Felda Hardymon's Keynote at Journey 2012

In response to popular demand, I am uploading the keynote presentation of my partner, Felda Hardymon, that was given at E&Y's Journey 2012 high tech conference. The presentation contains some fascinating observations on the state of venture capital.


 

...and some photos doyen of venture capital at the Journey event.

The Other Side of Innovation

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The proverbial “billion dollar company” seems out of reach for many Israeli start-ups, but may just require a different way of thinking about innovation and scaling. I learn a lot of Israeli start-ups and venture investing by observing my American colleagues and of course by studying successful American start-ups, whether or not they are in the BVP portfolio. While many American start-up ideas, particularly in the SaaS and Internet domains, could never have been started and properly executed from Israel, occasionally I come across a company that should have been founded in Israel.

One such example is Ubiquiti Networks (UBNT), founded in 2005 in the apartment of a 26 year-old wireless engineer from Apple, Robert Pera. Ubiquiti has no Israeli connection, but it offers some fantastic lessons for the Israeli entrepreneurial community because of their domain and go-to-market strategy. Ubiquiti operates in fixed wireless broadband, arguably one of least sexy market segments today due to cut throat competition and struggling customers (but one familiar to many Israelis).

To start off, Ubiquiti didn’t aim to provide the best wireless product, but to create a wireless product that would allow wireless ISPs (WISPs) to better compete with wireline competitors. Ubiquiti realized that its customers’ businesses were failing precisely because existing wireless gear and was too expensive (product cost including costs of service, customization, support, etc.). And so Ubiquiti set out to take over a billion-dollar market by solving this key issue of cost essentially throwing a lifeline to the vanishing WISP.

Ubiquiti’s disruption to the market came from the fact that it was to sell its wireless ‘kit’ for less than 1/10^th the competition without a significant tradeoff in quality and performance. They were able to do this with a unique development and business development model that lowered their own cost structure, which they then passed on to the customer. This not only includes the cost of goods sold, but cost of manufacturing, marketing, selling and supporting that product.

Ubiquiti didn’t hire any salespeople and directed everyone to their website and where they could easily find local distributors around the globe. Ubiquiti didn’t have a support organization, and instead directed all customers to a detailed online forum which now has 334K posts from 142K members! It helps when your customers don’t really compete with one another and will gladly help, advise and recommend products to one other. And because the product was so cheap and the customers themselves installed and maintained it, there was no need to sell or charge for expensive warranties.

Eliminating most SG&A costs from their model was a radical approach for a telecom equipment company like Ubiquiti, but one that fit very well with their WISP customer base, where the cost of base station and CPE equipment determined whether they had a viable business model or not. The resulting hyper efficient sales model is far more innovative and sustainable than the typical technology advantage that a start-up introduces to the world. That’s not to say there is little technology in their products, because there is. They relied on software to innovate, preferring to ride the downward cost curve of hardware commoditization. Even Chinese vendors have a hard time innovating price reduction like this and several companies had to resort to theft to compete.

Since it’s founding, Ubiquiti has generated over $100M in profits and will soon pass $100M in quarterly revenues. For a communications equipment company to grow this quickly, while maintaining operating margins of 35% is remarkable. 

Moreover, Ubiquiti never raised external money until it raised a $100M private round in 2010. Ubiquiti has since moved into adjacent markets, like enterprise WLAN, surveillance camera, microwave and routers with a similar approach of bargain prices and customer self reliance. So expect more disruption from these guys, and new competition for several Israeli wireless leaders.

To put this story in some perspective for the Israeli audience, in 2005, Israel-based Alvarion was a market leader in fixed broadband wireless and approached a billion dollar market cap.  A mere seven years later, it is Ubiquiti with the billion dollar market cap; and Alvarion is worth $25M, slightly less than its cash position. As for other wireless equipment players, Nokia Siemens Networks is falling apart, Motorola has been gutted, and you can buy both Proxim and Airspan in a package deal for $1M. 

Ubiquiti proves that fantastic outcomes can emerge from any sector, and that technology is not the only source innovation. Ubiquiti might be a wireless equipment company, but its thoughtful strategy provides lessons for all technology companies:  

1.     There is NO long term advantage in technology innovation that doesn’t result in a superior business model 

2.     Embrace the weakness of your competition, by leveraging hardware commoditization and reducing if not eliminating the need for expensive post-sales operations and support

3.     Listening to your customers is more important than talking to them. Leverage the Internet for marketing, sales, support and customer feedback (product definition).

Although Ubiquiti was not a BVP portfolio company, it represents the kind of innovative, software centric telecom we are fond of. BVP has invested in four telecom companies over the past few years, each one attempting to best its competition with a software technology that supports a superior and more capital efficient business model, including Axis Network Technology (acquired by Ace Technology), Traffix Systems (acquired by F5 Networks), Intucell Systems and Vasona Networks.  I look forward to finding and funding the Israeli Ubiquiti in the years to come.