO way too fast. I got sucked in by some empirical false positive and believed that a new market may be starting to trickle my way. But...I was too early. Eventually I was right but I was too early. So the question I am considering is what was the empirical false positive that created the vacuum pressure that drew me in?
This is going to come across as very odd but I can't shake feeling that pleasant customer testimonials of very early-stage software companies is a big-time false positive with regard to market timing - why?..you ask. Don't you want customers to say really good things about the software company into which you are about to make an investment? The answer is "yes" but within limits.
As software companies mature their customers make more demands and complain loudly. This happens because customers have an increased dependency on the underlying solution. At any point in time, most budding software companies are better today at what do for customers than when they were younger. They advance and get better. This should mean, by deduction, that customers that complain today had louder complaints before - provided they really needed the underlying software solution. Taken a step farther it can be reasoned that, early on, customers were not "ecstatic" (which some due diligence calls may suggest) but rather were "tolerant" of the software provider. The tone of tolerance suggests that the customer of the early-stage software company has a significant need and he is tolerating the youthful incompetence of this stumbling vendor.
Earlier in my career I would listen to a due diligence call and get this very pleasant report on an early-stage software vendor in which we might be considering an investment. My internal messaging would go something like this:
"Wow...what a great company...the timing must be right to invest in this area."
The more experience I gain the more I consider that, within certain parameters, positive customer feedback is a negative and a negative customer feedback is a positive. Specifically stated, I want to hear more people complaining. The more tolerance I hear the more I know that a real problem exists and I am speaking with someone whom is counting on the software vendor to solve the problem. The more verbally angry they are, the bigger and more immediate their problem (yes this sounds crazy). I am starting to believe that this may be one of the better clues that it is time for this start-up to begin.
Monday, July 6
Theories on Why Venture Capital Doesn't Scale
We continue to drift in the middle of a chaotic venture capital market that many say is "broken." I have been thinking about this and I am trying to understand the factors that add up to this "broken" state. To me, "broken" means that as an asset class venture capital is not performing well relative to the risks taken and the performance of other asset classes given their risk profile. (By asset class I mean the venture industry taken as a whole.) This industry's turmoil reveals itself in many ways but its root cause started as too much cash and now seems to be too little cash. Cash comes from several places including raising new funds or decreasing investment rates and operating expenses.
Raising new funds is not all that easy because the industry's recent track record is not exactly stellar. Decreasing our investment rates has been easy to manage and we cut operating expenses where we can. At the end of the day...the only true source of oxygen is "the next fund."
There are different reasons new funds are not so easy to raise for so many firms. One principal reason is that funds in the late 1990s and early 2000's were ambitiously large. By this I mean that firms used these funds to substantially expand their operations and investing scope. We saw many funds triple in size over the predecessor funds. Now if a new fund was three times as large as any predecessor fund...it had to likely have thrice as many "hits" as its predecessors in order to perform at least as well. In order to generate three times as many hits, venture funds recruited additional players en masse. This is really where the problem starts.
In my opinion, venture capital is much more artful than it is scientific. The best venture capitalist can not simply codify his instincts and experiences in such a way that they are highly transferable to other humans. The best venture capitalists are simply instructors who provide tools to a school of students some of which prosper many of which do not. There are good schools and there are not-so-good schools. Good schools take time to develop. As a result, it is very difficult to scale this business. No matter how many students Roger Federer enrolls in his tennis academy it is unlikely to produce the next Roger Federer. The odds against it are great.
A good venture capital firm probably has at any one time three or four natural athletes. Each firm can talk about this process and that process and proprietary secret investment formulas but I don't consider those plausible ingredients for achieving scale. It is marketing lingo for "it's ok to give us right now 3x more money than we can handle." The core team can put to work only so much capital and watch it effectively in a way to achieve results consistent with the risks undertaken. The school takes time to develop. Nonetheless...our current tendency is to continue trying to raise gargantuan amounts of capital well beyond any plausible management scale. This is, in effect, investors making the bet that a successful venture capitalist can transfer his skills with an efficacy that results in two Roger Federer's by the end of next year.
The other issue is this: there are only going to be so many big winners per period. By winner I mean investments that generate a lot of return. Since late 2001, the number of winners seems to have dwindled but the number of venture capitalists has sky rocketed. This means that a large body of professionals has really not had close contact with winners in such a way that they can understand what happened, why it happened and imbibe enough experience of success to plausibly create another success. This is not one of those life experiences where the only learning comes from failure..
There are many exceptions to this perspective..but there are many more points of proof than there are exceptions.
Wednesday, June 24
In Search of "Now"
I am observing the current, rocket-like ascent of "Twitter". Twitter is, among other things, a one-to-many text messaging system. The "one" is you or me. The "many" can range between a limited size, private group such as your friends or a universally large, public audience such as CNN viewership. In its smaller setting, group members use the system to keep others informed of daily activities...(sort of a never ceasing human exchange). In the more public setting, Twitter is a real-time news reporting tool.
The meteoric climb of Twitter is based, in my opinion, on its popularity as a medium for the "never-ending human exchange". I have seen this previously in many other electronic forms. Despite their visual differences each of these sort of does the same thing. Here are some examples:
The popularity of these mediums reminds me closely of the fashion industry. Each year designers are required to create new themes and visuals that satisfy the eye and offer a slightly vanguard way to humans for expressing themselves. The great design houses can completely change the user experience from season to season. The designers know the user experience needs to change because the old experience ceases to satisfy the user as an expression of the self.
The whole concept is a derivative form of something called "attachment" whereby we humans entrust things external to our selves with the power to determine whether or not we are happy or sad. Do I have enough money..I want more chocolate cake...if I just had a bigger house....etc...because none of these things individually brings peace to the soul we find ourselves hopping from one hope-filled attachment to another.
Now the difference between any of the human-exchange mediums described above and the fashion industry is: a designer clothing brand can change its feel sufficiently to accommodate the endless human journey of self-expression ( cloth is a medium capable of a very wide range)...a piece of software, in general, can not change enough to help here. As a result....social software gigs seem to pop up and then slide down (they sell the same dress year after year).
If I step back from these platforms and am honest with myself...I believe they are promising me some upside...a differently perceived future me...I can be a YouTube star. As a result, my mind is stuck in a YouTube/Facebook/Myspace/Twitter future. It is this very thing that many human philosophers and at least one eastern religion say is the source of human unhappiness. Not being in the present. I am still looking for the social networking site that puts me in the Now..this will be a big thing.
The meteoric climb of Twitter is based, in my opinion, on its popularity as a medium for the "never-ending human exchange". I have seen this previously in many other electronic forms. Despite their visual differences each of these sort of does the same thing. Here are some examples:
- Facebook: An organizational tool for building a personal profile that may be shared with a few or many.
- Youtube: A publishing tool for letting all comers have a visual understanding of you...who your are...what you can do...etc.
- MySpace: Same as "Facebook".
- Twitter: See above.
The popularity of these mediums reminds me closely of the fashion industry. Each year designers are required to create new themes and visuals that satisfy the eye and offer a slightly vanguard way to humans for expressing themselves. The great design houses can completely change the user experience from season to season. The designers know the user experience needs to change because the old experience ceases to satisfy the user as an expression of the self.
The whole concept is a derivative form of something called "attachment" whereby we humans entrust things external to our selves with the power to determine whether or not we are happy or sad. Do I have enough money..I want more chocolate cake...if I just had a bigger house....etc...because none of these things individually brings peace to the soul we find ourselves hopping from one hope-filled attachment to another.
Now the difference between any of the human-exchange mediums described above and the fashion industry is: a designer clothing brand can change its feel sufficiently to accommodate the endless human journey of self-expression ( cloth is a medium capable of a very wide range)...a piece of software, in general, can not change enough to help here. As a result....social software gigs seem to pop up and then slide down (they sell the same dress year after year).
If I step back from these platforms and am honest with myself...I believe they are promising me some upside...a differently perceived future me...I can be a YouTube star. As a result, my mind is stuck in a YouTube/Facebook/Myspace/Twitter future. It is this very thing that many human philosophers and at least one eastern religion say is the source of human unhappiness. Not being in the present. I am still looking for the social networking site that puts me in the Now..this will be a big thing.
Tuesday, May 12
The Thousand Yard Stare
I work at an asset management firm. The investment assets we manage are diverse and the skills required among our managers are diverse. Many times the managers will sit and talk shop about what they see, what they might be sensing around the market, their projects or something like this. These are illuminating conversations.
Many times I may be asked about this portfolio company or that portfolio company, its performance and the inevitable, "What do you think it is worth?" Since so many of our positions are in software, I am regularly quoting some multiple of revenue. This conversation generally results in a facial expression trying to conceal the listener's disbelief (i can feel the "thousand yard stare"). The suggested value appears to have no rational connection to earnings or cash flow of the subject company. The listener then politely leaves the room trying to spare my feelings from what he is really thinking.
When a software company is acquired by another software company...the rationale is generally in one of two camps: (a) the acquirer is trying to grow something they already own, or (b) the acquirer is trying to preserve something they already own. When the buyer is trying to grow something they already own...they are generally doing more speculating than not - they believe the product set is previously incomplete and that the addition of something else will finally be the thing that causes things [sales] to really take off (I am not sure I have ever seen this work). When the buyer is trying to preserve something they already own...my belief is that they are doing less speculating than in case (a). They have seen the acquisition target have a negative impact on the thing they already own and are worried about about its further negative influence on this thing (which they value so much). So what is the thing they already own that they value so much?
Investors in software early-stage software companies incur a lot of risk to get to a place of comfort and confidence. The possibility of operating leverage resulting from scalability in license sales influences this confidence. BUT...the end is not scalability of license sales per se but rather scalability of the maintenance stream (that license sales produce) and the recurring cash flow stream it produces.
The maintenance stream is really "the gift that keeps on giving." It is a pool of "insurance payments" that customers make for years after their initial product purchase. It guarantees them the right to all future advances of the software product. As customers become increasingly dependent on a particular software product the reliability of this "annuity" increases. It becomes extremely valuable to shareholders of software companies as a funding source for future product development and even more "annuity". It is when this annuity stream is put at risk that acquiring companies seem to go into action. The greater the risk to the existing annuity stream...the more they are willing to pay for the target company.
So...lets say you are a $20 million/year software products company. You are growing at a nice rate and you currently make $1 million per year in operating profit. Life could be worse. You get a knock on the front door and XYZ software giant wants to buy you. Nobody at XYZ software giant is going to tell you how scared they are about their annuity stream...they are going to say something like you are a meaningful complement to their solution set and that this is a build-vs-buy evaluation. If this is in fact true and you belief it is true...this will likely be a short negotiation and you should probably take the second offer they make. You will close the deal at 1.5x revenues.
However..let's say that XYZ software giant is calling because they see you as a threat to the maintenance stream on their "time travel" software. You go to their annual report, look deep in the footnotes and you see that maintenance revenue from "time travel" software was $600 million last year. You deduce that your product set is creating risk around this annuity stream and four years out could cause great problems for it. As a result...you have significant negotiating leverage. They are not focused on your annuity stream and speculating about what it could be. They are focused on their annuity stream and what it "is". They are taking some of the insurance payments made to them by their customers and, in turn, taking out insurance of their own by acquiring you. They are buying an extension of their own annuity stream It is the nature of the beast.
By way of example lets say that XYZ software giant estimated you had permanently impaired 1% of their annuity stream and that by next year this was going to reach 2%. Without considering any escalation thereafter XYZ anticipates that your existence would kill off $12 million maintenance per annum of say $7.2 million after-earnings. If ZYX trades at 10x earnings...then it might be worth $72 million (10 x $7.2) to stop the risk of greater damage occurring. So in this setting with this perspective layered on top...your little $20 million software product company might be worth 3.6x revenue ($72 million/$20 million).
And this is the story of how a fair number of software companies trade at something that bears absolutely no planetary resemblance to the rest of the world.
Monday, March 2
For all their faults...
I have been living in the venture capital world for what seems like too long. Many successful companies evolve to include investor syndicates consisting of 3, 4, and sometimes 5 different venture groups. Many times the perspective and priorities across the syndicate vary greatly. It can cause huge headaches for management teams simply trying to do their jobs. These management teams sometimes are not exactly sure who is the boss. They are left guessing and a "gap" is created between the company and its investors.
Despite the resulting lunacy, the measurable dysfunction manages to plod along approximating (over time) something resembling rational thinking. I say this in comparison to one particular form of alternative: one where there is a mix of professional investors and non-professional investors.
I have lived in this dynamic believing that non-professionals can come along via the experience gained along side those whom invest for a living. This is nothing less than a near-fatal belief. Many times the absence of experience causes all humans to cling to emotional behavior. Absent a recognizable pattern of data the emotion takes root and chaos begins to surface. One experienced investor can not overcome the emotional activity of the inexperienced lot. I have lived this too many times to know otherwise. It really only takes one person screaming "the sky is falling" to create doubt despite substantial empirical facts to the contrary.
We live in a period currently where "the sky is falling" is very difficult to quash. Here is an example: We have an investment in a small company that has over the past four calendar years grown license revenue 400%, wiped out competition, is winning the sector and is producing significant operating margins (this is a software company). Is the sky falling....? YES. Just ask the non-professional investors. As a professional investor I am absolutely delighted by the progress. We are winning a turf war and dominating a sector. Until the market emerges into the thick of "early majority" this is about as much as one can ask for. Nonetheless, chaos reigns supreme. It is exhausting.
So why the panic? The answer is that the non-professional investors in the deal are not familiar with the attributes of a successful enterprise software endeavor. They don't really know what to look at. There is no recognizable handle upon which the can firmly place their fingers, tighten and derive confidence. Unchecked panic is a California brushfire headed toward the planned community anxious to leap on rooftops and jump from house to house. Don't believe me...just contact the local branch of your go-to venture firm and ask if they have any "similar" experience. It is nuts.
So what is the lesson here: To the professional investor - as capable as we make think reason alone may be, it is not always an adequate translation mechanism to overcome many categories of those who don't do this for a living. To management teams - chose wisely whom you elect to pull into the syndicate....the price of some money can not necessarily be computed in an Excel spreadsheet.
Yes...this may all sound like hubris but this is the exact reason so many firms invest only in control positions so perhaps it is a popular form of hubris.
Despite the resulting lunacy, the measurable dysfunction manages to plod along approximating (over time) something resembling rational thinking. I say this in comparison to one particular form of alternative: one where there is a mix of professional investors and non-professional investors.
I have lived in this dynamic believing that non-professionals can come along via the experience gained along side those whom invest for a living. This is nothing less than a near-fatal belief. Many times the absence of experience causes all humans to cling to emotional behavior. Absent a recognizable pattern of data the emotion takes root and chaos begins to surface. One experienced investor can not overcome the emotional activity of the inexperienced lot. I have lived this too many times to know otherwise. It really only takes one person screaming "the sky is falling" to create doubt despite substantial empirical facts to the contrary.
We live in a period currently where "the sky is falling" is very difficult to quash. Here is an example: We have an investment in a small company that has over the past four calendar years grown license revenue 400%, wiped out competition, is winning the sector and is producing significant operating margins (this is a software company). Is the sky falling....? YES. Just ask the non-professional investors. As a professional investor I am absolutely delighted by the progress. We are winning a turf war and dominating a sector. Until the market emerges into the thick of "early majority" this is about as much as one can ask for. Nonetheless, chaos reigns supreme. It is exhausting.
So why the panic? The answer is that the non-professional investors in the deal are not familiar with the attributes of a successful enterprise software endeavor. They don't really know what to look at. There is no recognizable handle upon which the can firmly place their fingers, tighten and derive confidence. Unchecked panic is a California brushfire headed toward the planned community anxious to leap on rooftops and jump from house to house. Don't believe me...just contact the local branch of your go-to venture firm and ask if they have any "similar" experience. It is nuts.
So what is the lesson here: To the professional investor - as capable as we make think reason alone may be, it is not always an adequate translation mechanism to overcome many categories of those who don't do this for a living. To management teams - chose wisely whom you elect to pull into the syndicate....the price of some money can not necessarily be computed in an Excel spreadsheet.
Yes...this may all sound like hubris but this is the exact reason so many firms invest only in control positions so perhaps it is a popular form of hubris.
Friday, November 21
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.
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:
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.
Friday, September 26
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."
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."
Tuesday, April 22
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"):
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.
Tuesday, January 15
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...
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...
Monday, November 12
The Venture Capital Tree Hugger
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."
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."
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