A Startup CEO

So I bit the bullet and moved my blog to www.panstartup.wordpress.com from my hosting site. The reasons speak to the larger evolution of SaaS and its inevitable, inexorable march to supplant installed software.

1. Iterative software development is how we are all working. Wordpress releases constantly. No sooner had I installed 2.5 then 2.6 came out. Just 5 years ago, you could measure releases in months. Heck MSFT releases in years. Not with web products.
2. The cost of my installing 2.6 vastly overwhelmed the advantage. Years ago, with installed software, I would have simply ignored the upgrade because there was no alternative.
3. Wordpress provides the alternative — host your blog on their site and they take care of the upgrades.

With offline doc support in Google Docs, all I need is offline support for Gmail and I am done with installed software.

Its great to see a lot of work come together. Its very cool to see how kids and folks are using the site. Lots to learn and lots to do. If you want an invite, go to hangout.net and leave us your email address.

Our fb application this spring was a great start for us to understand the interaction of users with our approach. Its fascinating to chart how folks are actually interacting on the web and how things rise and fall very quickly in this space — no one wants the “Jumping the Shark” effect on usage.

What has been most challenging has been to blend two different development cultures in one company. By combining both web and 3D into one company, we have the drive to iterate quickly (web) with the pipeline dev mentality of game companies. The good news is that we have bred a culture which releases cool stuff in 3D and web in two week cycles. We are always dealing with the tension between polish and speed, but its a good tension that has resulted in some very exciting interaction on the web.

In another chapter of “There is Nothing New Under the Sun”,  we find a close comparison between the attempt to control information for economic superiority and the economic impact of free flowing information.

The time is 1791 and the United States is in its infancy. Britain has invented numerous technologies such as textile machinery which had catapulted Britain to great wealth. The US is an agrarian democracy, enabling Britain to reap the greatest profit margins from America’s raw materials. To maintain its leadership, Britain outlawed the export of textile machinery, skilled textile mechanics were forbidden to emigrate, should they memorize methods and peddle this information abroad.

Alexander Hamilton, meanwhile, understood that gaining this information was key to building the US industrial base. He supported numerous spies in England and welcomed English “defectors” to begin building America’s industrial might.

Despite Britain’s best efforts, restricting information and controlling the flow of technology failed as we now know. Employment non-competes will end up like Britain’s  — shackles that fail in the end.

I just got back from a digital media summit that was one of the best demonstrations of value add and entrepreneur can hope for

As an entrepreneur, you are supposed to be looking for at least two things when you seek venture capital:

1. the capital itself;
2. the added value their experience brings to your company.

But while every early stage VC makes that claim, it is really hard to distinguish one from the other in many cases. The really good ones, (who are usually very successful), have a network that they can tap to answer key questions around recruiting, product development and business development.

The problem is often that the network is dispersed and accessed via 1 on 1 conversations that the entrepreneur must piece together to form an answer. This task becomes especially challenging when one area (business development) can have significant impact product development. What the entrepreneur would really like would be to have the BD experts in the same room with the product experts to hash out the differences of opinion.

But I just encountered a tremendous solution to this vexing problem of sorting out opposing answers to key business questions.

The digital media summit was hosted by one of my backers this last weekend . I had deep suspicions about coming in to it. Was going to be a boondoggle with a lot of happy talk and backslapping, or was I going to be able to put forward and get answers to some challenging questions my new startup is facing.

I got my answers at this conference because both networks (advertising giants, and social network experts) were in the room at the same time and challenged each other over my questions and many others from other portfolio companies.

So I got not just business cards, but real answers to challenging questions that make my decision-making much, much easier.

So when a VC says that they are value add, remember to see if they make it really easy for you to get your answers or just send you a bunch of email addresses to ping. Summits like the one I attended really do help.

And there was incredible powder on the slopes.

Every now and then I will post a phrase I have heard often in my journeys through and with VC land. Interpreting these phrases is key if we are to get the right meaning and act accordingly.

“He is a good guy”

This is a classic phrase VC’s use when they describe a person, who we will refer to as “them” in this thread. It can mean almost anything from — “they has no criminal record” — to “I have worked with them and I like them, but they did not make a ton of money for me, but they has some potential. Its a safe phrase that tells you that you can and should talk to that person, but that the VC is not overly awed by them.

As compared to “This guy is awesome. He is a rock star (another post)”, “He is a good guy” is far less positive.

Frankly, it really means you are on your own — caveat emptor. You the entrepreneur need to figure out if you are interested in the person and want to hire them. I, the VC. certainly would not question or “block” the hire.

So corporate IT has finally gotten what they asked for — one throat to choke. With the acquisition of BEA, Oracle has taken out its last other smaller but major competitor leaving SAP and Oracle to battle it out. Corporate IT has made it so difficult for startups that they are now going to get their just desserts — very slow to innovate, plodding technology delivered through a relatively unresponsive sales and support channel.

So if anyone had a doubt about how IT is a commodity, the consolidation of the industry confirms this resoundingly. BEA was known for its engineering prowess and willingness to blaze tech trails that Oracle and SAP sought to catch up with poorly, as evidence by the clamor of BEA customers to have Oracle acquire BEA.

Innovation in this industry is going to look like the innovation of the Big Three in the automotive sector (or should I say big 1.5?). The best cars come from elsewhere, both in terms of quality and reliability because the pressure to innovate really didn’t exist once the consolidation took place. Cars took years to design and build. Their quality was poor and we customers suffered until an outsider (e.g. Japan) became the upstart that now leads in market share growth and innovation. (If you doubt this, test drive a Prius. At 50 mpg, its a phenomenal blend of technology and customer attentiveness.)

But this is old news. What is clearly the case now, is that the consolidation of the Enterprise IT space profits the bankers and the stockholders of the acquired companies, but will not benefit the enterprise IT organization. In fact, it will choke them as Enterprise IT has effectively choked off enterprise innovation.

I have been trying out Plaxo on-line since it was a plug-in in my old Outlook world. The concept seemed excellent — manage yourself (contacts, calendars, etc.) on-line and use it as a conduit across  your various computing and communications pc and mobile platforms.

But I started getting a weird error message (Object already exists) whenever I would try to synchronize. And it only came with the latest release. So via Plaxo support, I learn that what they have done instead is limit the number of items about myself that plaxo on-line will sync:

I am currently reading American Creation by Joseph Ellis on the founding of the US. I am big proponent of the maxim that history constantly repeats itself. Building consumer-based internet companies parallels a key event in our history — the writing and release of the Declaration of Independence.

The founders spent gads of time making sure that all of Britain’s “crimes” against the colonies were very well documented. (later sections). They did not want any errors in this section and went to extraordinary lengths to make sure it appealed to the people. They spent almost no time or edits on the first section “Life Liberty and the Pursuit of Happiness”. They breezed right by it, not caring to edit or change anything. Granted one could say that they all agreed on the text. But Ellis contends that the founders really did not care. All of their time was focused on the specific violations.

So what did/do we all remember 50, 100 or 200+ years later?? Certainly not the specifics, but the eternal truths — the grand, sweeping language that has inspired countless numbers of independent countries to form.

Fast forward to building internet applications –

The latest buzz in building apps is that you never can know in advance what will be a killer app. You take a chance, build some stuff, throw it out there and let the users tell you what is really important. There are scads of stories about products that became wildly successful for all of the reasons NOT thought of by the founders. We are told to Don’t try to overengineer or out-think the customer. Let them tell you what’s important and what isn’t.

If our founding fathers could not figure what was important, why can we?

History always repeats itself.

I have just gone through a very bizarre experience where I, the entrepreneur, somehow became more pessimistic than my accountants about my company’s prospects. Usually the entrepreneur is the one who paints the picture of the future that leads to riches for everyone — where despite the lack of present cash, revenue, product (or any one of the above), the future has never looked brighter. And I am as fervent as they come.

But somehow, I became the pessimist and my accountants, the optimists.

It is all about a new IRS regulation called 409 A. The IRS insists on having independent auditors perform a valuation on the company to value common stock in order to determine a reasonable option price that is set based on this valuation. Whereas the entrepreneur would like to see an option price as low as possible to create as much incentive as possible to potential hires, the IRS and their accounting legions, wish to see a common stock price valued at market value and the option price closely approximating it.

The accounting sages do allow for discounts to the option price based on concepts like participating preferred clauses but they do not take into account the following logical concepts:

1. That the pricing of the venture money (pre-money valuation) is subjective and has no direct market value.
2. They do not take into account the success ratio of most startups. They do not take into account the likelihood that the startup will likely fail (at least statistically).
3. They do not comprehend the value of low priced options to recruit employees. By forcing us to price our options close to the common stock price, the spread is necessarily small as is the attractiveness of the option.

Granted the excesses in the option pricing past needed to be rectified. But in typical governmental fashion, our accounting sages have gone to the other extreme (Sarbox anyone) and reduced the value of one of the few financial incentives we CEO’s have (beyond our flashy personalities) to recruit top talent.

Of course, the size of the spread is meaningless if the company fails or is sold for change. But an option price of $.1 is very different than $.70 , especially when with typical IPO prices of $10-15.

Give us a break. Let us hire great talent, build great companies and fill the tax coffers with our capital gains. The cost (easily 5K/year) for these valuations and the negative impact on our employees is burdensome and very unhelpful.

I have been coming to the Outer Banks (OBX) for over 20 years. Its a magical beach that offers the best of all worlds — large, smooth sand beaches, very unpopulated shores, good surf — body or board - and lots of nearby diversions — great golf, good food.

On this trip, I am most struck by the similarities between Wall Street and OBX weather patterns. The recent mortgage crisis is a good basis for my analysis, which can be summarized –

When the wind shifts to an easterly breeze (out of the west) , the changes are dramatic and change behavior equally dramatically.

1. The shift is sudden
   At OBX, the wind shifts can happen in mid-day suddenly and silently. No major storm or forewarning has to occur for the change to occur. Its on you before you know it.The changes on Wall Street have been equally sudden. Sure, some prognosticators are saying “I told you so”, but the lack of transparency of companies like American Home Mortgage make determining the “when” much harder. And like the shifts in the winds at OBX, nearly impossible to predict precisely.
2. The air temperature changes by over 10 degrees
   When the wind shifts, the air coming over land brings a far hotter temperature than when it comes off the ocean. A full 10 degree shift is felt. The beach is much hotter, people stay out there less time.
   Wall Street seems to suffer similarly — the mortgage market has shut down. No one wants to loan. Its too hot to sit outside.
3. The water temperature changes — much colder
   When the wind shifts to an easterly breeze (west to east), the ocean water temperature drops over 10 degrees (from a very comfortable 70’s to chilly 60’s). The breeze shift moves from everyone being in the water to only a few brave souls willing to dip their toes in, even though the desire to swim is much stronger (#1 above)People who need mortgages are feeling this shift profoundly. Credit markets are drying up. Prospective purchasers have less options, and those fewer options are far more restrictive. Fewer people are willing to brave the icy temperature even though the need is there.
4. The biting flies come out when the wind shifts
   When the breeze shifts to an easterly breeze, the flies come out in force. Not only is it hotter and the water colder, but the flies are everywhere, nipping at you and bothering what little quiet you seek. Beach-goers see the calm seas and the strong sun and assume that their beach experience will be lovely.Mortgage delinquencies are rising and are projected to get worse. The feeding frenzy among collection agencies is growing. For those poor souls who thought the mortgages looked enticing, they are now facing the reality of hot sand, cold water and no biting flies.
5. No interest in other activities — stagnation ensuesWith the weather getting hotter, playing golf, putt-putt or other outdoor activities become unbearable. All anyone wants to do is sit inside air conditioning and avoid the heat and the bugs.If credit markets contract beyond the mortgage space, we will see equity markets suffer — prime takes a hit because of sub-prime. No surprise that the Times article “Putting the Clamps on Credit” highlights Oneida’s difficulties in raising funds in the debt markets — a company as far afield from the mortgage business as one can get.

What’s next? Well if you are on the beach, you pray for a wind-shift. Otherwise, you make the best of your circumstances. You enjoy each activity, but less of each — you sit on the beach for fewer hours, you hit the water more often but for shorter periods, you drink much more water and you use bug spray.

I am not sure the beach prescription holds for future Wall Street activity, but until the wind shifts, we had better get used to it. Financial advisors can speak on the right approach, but for all of our intelligence, we are still strikingly similar to our surroundings.