Sunday, November 22, 2009

A Farewell to the Walking Dead

If recent headlines are even somewhat accurate concerning the pending sales of multiple Israeli start-ups, Israeli high tech should be feeling a great sense of relief. I know of at least 10 start-ups in advanced stages of concluding M&A transactions, with all but one at a loss or near loss to their investor base after many years of toiling in a challenging market environment.

So why should we feel relieved with such depressed prices?


Many of these companies are at least 7 years old, and fall into a forbidding category of start-ups that I call the “walking dead.” They are very much alive in that they have a fully functioning business, working products, satisfied customers and perhaps even modest year-over-year growth. But they no longer exhibit any of the cutting edge or hyper growth characteristics expected of venture-backed start-ups. Time has not been kind to them, and is no longer on their side. Their successful sale as a going concern is essential to sustaining the Israeli entrepreneurial ecosystem and a much preferred to a slow demise. More specifically, such M&A transactions provide vital liquidity for shareholders, release entrepreneurs to pursue their next dream, and free up the capital and time of venture capitalist to hunt for the next great deal. Furthermore, if done properly, such transactions will bring the company to a multi-national level, generate more jobs, and allow employees to expand their careers and horizons in a larger corporate environment.

Some of Israel’s fastest growing companies are approaching the end of their first decade, so I would not want to imply that all aged start-ups are condemned. However, these are often few and far between. More often, entrepreneurs and VCs unwittingly convince themselves that time will prove them wise, and that there is a light at the end of the tunnel. Unfortunately for most, it is a another tunnel that is at the end of the light and time and money are running out. Recognizing the direction a company is heading and forcing early action will avoid the painful existence of a walking dead company.

For companies past their 7th birthday, I propose a simple litmus test of two questions to determine if a company is walking dead: 1) Can the company find a buyer today were it to put itself up for sale? 2) Is it clear that the company’s value will appreciate as time goes by? If the answer to both of these questions is ‘no’ or produces a pensive stare, then there is a real risk that the company may already be walking dead. Once trailblazers, these companies are now laggards, passed up by the more aggressive and nimble competition. Once the undisputed leader in a promising market niche, these companies are still the undisputed leader, but in what is arguably now a much less promising market niche. Unfortunately, those asking these questions are also the very people who have invested too much time, energy and dollars, to arrive at impartial conclusion to the above questions.

As a result, many of these companies are in fact dead weight in a VC’s portfolio, consuming precious time, energy and resources. For employees, the board’s persistence can turn a start-up stint into a bottomless pit on a resume. And for the Israeli high tech market as a whole, these companies tend to crowd out new start-ups that might otherwise have been created and funded (sometimes by the very same entrepreneurs and VCs).

Aside from the demonstrating their pitiful grasp of investment return analysis, the Israeli media miss the point with their headlines bemoaning exits at valuations below the sum of the total funds raised to date. They too should see such activity as a healthy catharsis, which will pave the path for new start-ups in the next cycle. Larger and more exciting exits will follow the sale of the walking dead, so the Israeli high tech still has a lot of headlines to look forward to.

Wednesday, August 12, 2009

Competitive Crowdsourcing

The Netflix Prize reached its final stage last month almost three years after it began. For those unfamiliar with the competition, Netflix posed a challenge to the scientific community to develop an improved collaborative filter algorithm for use in determining Netflix customers’ cinematic tastes. The challenge was to improve on the current Netflix algorithm by at least 10%. Although a small improvement in percentage terms, the target was much harder than originally thought and has attracted 51,000 researchers since 2006. Ultimately there were two winners here. First is the research group that claimed the $1m prize. And then there is Netflix itself. The competition was a clever idea, and proved much more capital efficient then hiring scores of engineers, outsourcing or buying a collaborative filtering start-up. With minimal upfront costs Netflix now has a much improved product that is worth considerably more than the $1m payout.

Aside from learning about the fascinating world of collaborative filtering and algorithms, the exercise revealed the competitive nature of scientists, mathematicians and engineers. Of course, the prize money was an important catalyst and attention grabber, but it was the prestige associated with the battle of intellectual minds that lit a spark and kept these math geniuses going although way to the final stage.

Pride has always been a strong driver of innovation in the scientific and academic community, but is distinct from the pride of an entrepreneur, who is foremost driven by economic considerations. In science, there are grants and there are prizes. The former funds specified projects in the hope they succeed (e.g. NIH, DARPA). The latter are awarded in a fairly subjective manner for past achievements (e.g. Nobel, UNESCO, etc.). What we clearly don’t see enough of, are competitions, where prizes that are awarded for meeting a defined and measurable goal.

It is perhaps less scientific and more commercial, but such competitions can galvanize both entrepreneurs and scientists to pursue a worthy goal…and I am wondering why we don’t see more of them. After all, competitions not too dissimilar to this once spawned the world’s first marine chronometer and parking meter. Such competitions are a form of “crowd sourcing,” except that there is a fairly specific goal and a payout to the winner.

It reminds me of the X-Prize Foundation, which promotes scientific and entrepreneurial achievements that benefit humanity through $10m awards to entrepreneurs and scientists who are the first to achieve an objective goal. The most famous of these awards was the Ansari X-Prize, which awarded the prize to the first group “to launch a spacecraft capable of carrying three people to 100 kilometers above the earth's surface, twice within two weeks.” In retrospect, the monetary reward has little to do with spurring teams to win Ansari X-Priz, as the prize money is almost certainly not the incentive given the vast sums of money often invested in the projects.

Often forgotten is the fact that the Ansari X-Prize was modeled after similar prizes given away in the early twentieth century to spur the creation of the aviation industry. Most notably, Charles Lindbergh won the Orteig Prize for flying across the Atlantic in fixed wing aircraft. Here the cost was most certainly more than the $25k prize, as 6 lives were lost in 3 different crashes.

The recent success of the Ansari prize in turn prompted Richard Branson and Al Gore set up the Virgin Earth Challenge, which promises $25m to promote technologies that removal of greenhouse gases. Cisco too has the I-Prize. However, the Virgin and Cisco competitions are more akin to awards for past achievements, as they are not well defined, objective competition.

The more nagging question I have is why more companies and government institutions don’t use a similar strategy for solving complex problems. Perhaps they are simply afraid to reveal their technology holes or give away ideas to entrepreneurs. Nevertheless, for corporations brave enough, companies such as Innocentive, BrightIdea and Big Carrot offer a hosted platform, or exchange, for creating competitions and sourcing ideas/solutions from the masses. I look forward to seeing companies, large and small, use competitive crowd sourcing in the future, as it may prove a core part of corporate R&D, just like M&A and outsourcing are today.

And what a case of serendipity that as I write, I discover that Netflix is preparing a Netflix Prize 2!

Monday, August 10, 2009

Stanley and the Giant Shekel

For those of you not living the Shekel-Dollar drama of the past year, I wanted to give a quick update. Twice over the past year, the Israeli export economy (including all high tech), has been jolted by the rapid strengthening of the Israeli currency. Versus the Dollar, the Shekel gained almost 25%, then lost it, and was most recently showing worrying signs of strengthening yet again. This might be great for those Israelis traveling abroad during the August vacation, or Israeli peddlers of Ahava Dead Sea products in suburban American shopping malls, but it’s downright awful for the industrial and high tech sector! In the current economic environment it’s probably the worst possible thing that could happen, especially given our natural dependence on exports.



The drama with our central bank started back in March of 2008 when the Shekel reached a low of 3.2 to the Dollar (after sitting around 4.2 for an extended period). Chairman of the Bank of Israel(our Federal Reserve), Prof. Stanley Fischer, announced he would start purchasing $25m a day to take advantage the strong shekel and increase Israel’s foreign currency reserve which then stood at $29bn. It worked for a while, until the Shekel began to steadily rise again. Most recently, Fischer started spending $100m a day; taking Israel’s reserves to an all-time high of $51 billion (India only has 5x that amount). Today he aggravated many and committed himself to a different form of intervention spending anywhere between zero to several hundred million dollars a day.

Most countries have the opposite problem of too weak a currency, which creates a real burden for individuals and the state when purchasing vital imports and natural resources. Our problem is that because Israeli exporters sell their products in Dollars and Euros, the rising cost base of Israeli companies (labor) actually threatening the country’s long-term competitiveness. Our shiny new car is cheaper, but the owner of our R&D center is already drawing up plans to move the facility to China.

There are many potential causes for the rise in the Shekel, including the weakening of the dollar versus most other currencies. We can speculate about speculators, about Israel’s pending entry into the OECD and pending upgrade to “developed country” in the MSCI composite. However, the real problem is that our economy and currency markets are simply too small, and easily moved by large transactions such as a block sale of stock. It’s notoriously difficult to assess the true value of a currency, but as a consumer and venture investor, I know the shekel is too strong. Unfortunately, the Big Mac index doesn’t really support my view, but it doesn’t matter (it doesn’t negate it either). Take it from me when I say Israel needs to be at a discount to the US market, and when the cost of high tech labor approaches that of the US, we venture capitalists start pondering our 6-day work weeks and trans-Atlantic jetlag.

For start-ups that take their investment in dollars and spend in Shekels, the fluctuations can be hazardess. As a board member, I advise my start-ups to use a conservative exchange rate for budget planning and then to lock-in at least 9 months expenses at a fixed rate.


Bank to Stanley.
At first analysts and columnists predicted that the Bank of Israel would fail to tame the free market, but they were forgetting that the Bank has infinite resources at its disposal…the ability to print all the shekels the world wants. As long as there are buyers, Stanley is happy to keep the mint working overtime. As a reminder, this is not a repeat of the fabled battle of George Soros against the Bank of England, but the opposite!
Like me, Fischer is an import from Washington, and former citizen of an African apartheid state (Northern Rhodesia). He likely doesn't remember, but I met him in his Georgetown home in the early '90s when he was at the IMF, and discussed our mutual interest in Israel and Zionism. The point I am trying to make is that one should never underestimate the resolve of such an accomplished immigrant. Fischer may halt his dollar buying binge for other reasons, but I am rooting for him day and night…and so should you if you want Israeli high tech to succeed.

Monday, July 20, 2009

Wanted: Small, No-Name Customers

Readers of my blog should be familiar with my deepening preference for software companies, especially those that exhibit a low cost structure and high margin sales (not all software companies do). However, increasingly I prefer to characterize my investment focus less by sector, and more by the sales and go-to-market strategy. Specifically, I find myself favoring companies that use the Internet to sell directly to small businesses and consumers, and skeptical of start-ups that build their strategy around selling to large, strategic customers. For a variety of reasons, it has simply become more expensive and less rewarding to sell to large customers, regardless of whether this is a Fortune 500 company, telecom operator or hardware OEM. At the same, new marketing and delivery methods have made focusing on small, no- name customers more capital efficient and scalable.

In the first decade of Israeli venture capital, entrepreneurs and venture capitalists had a natural bias towards start-ups that focused on large, marquee customers. Wins with such customers meant large deal sizes, the attention of strategic partners/acquirers, and a rush by other customers to emulate the early adopters and thought leaders. Always preferring a technical sale, Israeli start-ups preferred large customers with a strong understanding of technology. Conversely, we venture capitalists eschewed start-ups that focused on small businesses or consumers, mostly because there was no cost effective way to reach them from Israel. Even if you could reach them, it was widely felt that these small customers do not appreciate cutting edge technology and are partial only to established brand names. Furthermore, while the strength of Israeli high tech was generally built around product sophistication, performance and intellectual property, selling to small, no-name customers required a product that emphasized design, usability, simplicity and price.

Large Can Be Longer, High Touch, Expensive, Non-repeatable & Unrewarding

A lot has changed since then. First of all, post 2000 these large customers have grown wary of working with and relying on start-ups, hundreds of which have disappeared, changed direction or simply never reached scale. The result is that the sales and testing processes of large customers is longer and more arduous for start-ups than ever before. Additionally, the procurement process of these large customers is more stringent, built on the premise that they are always better off buying from a select group of large, established vendors(even with an inferior product). Even where they have no alternative, their reluctance to buy from start-ups persists with attempts to indentify a middle man, place the start-up’s IP in escrow(in the event of shut down), or extract a hard commitment to fulfill the product roadmap(rarely accompanied by any NRE dollars). And once an order is finally placed, the long coveted joint press release is blocked by the legal department.

Secondly, the established competition has become more proficient at thwarting start-ups’ efforts to penetrate their strategic customer base. The competition knows to take advantage of the customer’s preference for buying a full portfolio of products and related services by bundling products and offering their variant of your product for free or at cost. The weak start-up market bolsters the larger competitors’ attempts to sow doubt about start-ups’ long term viability. Even Oracle’s sudden shut down of Virtual Iron only a month after acquiring them can be seen as a message to enterprise customers that even M&A provides little assurance for product continuity. This systematic obstruction was always present, but has intensified with industry consolidation in networking, semiconductors and enterprise software.

Lastly, penetrating a couple large customers no longer provides the same currency it once did. Not so long ago, regardless of sales growth and profitability, a few big customers wins made you “acquisition material.” Such customer wins meant the company was turning a corner, and generally made the start-up “financeable” by fellow VCs. Investment bank research analysts would warn larger competitors of the upstart’s superior technology and growing traction, and the young start-up’s credibility would rise remarkably. Today, this connection has been severely weakened if not completely dislocated. This is partly due to the challenge of a repeatable sales process among more skeptical customers, but also due to the indifference of potential acquirers.

Small Can Be Quick, Low Touch, Repeatable & Inexpensive

With large customers no longer worth the effort, start-ups should consider focusing on smaller customers and/or consumers. Luckily, several trends play in favor of such a “no-name” customer strategy. Performance marketing including targeted online advertising and affiliate networks allows start-ups to reach a wide audience cost effectively and with minimum up-front investment ( see “When Marketing and Sales Becomes Scientific”). Similarly, advancements in delivery methods, including downloads, virtual appliances and software-as-as-service lower the cost of sales, deployment and maintenance. Of course, strategies focused on small customers and consumers do not preclude sales to large customers as mentioned in my previous blog post “A Preferable Route to Market.” The challenge for Israeli companies is to build a product that emphasizes usability and simplicity as much as technology and performance. I have little doubt that such skill sets exist in Israel, but the key is to make this a priority.

The start-up and venture world has undergone a flip over the past 10 years. Large customers, once thought to provide a short cut to success, are now seen as more demanding and less loyal than before. Fortunately, smaller customers scattered across the globe are now accessible and serviceable via the web. Telecom once has its version of “small” customers called CLECs, while the semiconductor companies focused on Original Design Manufacturers(ODMs). In both cases, the smaller customers proved to be short lived or unreliable. I believe software delivered over the Internet could be both long-term and successful, but in the very least it’s an inexpensive model to experiment with.

Saturday, July 4, 2009

High Tech Won't Solve Israeli Driving




Israel is known for many great things, but its chivalrous driving is not one of them. Israel does have more roads per kilometer of road than any other country…but I would bet also fewer traffic cops per capita than most. Blame it on the hot weather, the tense political environment, old or young drivers, one of several minorities, the religious, the high tech employees with leased cars or wealthy elitists, either way Israeli drivers rival Italians in their aggressiveness, and South American’s in their disregard for laws.

Israeli high tech has produced start-ups like MobileEye, GreenRoad, Sensomatix and Traffilog to improve driver safety and behavior, but it will require a cultural change to turn Israel into a genuinely friendly place for drivers. As a frustrated driver myself, I have assembled a list of observations and camera phone pics for those unfamiliar with the experience of driving in Israel. All pictures are courtesy of my faithful Blackberry Bold.





1. Tailgating at speeds of 120kmh is a true sport in this impatient land. The logic goes something like this: “The closer I get to the car in front, the clearer I will become in his rearview mirror…and the more likely he is to move out of the way in haste.”










2. Shoulders on the side of the road are for those people in a real hurry and who didn’t know there would be traffic.





3. While frightening, it’s completely routine to see cars enter a highway and then slowly reverse after changing their minds.


4. Crosswalks merely indicate where a pedestrian might be run over if one is so bold as to cross the street. Conversely, drivers only have to stop at a crosswalk if a pedestrian has fully stepped off the pavement.


5. Mopeds, ATVs and small motorcycles can morph into pedestrians at will and use the crosswalks to get around a red light at an intersection. Consider this the next time you marvel at the speed of your pizza delivery.



6. Disabled parking spots tend to be occupied by luxury sedans and SUVs. In fact, I generally associated illegal parking in the cities with luxury vehicles whose drivers are above the law.
(graffiti on wall reads: "Disabled Parking is for the Disabled Momo!")




7. Don’t be alarmed to see seemingly senile pensioners taking their motorized wheelchair on main roads during rush hour. It’s part of the fearless, laissez faire culture we cherish so much.






8. If you want to meditate while driving, you can always read the religious graffiti on the road signs. Na, Nach, Nachma, Nachman Meuman is a chant of the Brezlov Hasidic sect. Why they feel compelled to use spraypoint is beyond me.


9. Israeli road signs are conveniently translated into English and Arabic. However, don’t be surprised if the English name of your destination appears to change its spelling as you drive along. Netanya may become Natanya. Zichron Yaakov may become Zikron Yaakov or Zikhron Yaakov. Petah Tiqwa, Petah Tikva or Petach Tikva…and so on. This should change soon with a harmonization in tranliteration, but in the meantime it must really confuse tourists.


10. Traffic cops exist, but you have to look carefully. And when you do, you will see that justice eventually comes to all repeat offenders regardless of their status.







Thursday, June 11, 2009

Google Article in Wired Magazine

Just read a nice article by Steven Levy at Wired about Google’s economic model. None of it is particularly new, but it does a good job of highlighting innovations beyond search.

Key Take-Aways

  • The first major innovation was in auctioning off a slate of ad slots each time a search query was made, and billing advertisers based on clicks on the ad, rather than impressions. Both were major departures for vendors/advertisers, who were familiar with drawn out auctions on eBay, or CPM based ad pricing on Overture.

  • A major innovation in Google’s auction process was the use of “second-price auctions”, where the winner of each keyword auction pays the price of the next highest bidder. The process reassured bidders they wouldn’t be a paying much more than the next guy, and ironically, provided enough comfort to actually result in higher bids over the long-run. Anyone who buys via AdWords knows how this affects their thinking in placing bids.

  • Auction winners and price is also determined by a set of algorithms which determines the quality and relevancy of the ad and associated landing page. This “quality score,” is meant to ensure high click rate and satisfaction for the consumer and advertiser. It also allows Google to predict click-through rates and improve its own business.

  • Google uses a “keyword pricing index”, which similar to the Consumer Price Index in that is measures the relative value of keywords to one another. This is indicative of how much emphasis Google places on data accumulation, trend analysis, and constantly improving its product for advertisers and consumers alike.

The most important I gained from this article is a reminder that Google did not anticipate the intricacies of its business model, let alone the auction model in advance. This is not to say they had no clue how to make money. Early on, they know the value of search provides users, that search implies "intent" and that intent is perfect for monetization. Ultimately, their success came from emphasizing consumer experience, customer experience (advertisers), and harnessing the results to further improve and refine the model and product. Google long ago ceased to be merely search company, and is now an economy unto itself.

Wednesday, June 10, 2009

BVP's David Cowan Gives the IVA Keynote


For those of you who missed it, my partner, David Cowan, gave the keynote address at this year's Israel Venture Association annual conference. I provide this link to his own blog, where you can review his presentation and read most of his thought provoking notes from the speech.

His message was a sober one about the current state of venture market, and how to turn the venture business into asset class that once again yields meaningful returns for our investors. He pointed out the little known fact that only a handful of VCs actually have the attractive returns that warrant continued risk taking on the part of LPs. A recent Kaufman report even claims the venture capital industry must shrink by half for it to survive, and cites stark statisctics from Cambridge Associates that the "venture industry lags the small-cap Russell 2000 Index by 10 percent on a 10-year timeframe, despite the fact that those 10 years include the dot-com period, which materially inflates venture industry performance."
The reality is that while the venture market already experienced an earthquake back in 2000, we are only now coming to grips with the effects post-bubble economics are having on our underlying business. At this point, optimistic scenarios for the return of '90s style venture investing should have been eliminated with the latest financing crisis(which has now undermined the VC's capital base).

In Israel, such optimism over the past decade paved the path for funds to continue backing underperforming companies with the hope that good times were just around the corner. The result is that when looking at the portfolios of Israeli funds, few investments have been written off, and the vast majority are still private many years after the initial investment. David made a compelling argument that most funds would be better off having never invested most of the portfolio, even if it meant accepting a larger write-off(because right now, there aren't enough write-offs to speak of).

We Israelis have an uncanny ability to adhere to the "perseverence of mission," which is one of core principles in the Israel Defense Forces' code of ethics. By this I refer to the ability of both entrepreneurs and their VCs to keep at it as long as it takes to prove even a modicum of success. While this can be an admirable quality in some cases, it can also become a burden that prevents both entrepreneur and VC from stepping back to reassess the rationale of continued investment. As a result, "walking through the dessert" with a portfolio company during a rough patch is not an isolated event reserved for elite crop of companies, but rather the typical route for Israeli VCs and their portfolio companies.

Surprinsingly, there seems to be a difference of opinion on this matter in talking to entrepreneurs and LPs over the past few years. Entrepreneurs in Israel are convinced that Israeli VCs pull the plug too early and don't provide support during tough times. This became clear once again in comments made during the recent Globes survey of venture capital funds. In speaking to LPs from the US, however, they make it very clear that Israeli funds support their portfolio companies in excess, and don't do nearly a good enough job in cleaning their portfolio of underperformers. I for one believe that the LPs are in the better position to point out that Israel is an anomaly in this regard.

From the many compliments David received on this speech, it is clear that many in our industry are also exhausted from the omnipresent cheerleaders, who glorify the Israeli high-tech story ad nauseum. The strength of Israeli high tech is globally renowned for good reason, and its prominance will endure for decades to come. The threat the local industry faces is one of simply being an unattractive place for venture investment due to out-of-date company building models and out-of-date investment models. Despite the somber assessment of our collective performance over the past few years, David made it clear that that there are new and exciting trends, sectors and business models that are clearly attractive for venture investing.
Going forward, David offered advice(given in this blog too) including smaller investment amounts in more capital efficient companies, and not being afraid to fail, admit error and move on to the next opportunity. On the last point, the earlier and faster we do this, the more likely we all have a chance of finding or creating the next success story.

In classic style, he ended the presentation on a literal high note, playing Al-Kol-Eleh (a traditional Jewish song), using his iPhone and an application called Leaf Trombone by Smule (a BVP portfolio company). Thanks for sharing your insight David.

Sunday, May 17, 2009

A Better Historical Parallel for Clouds

Cloud computing is often associated with “commodity” pricing and efficiencies of scale, which is why the transition to a world with cloud resources harks back to the emergence of public utilities and mass manufacturing. Cloud networks may provide a utility of sorts, but there was never an industry-wide transition from in-house electricity generation to public utility, which is what is likely to happen with cloud computing. Furthermore, while standardization and interoperability has created a layer of abstraction between applications and their underlying data center infrastructure, clouds are far from offering any service as fungible as commodities, like water and electricity. History should provide some insight into what to expect from the emergence of cloud computing, but this industry parallel from 100 years ago is not ideal.

In reading and speaking to people in the industry, I have come to the conclusion the transition to cloud computing will most resemble the transition in the semiconductor industry, as it went from fully owned fabrication facilities(fabs) to third party foundries. At first glance, this might seem silly, but let me explain.

When foundries first emerged in the 1980’s, it was in response to both the
rising cost of fabs, and the emergence of many small, independent silicon design companies that had difficult financing their own manufacturing facilities. At the time, integrated device manufacturers(IDM), like TI and Intel, developed all of their own process technologies and manufactured at their own fabs. But as the global market for semiconductors grew and process technology advanced, many of the smaller IDMs were unable to keep up with the innovation necessary to remain competitive. Each new geometric process node raised the cost of fabs from $100m in 1985 to $1bn in 1994 (when the Fabless Industry Association was created) to an estimated $10bn today, making it prohibitive for only the very largest companies. Over time, even those that could afford to build a new fab found that the ebb and flow of semiconductor demand, combined with the difficult of capacity forecasting, rendered these operations highly inefficient over the long run, and a real distraction from their core business in the short run.

The emergence of foundries like TSMC offered an alternative for large silicon vendors who had difficulty managing their growth and costs. For small vendors, the impact was just as great, as the foundry model became essential for the emergence of the fabless industry, and companies like Nvidia, Qualcomm, Xilinx and Broadcom. As with any outsourcing transition, the resistance was led by arguments about IP leakage, and the strategic importance of owning and controlling their manufacturing as a competitive advantage. But such myopic views became a costly gamble with some chip companies ultimately buckling under the weight of their fab operations, and others simply ceding market leadership to their more nimble, fabless competitors.

The foundries that succeeded did so by building massive and highly efficient facilities, working closely with the process companies and leading customers. Today, the industry has only five or six leading foundries, with a handful of niche players using specialization to eke out an existence. While quality and the maturity of the technology process is critical, price is still the key determinant in choosing one foundry over another.

In thinking about the analogy I first want to point out the every growing investment required to launch a large-enterprise data center, which has risen to $500 million, from $150 million, over the past five years[1]. Additionally, the cost of running these facilities is rising by as much as 20 percent a year, partly due to the price of electricity, but also due to general opex. Secondly, due to the lead time required to design and build large data centers (2 years), capacity is added well in advance of actual business needs, forcing enterprises face a difficult task in forecasting data center requirements. For some of enterprises, data center spending is rapidly getting out of control as new data intensive applications for internal and external purposes consume valuable resources with an uncertain economic return.

While foundries and clouds provide very different services both solve a similar build vs outsource decision for their customer base. Both provide their customers with access to cutting edge technology, with minimum up front commitment, and the ability to scale infinitely at variable cost. In the case of the foundry business, there are relatively low switching costs and most large chip vendors give their business to multiple foundries to reduce risk and improve pricing. Thus far, there appears to be a similar dynamic with cloud services and their customers, but its still early days.

So what can we learn from the history of the fabless/foundry industry? The first is that due to the economies of scale required to stay competitive in terms of quality, technology and price, there are likely to be only a few big winners(aside from niche and local players). This is an issue, as most large hosting and managed service providers will make an attempt to morph into cloud service providers, with consolidation the likely result. Secondly, it will become harder and harder to justify continued spending on internal data centers as costs spiral out of control with an unclear ROI.

Finally, if there are only a few large players ten years from now, making a business selling hardware and software to these players may be harder than we think. I am reminded of the fact that despite the enormous annual capex of Google, few companies can claim to have built their success around selling to Google. On the contrary, Google has been building its own servers, and is now rumored to be building its own switches, in both cases buying off-the-shelf chips. Whether this will continue is a big question, and I am still undecided. After all, in the foundry business there is a clear distinction between companies like TSMC and Applied Materials, but this could be where the analogy fails.

In any case, one clear opportunity is to be the "fabless start-up" of the cloud era, taking advantage of cutting edge, third party data center technology and infrastructure to build a new businesses with a superior cost structure.


[1] McKinsey Quarterly November 2008 “Data Centers: How to cut carbon emission and costs”, William Forrest, James M. Kaplan, and Noah Kindler

Friday, May 15, 2009

Clouds with Silver Linings


It is no secret that the costs of launching an Internet or software company have come down dramatically in the past decade, due to new programming languages, open source software, and ever declining server and bandwidth costs. At Bessemer, we actually calculated that cost of launching a web site application declines 50% every 18 months… one key reason we favor companies that leverage the web.

Much like the broadband build-out race of the last decade, today we see a host of companies prepared to spend billions to build out data centers(aka “clouds”) which they aim to resell as a monthly service. While some technology companies may profit from selling into these cloud networks with core infrastructure, such as management software and virtual appliances... many more will find their fortunes by properly leveraging this massive investment by others(even if some cloud companies ultimately go the way of some quixotic broadband companies).

On the face of it, cloud computing and storage services like Amazon Web Services, Joyent, Nirvanix and Mosso, are yet another example of the ever declining cost curve for web start-ups. However, cloud services are riding their own steep cost curve as these massively scalable data centers reach economies of scale and deploy cutting edge technologies becoming far more efficient, responsive, and flexible than anything known in the hosting business. The upshot is that start-ups will be able to craft their own virtual data center and pay a monthly fee only for what they use. Many of the initial customers of these services are in fact Web start-ups, but most are simply using clouds to cut costs or offload peak demand. In the coming 18 months, I expect to see many more business plans that rely heavily on this incredible resource, previously available to only the most well financed in the industry.

Lower start-up infrastructure costs will enable entrepreneurs to test more innovative product concepts, many of which were previously prohibitive from a cost standpoint. Many of these new product concepts will also involve experimenting with daring business models that can upend the established order. On this latter point, I anticipate we will see start-ups using the cheap data center infrastructure to give away more products and services that might otherwise have been paid for. Not unlike web start-ups today, these companies would then recoup their infrastructure costs and profit through premium versions and/or through lead generation revenue models. I will admit there is a fine line and overlap between your typical Web or SaaS company and start-ups that I consider to leverage the cloud. Lets just assume that in the latter case, the start-ups' product concept or marketing/distribution strategy rests even more heavily on rapidly declining computing and storage costs. Panda Security’s recent release of a free anti-virus solution might be one such example, as are the free desktop in the cloud service of G.ho.st.

In many instances, successful cloud applications will be those that are able to put a premium face on a commodity infrastructure in order to benefit from an ever widening price differential. In other words, these companies will use their own technology innovation to deliver proprietary service or application, while enjoying the ever declining costs of the cloud infrastructure. I don't refer to the myriad online storage and file sharing vendors, but new services that marry their own intellectual property to a commoditized cloud infrastructure. There aren’t too many examples just yet, but IT Structures , HD Cloud and Ctera are several companies that come to mind, and are worth watching closely.

This is the first of several posts I intend to write on cloud trends, as it the intersection of some of the dominant growth trends in today's technology market, including SaaS, Web applications and data center consolidation/virtualization.

Saturday, April 25, 2009

A Preferable Route to Market

With IT budgets frozen or shrinking, and most of what is left going to only the very largest vendors, software starts ups find themselves in a real quandary. However, a little observed trend in software usage and purchasing over the past few years has steadily opened a new set of doors to businesses accounts, effectively bypassing the punishing decision making processes of the IT department. Purchasing power within these organizations has become distributed and democratized, as more and more employees acquire the necessary Internet proficiency, management authority and expense account to purchase software and services online. These employees do not necessarily work in IT and may have a very limited budget, yet they are empowered to make such software purchases for themselves or their department, because Internet purchases have become as mundane as paying for a dinner with a client or ordering a plane ticket. Smart start-ups are building strategies to capitalize on this fascinating trend, and many have already become market leaders in their respective market segments.

Many of the effective marketing and sales strategies actually emulate those found in pure play consumer Internet and software companies, and often incorporate consumer-like simplicity in the product design itself. The reason is that these new buyers in the enterprise are using their consumer technology intuition to identify utility and productivity solutions on their own through downloading software or subscribing to new web-based services. From what I can see, this new breed of software companies has employed one of, or a combination of, two strategies:

1) Consumer as a Conduit – Simply put, this strategy starts with the consumer, but designs the product with an aim of ultimately transmitting it to the enterprise to build a business. It works by casting a wide enough net in the consumer community, and relying on a certain percentage of consumers to infuse their employers’ organizations with the product. This may start with small businesses, but there are plenty of examples of large businesses adopting software through this chain of events.

This strategy is often predicated on launching a free or low cost consumer version, and exacting a charge when businesses use the otherwise free consumer software. In some ways, this business model is reminiscent of shareware, and is often termed “freemium”(although many “freemium” products have limited appeal to the typical business organization). This strategy has proven successful because consumers have shown a remarkable capacity to embrace innovation, far outpacing that of businesses. For this to work properly, a product must clearly address both consumer and business needs in full.

Some examples:

- Mozy, now a part of Decho(an EMC company), offers consumers a dead-simple, free back-up solution. The company’s rapidly growing consumer base brought the product’s premium version in the office environment and even to the enterprise. (see also Carbonite)

- Teamviewer is a remote desktop software download that is exceedingly simple to use. Consumers downloaded it 15m times for fre, and fair amount of them then brought it into their places of work allowing the company to build a sizable business. (see also GoToMyPC and DimDim)

- YouSendIt offers a web-based service for distributing large files (essentially FTP replacement). Embraced by 10m consumers, the familiarity and simplicity of the product pushed it into the enterprise, where they have thousands of paying customers. (see also Box.net and Dropbox)

- Wix is a website builder/hosting service funded by BVP. The product is provided free to consumers with Wix branding, but at a monthly fee for small business users. Despite the product depth and differentiation, Wix chose to forgo the option of charging consumer preferring to build subscription model using consumers as the conduit.

2) Targeting the Expense Account – This strategy uses Internet marketing to directly reach the desired customer within the enterprise. These individuals don’t really have any IT budget(at a minimum they are reimbursed for business expenses), but are able to make small online purchases that can lead to widespread adoption in the enterprise over time. The employees may be a low level IT employee, sales rep, project manager, systems analyst or marketing analyst. They also may be engineers looking for solutions to improve their productivity, which explains why open source software can develop traction very quickly. These individual employees have something in common in that they don’t get the attention they need from their IT organization due to their limited influence and supposed narrow use cases. Nevertheless, they are always interested in using new products and to improve their performance or simplify their work processes. As a result, they speak to peers at other firms, and scour the Internet for products they can quickly trial, buy and use.

Some examples:

- Early on Salesforce.com was able to gain initial penetration into organizations by selling to the individual sales rep, not the SVP Sales, CIO or CFO. Not too dissimilar, individual sales reps were early adopters of WebEx.

- Spiceworks has a software download that helps technology professionals manage, track and report on the software and hardware on their company’s network. Interestingly, their strategy has been to give the software away for free and develop a revenue model using lead generation for IT products.

- A former Adobe exec recently told me that while it was not their intention, the biggest purchasers of their Acrobat software comes from individual employees, who come into account with the free Reader product elsewhere in the Internet.

There are many more examples, of successful software company’s reaching their target customer via Internet marketing and sales including LogMeIn, Solarwinds, Altassian and Acronis. Nevertheless, it is clear that all of the above examples have several common attributes, including:

1) Simplicity in terms of sign-up, installation and basic usage
2) Low entry cost (perhaps via monthly subscription model) or no entry cost (“freemium” model)
3) Low cost of goods, to ensure consumer exposure to the product via a free variant of the product (COGS may include bandwidth, storage and serving costs)
4) Low-touch product support
5) Easily marketed and sold over the Internet

The last of these deserves a separate post, because direct online marketing and sales requires a strong understanding of the market size, buyer, and of course unit economics.

The model doesn’t work for everyone, but a lot of software companies I meet can adopt these strategies with only some incremental work to the product. Longer-term, these companies will have a far more scalable and profitable sales model than traditional enterprise software companies hiring sales reps, signing channels, or working with OEMs.

As I have mentioned in a previous post, Israeli companies should be jumping on these low-touch, no travel, limited-interaction sales models. The challenge however, is to develop your product to support the business model, something many Israeli companies often do backwards.

Saturday, April 18, 2009

Pride and Humility

In my work with entrepreneurs, I come across three essential traits that define an entrepreneur: self-confidence, passion and perseverance. All three traits are a necessity for acting upon an idea, facing adversity and doubt, and ultimately bringing the idea to fruition. However, there are two more traits, which I have come across on rare occasions, and which I have come to admire most in entrepreneurs.

The first of these is the ability to recognize when “it’s just not working” or at least when “it’s not going to get much better without a lot more money and risk.” It could be that there is no attractive business model, the competition is intense, the market is too small, or simply that the capital and time required to overcome any of these challenges is simply too much to justify. The ultimate decision may be to wind down operations, to seek a buyer for the business, or to forget about growth and cut costs to keep the existing business alive.

These are all among the most courageous decisions any entrepreneur can make, and actually require more self-confidence than the confidence required to start a company in the first place. Why? This person is in fact so self-confident in his entrepreneurial abilities, that he/she knows that they have more and better ideas just waiting to be realized. He is also wise about his personal economics. An entrepreneur that makes such a decision is essentially saying that a guaranteed dollar today is better than a 50% chance of getting anywhere between zero and two dollars in the future. He/she is also saying they can better spend their time and money on something else, and don’t want to waste other people’s time (employees) or money (investors) more than is necessary.

We all know most start-ups don’t succeed, but ironically, most of those companies only shut their doors once they exhausted all sources of capital. And considering that the high rate of failure among start-ups is not about the lack of capital, but rather about a fundamental problem with the concept, market, or business model, one would expect more entrepreneurs to initiate the winding down of the business on their own. So why is it that more entrepreneurs don’t recognize when things aren’t working, or at least are unwilling to act upon this conclusion?

My belief is that there are actually two strains of self-confidence among entrepreneurs: the first kind is actually self-confidence commandeered by pride, or tainted by arrogance (unfortunately, all too common among both entrepreneurs and VCs). The second strain is a genuine self-confidence, and one that is easily recognizable because it can co-exist with the most beautiful of human traits….humility. So to explain the anomaly of so few entrepreneurs convincing themselves, investors and partners to move on, it is actually the result of certain entrepreneurial traits dominating others. Specifically, perseverance and passion overshadow the self-confidence required to call it quits. A similar argument can be made of investors who don’t know when to recognize an investment gone bad, but I decided to focus on entrepreneurs as they ultimately have more immediate control over the direction of their business.

The second trait that I admire most in an entrepreneur is the ability to recognize one’s own strengths and limitations, along with the ability to build a team that complements and improves on them. Most entrepreneurs bring on co-founders, and many others hire senior executives along the way, but few go as far as they need to. My favorite entrepreneurs explain to me that they hired someone because “he is smarter than me,” or because “I want someone smart to constantly challenge me.” I am not talking about a “technical founder” hiring a “business” partner or vice versa. That is obvious and essential. I am instead referring to the ability to hire someone with overlapping skills, but perhaps a different set of experiences.

The ultimate manifestation of this trait is a strong and successful entrepreneur going to his board and convincing them to hire a more experienced CEO to take the business to the next level (and it doesn’t count if they do this when their failure is already clear to all around). Sometimes, the recommendation is actually to think about hiring a senior executive who is at least capable of taking over the reins as CEO if such a decision makes sense(planning for succession). Either way, similar to the ability to “call it quits”, the ability to hire great people all round you, is a variant of genuine self-confidence. However, the entrepreneurs I have just described possess a great degree of both humility and self-awareness., as they know what they are good at and recognize it’s in their economic interest to bring the best people to the company.

I don’t want to undermine the importance of traits like perseverance, but sometimes I think we suffer from an overabundance of this in Israel. The entrepreneurs who exhibit some of the other incredible traits I mentioned are on the top of my list and are ultimately the entrepreneurs we as VCs want to back again and again, regardless of the outcome. They do not doubt themselves for a moment that if they wanted to, they can start another company and raise capital for it. They may not get the recognition they deserve in the press, but investors, executives and employees all recognize them as among the most brilliant and ultimately successful.

I conclude this post with an apt quote by pianist and comedian, Oscar Levant (1906-1972), who wisely pointed out that “what the world needs is more geniuses with humility, there are so few of us left.”

Monday, March 30, 2009

Marching to a Slightly Different Beat

A recent TechCrunch post by Sarah Lacy raises some interesting questions about Israeli high tech, in particular why is Israel seems to be limited to small exits and why have venture capital returns been poor relative to the top US funds. One can’t compare venture markets at a given moment in time without taking into consideration the fact that Israel is primarily a market for technology start-ups. By technology companies, I refer to those start-ups founded by engineers, and whose personnel consist almost entirely of engineers until a product is finally ready to enter the market. These are companies which requires 2-3 rounds of financing to complete R&D, and which differentiate themselves from the competition based on a technological edge. Whether in the US or Israel, technology companies have a longer gestation period and require more capital to reach revenue stage, hence making them more sensitive to market cycles. Those who invest in the early stages of technology companies, including most of the Israeli venture community, will therefore have longer gestation periods of their own until meaningful returns (or losses) can be demonstrated. However, Israel has some additional attributes that exacerbate this overrepresentation of technology companies in the start-up market.

Entrepreneurial Engineering Culture: Unlike the US, there are only few billion-dollar tech entrepreneurs to look up to (and maybe only one associated with a founder’s name), but literally hundreds of entrepreneurs who sold the equivalent of a prototype technology for tens of millions of dollars. These entrepreneurs are successful, but did not build successful or scalable businesses, and may or may not have made their investors money along the way. On the whole, Israel is not yet a market for building highly profitable and scalable companies, but still a technology heavy market that serves as an outsourced R&D lab for the world’s largest corporations. This situation is a product of Israel's engineering oriented entrepreneurial culture, where there is a desire to be recognized foremost for their technology brilliance. As a result, many Israeli entrepreneurs are centered on developing a clever technology, and not necessarily on developing a clever business backed up by strong technology. They want to be hailed a genius, and to be rewarded handsomely by being acquired by a large American corporation, or simply selling the patents. This is far more prestigious in a market overrun with engineers, and let’s face it…its easier and more gratifying to explain to mom how someone paid you millions for your cerebral prowess, than talking about EBITDA margins and growth. My cynicism aside, not all entrepreneurs are really focused on building a profitable business, and this has to change.

Spoiled by Tech M&A: The myriad technology acquisitions of Israeli companies with little or no revenues (not to speak of profits) has created a vicious (or virtuous) cycle that engenders yet more technology oriented companies, entrepreneurs and technology exits. I can write all I want about the need to focus on building and financing real businesses and leaving technology to the labs, but then bankers and corporate M&A teams come an pay outrageous sums for early stage technology companies! Looking at acquisitions over the past four years, one will find that in 90% of these deals, valuations were not calculated based on revenue multiples (let alone EBIDTA multiples). Entrepreneurs and their VCs are spoiled by these acquisitions because, devoid of financial metrics, building and navigating such companies is incredible difficult. In this market, its downright impossible. Moreover, these types of pre-revenue tech exits create a false hope for hobbling start-ups, their entrepreneurs and investors.

Billion-Dollar Companies: Many Israeli VCs are culpable in focusing entrepreneurs to focus on technology, rather than on a smart business strategy and early revenues. A lot of the problem stems from what I see as a quixotic quest to build a “billion dollar company.” This pressure in turn comes from limited partners of VCs, who see billion dollar exits as the only way to ensure strong venture returns managing hundreds of millions of dollars. They may be right, but how can investors possibly recognize such opportunities as seed or Series A investor? The result of insisting on billion dollar opportunities, is throwing lots of money at very risky, early stage bets. If companies raised less capital, and were more efficient and productive with that capital, we could focus on hundred-million dollar companies and give everyone fantastic returns.

Selling Too Late: I have often cringed at the notion that Israeli entrepreneurs and their VCs sell “too early”, although I assume there are a few corner cases like this. I have never seen data to back-up this assertion, but presumably the argument is that if everyone has a bit more patience, exit valuations would rise and we would have more Checkpoints, ICQs and Comverses. Those who put forth this argument probably have a certain start-up in mind, but few ever mention a company’s name or can point to the absurdly low valuation multiple at the time of sale. Because the vast majority of exits are pre-revenue companies sold at decent prices, the idea of waiting for the company to be valued based on revenue and EBITDA multiples is pretty bold. And if the argument is that the valuation multiple was too low at the time of sale, we should remember that such hindsight is only relative to current market conditions and valuation multiples. I mean are any company’s valuation multiples really better in today’s brutal market? I am sure there are also a handful of companies that might have had a good shot at maintaining their independence and growing into large public companies, but these are certainly the exception. I argue the contrary, as I come across too many tear jerking stories of companies who recently closed their doors or who were forced to sell in a firesale, several years after refusing to be sold at ostensibly very attractive valuations. I hesitate to name names, because of the confidential nature of this business, but they are legion and everyone knows at least one. The reality is that most sectors go through a certain hype cycle, and those fortunate enough to be ahead of the curve and to recognize it, can capitalize and find riches. If we Israelis are guilty of anything, it’s sometimes believing our own hype and failing to capitalize on it in time when an exit opportunity appears.

No Israeli Growth Capital: The final unique attribute about the Israeli venture market is the absence of growth capital, which is really a prerequisite to building large and lasting companies. However, the reason there aren’t any late stage VCs is not because they have yet to discover Israel, but rather because there are so few late stage Israeli start-ups and few that meet the investment criteria of growth capital investors. Many exciting companies are acquired ahead of building a business, but there are other factors at play. I often get the sense that because some entrepreneurs can almost taste the exit proceeds, many of them approach late stage financing as if they were really negotiating the sale of the company. By this I mean, their goal of price optimization eclipses their goal building a business plan that can justify late stage financing and high valuations.

As similar as they are to one another, the US and Israel venture markets are still apples and oranges. These 5 attributes of Israeli venture capital reinforce one another and provide some explanation for why venture returns might not reflect those in the US. It also explains why it is so difficult to build large Israeli companies; namely, because we are so good at selling technology companies. This is a far better situation than almost any other geography worldwide, so we shouldn't be ashamed, or abandon it. However, I do believe that entrepreneurs and VCs should focus one another on gradually getting out of this cycle of technology sales, as it is the natural evolution of Israeli high tech.

Friday, January 30, 2009

Half a Dozen for BVP


Yesterday, Forbes published its annual Midas List, which is a ranking of sorts for the most successful venture capitalists. I am extremely proud to write that no less than SIX partners from Bessemer Venture Partners appeared in this list of 100 investment professionals, including: Rob Stavis, Bob Goodman, Felda Hardymon, Ed Colloton, David Cowan and Rob Chandra. This is the most of any venture capital fund, which I attribute to the unique and indepenent culture of BVP. Congratulations to my partners and keep up the fantastic work! The bar is set very high for the rest of us.
Surprisingly, not a single venture capitalist from the Israeli VC sector appears on the list this year, perhaps owing to the dearth of high profile exits in recent years. Whatever the reason, I would expect to see several Israeli names on the list in the years to come as Israeli start-ups become great success stories themselves.

Sunday, January 18, 2009

Lets Hope its Just A Little Gas

Maybe I am getting ahead of myself here, but I have always felt that Israel was fortunate to have never discovered serious quantities of oil or gas. This morning, a group of companies made an official announcement regarding conclusive results of tests indicating considerable natural gas deposits in the eastern Mediterranean. While excited at the prospect of energy independence and some extra change for the government to dole out, I am actually quite anxious.

Energy independence is the dream of any modern nation, but too much “independence” is a recipe for economic disaster. Specifically, I refer to the deleterious affects caused by the “rents” that flow to government coffers when natural resources are sufficient for export. Admittedly, Israel is too advanced and diversified an economy to suffer from the “Dutch Disease” of other Middle East economies, which distorts development and in a way that impedes the growth of non-energy industries. However, with populist tendencies now evident in all major political parties in Israel, I genuinely fear the financial mismanagement and irresponsible policy making that will likely result from too much energy independence. I anticipate a situation in which demands for reform, privatization and good government, will give way to demands for populist hand-outs across the political spectrum(now even second and third cousins of the Israel Electric Corporation’s employees will get free electricity for life).

There are few energy rich economies that responsible nations would like to emulate, although there may always be a tinge of envy. Only several months ago, it would have been considered blasphemous to speak of such ruin with the price of a barrel of oil reaching $140. But now that it has plummeted to $35, government budgets are imploding, inflation souring, and currencies swooning. Moreover, unrest is likely to ensue when these populist authoritarian governments are unable to meet the rising expectations of their citizens. I am of course thinking of Russia, Saudi Arabia and Venezuela, among others. While counter examples exist, I am not sure future Israeli governments will be able to take advantage of energy riches and follow in the footsteps of Norway and Canada. I know that this might be different because there is no government owned company calling the shots, but I am still anxious.



Gazprom's new headquarters building will be two times the size of the Eiffel Tower.

Lets just hope that the gas discovery off the coast of Israel is enough to meet Israel’s energy needs, and not much more(not enough to build the tallest building in the Middle East). And lets hope that the next great discovery in Israel is the software that facilitates the discovery of oil/gas in other regions of the world, or even better new solar cell technology that allow Israel to harness the sun to be completely independent (could we then be a light among the nations?).

Sunday, January 4, 2009

Just the Minimum

I constantly find myself trying to convince entrepreneurs of pre-revenue software and Internet start-ups to scale back their development plans and accelerate the introduction of their product. This has only intensified in the current economic environment, where hundreds of start-ups, caught fundraising during the R&D phase, look pretty unattractive to venture capitalists right now. My advice is met with an emotional reluctance, because invariably this means curtailing ambitious development and product goals, which were the basis of the original business plan. And in pushing companies to develop only the minimum necessary to engage a customer with a real product, a second piece of advice emerges with regard to narrowing the market focus. I encourage companies to tighten their market focus through cuts in development, but to do so in way that does not completely forsake the larger billion dollar market dream.

We in Israel have been spoiled and even misled by multiple, high profile technology acquisitions over the past two years. These companies were purchased by large US companies at prices that had no relationship to revenues. Contrast this with the most successful US start-ups over the past few years, where technology took a backseat to superior business, sales and customer acquisition models. I have long felt that Israeli entrepreneurs rest too heavily on technology superiority as the core of the business plan. Such emphasis on technology creates protracted development plans, and delays the critical stage of ascending the “sales learning curve.” My colleague, David Cowan, has written better blog posts on this “sales learning curve,” but my angle on this is to implore Israeli start-ups to move as fast as possible to this stage. This stage of selling and learning from customers is actually a lengthier process for most Israeli companies due to distance and culture.

Needless to say, a company enters a new stage of its life when it brings a product to market. On the sales side, the start-up is able to better understand the sales cycle, the viability of the go-to-market strategy, the priorities facing the key decisions in the customer’s organization, and strength of the marketing message. On the product side, the company gains insight into the competition and pricing, and receives valuable feedback to refine the product roadmap and feature set. On the technology side, the start-up also learns valuable lessons regarding integration and implementation, interoperability with the other products in the customer’s environment, and support requirements. All of the above also serves my interest as an investor; as we become more educated about the opportunity, a company’s sales assumptions and cash needs. But ultimately, this is about making a plan more attractive for outside investment, which should be in everyone’s interest.

By doing only the minimum, a start-up actually lessens its reliance on technology, and is forced to hone its customer acquisition and support skills, which is a very healthy test of viability. In the current environment especially, I believe we all need to tone down the technology goals in pre-revenue companies precisely in order to focus on building a business much earlier than we have seen in the past.