Head in The Cloud(s)

Enterprise 3.0 - The Rise of On-Premise Artificial Intelligence

With a blog titled "Head in the Cloud(s)," you'd think I'd be all in on cloud computing, distributed computing, large data centers, etc. Yes, the shift to cloud computing has been a net positive for specific applications. It is easier to get up and running, more scalable than on-premise computing, and financially more accessible to track.

That said, the emergence of large language models (LLMs) and generative AI creates a once-in-a-generation opportunity for certain on-premise, non-cloud applications.

For all the buzz around ChatGPT, Perplexity, etc., there's a quieter movement to deliver on-premises AI, leveraging several open-source packages in current use. Without naming specific vendors or packages, I submit that the (relatively) quiet development of on-premise AI is both a significant investment opportunity and a means by which organizations with security concerns or just large volumes of data can take more substantial advantage of the AI revolution.

Let's use the insurance industry as an example. Several years ago, incumbents were sprinting to develop glossy new interfaces for customer acquisition, as well as a counter to the emergence of the new "insurtechs" that threatened to "digitize insurance." Years later, it appears that much of that "insurtech wave" was little more than putting a digital front end on existing processes and targeted more at "edge" applications such as customer acquisition vs. "core" applications in insurance, most notably underwriting. The few insurtechs that managed to go public (Lemonade, Root) have seen their stocks largely crater in the public markets since IPO (LMND: -77%, Root: -88%), as the level of real disruption they posed to the industry was minimal, and thus their profitability.

Fast-forward to today, and with on-premise AI, an opportunity is emerging to tackle one of the core value propositions that incumbent insurers still have a handle on: underwriting. Decades, if not centuries' worth of data exist almost entirely on-premises, which can be used to train an enterprise AI to make better underwriting decisions. Because of the media where that data resides and the sensitivity, that information will certainly NEVER be shared to the cloud.

THAT is the opportunity. 

Stay tuned. 

 

Cleantech 2.0 is coming

As expected, a second wave of clean energy investing is now in force. Experienced investors from the first wave (2005-2014) who had less than impressive returns are back in action. Much like the second wave of internet investing that led to the massively valued social media companies, I anticipate the Cleantech 2.0 will yield a number of valuable franchises.

On a related note, the research on VC and cleantech that TBJ Investments contributed to is on Connected Papers, which links the paper to prior art and derivative works:

https://www.connectedpapers.com/main/61a95467ba058f0ced44cb5afd4ea5805f804ef3/Venture-Capital-and-Cleantech-The-wrong-model-for-energy-innovation/graph

New Year, New Location, New Investment Themes

2013 was a year of transition. 2014 is going to be a year of dramatic changes. First off, we've made a few key moves at TBJ Investments over the winter. The most dramatic of which is that we moved out of Boston to Washington DC. Some of this is related to career opportunities, but the essential fact is that DC is going to go through a significant set of changes, and with that will be a number of investment opportunities:

• Unstructured and Big/Social Data Analytics
• Reorganization of the Intelligence Community, as fallout of the NSA/PRISM disclosures
• Rebuilding of the Security Software Stack
• Jumping off point to Emerging and Frontier markets, where GDP growth rates outstrip those of the USA.

Each of these themes will be explored in greater depth, but expect 2014 to be a dramatically different year.

 

More Buzzient social media analytics on $BA Boeing Dreamliner

There's more evidence of $BA Boeing brand damage after the battery debacle. Some of this has been listed in a previous post on the Buzzient blog:

www.buzzient.com/blog/the-boeing-dreamli.../

Since this original post, there's been a lot of noise about various aircraft fleets delaying purchase of 787's or even shopping for alternative airframes. If we take a look at Buzzient sentiment analytics for the last month, we can see this clear divergence for the 787 product line, where sentiment drops appreciably when compared to other Boeing products:

(click to enlarge)

The dramatic drop in the red line (787 model) corresponds to the time period where it became known how bad the battery problems are. Since that time, Boeing announced decent results, but we can see in the social sentiment charts a lingering gap in product sentiment. Will this show up in delayed orders in subsequent quarters? I think prudent traders, using this Buzzient data alongside other measures would advise a HOLD on $BA.

Beat the Series A Crunch through M&A

As a follow up to the previous post on the Series A crunch(  Series A Crunch), it's important to also think of alternatives. Yes, my principal thesis is that seed-funded companies without institutional investment should focus first on their core business and customers in order to get over the financing hump. That being said, the smart company also looks at alternatives.

If you're a startup that has been bootstrapped, hasn't raised any institutional money, and will need money anytime in 2013, you should strongly consider selling. Why?

1. The angel market is about to dry up

Everyone feels it. There's lots of competition right now for angel money, and few angel groups really have an efficient process for looking at lots of deals. To be blunt, so few angel groups have high volume deal screening processes that there's a bottleneck in looking for angel money. So, if an angel group tells you that their process takes 30 days, well, it actually takes 60 to 90. If they say 60 days, it's really 6 months.

In addition, there are so few cash on cash returns at the seed stage that a lot of angels are illiquid as well.  That means they're waiting for cash buyers for existing portfolio companies in order to get back in the market.

2. VC's are being "Crunched" as well, and will act accordingly

There's another crunch going on; it's the Underperforming VC Crunch. Most venture capital firms underperform the S&P, and have done so for the last decade. A number of LP's are reconsidering their allocation to VC; CalPers for example is reducing their allocation from 7% to 2% or less.

That means that in order to justify their existence, those firms which aren't in a select few will have to drop eye-popping returns on at least 1 deal that captures headlines. That deal may/may not drive the overall portfolio, but will give the VC firm a reason to lobby for another LP allocation.  To do this, VC's will tend to do later stage deals, even though their charter might be to invest earlier stage (Series B at a Series A Price). This is all about survival and justification of that 2% management fee, so charter be damned.

So, if you're a seed funded company looking at a "true" Series A where you have some revenue, customers, product, etc, but haven't begun to auto-scale, you're SOL. 9 out of 10 VC firms are just not going to be up for company building right now. For them, they're in their own "crunch", and in the battle for survival between you and them, well, guess who they'll pick?

3. There is an innovation gap that advantages startups; this means YOU!

Since the financial crisis, the level of R&D by both public and private companies has been somewhat suppressed. What that means is that the VP of Engineering/VP of R&D for larger companies has a list of innovations he/she would love to have, but has never been able to fund. That's where startups come in. If you're seed funded and have an actual product, your offering helps those companies accelerate their own plan. For the seed-funded entrepreneur, you get access to larger distribution channels and resources you don't have. It's a Win-Win.

To survive the Series A Crunch is going to take a lot of nerve, hard work, and an iron stomach. As you gird yourself for more capital raising, don't turn away from the acquisition route  as well. If you find the right investors who are up for company building, carry on. If you don't find enough of them, M&A provides an alternative path that benefits your startup, your investors, the acquirer, and you the entrepreneur. Particularly without the "overhang" of VC preferences, M&A could be a BETTER outcome for early investors and entrepreneurs than with continued capital raising.

 

Digital NYC is Real; Observations as an angel investor and CEO

I had an awesome last week in NYC while presenting my portfolio company Buzzient (www.buzzient.com) to potential business partners and investors at the Gridley and JEGI conferences.  So good that I've tried to step back and understand why Buzzient seems to get more customer and investor traction in NYC?  IMHO, there are a few characteristics of the NYC scene that make it (second only to Silicon Valley)  a dynamic place for tech businesses:

1. Sense of Urgency

One of the things I've always loved about NYC is the sense of urgency in business conversations. There is very little of the "let's see what happens, come back in 6-12 months" inertia that you find in a number of other areas. Some of this is the "trader" mentality which has moved uptown from Wall Street to the technology clusters in the city. This awareness of the fleeting nature of opportunity makes business conversations in NYC move faster, and have a definite action or endpoint.

2. Availability

I've found CEO's, financial executives, and prospective customers FAR easier to get to in NYC. I think this is related to the sense of urgency, but doors and rolodexes seem to spring open with far less advance notice in NYC. I was pleasantly surprised on this trip to have senior people in a variety of organizations re-arrange their schedules to accomodate my trip.  I find that in the Valley, VC's are booked so far in advance(with a lot higher volume demand) that this is hard to do.

3. New Perspective

NYC has changed a lot from the Silicon Alley era. During that time, one could experiment with a tech startup and if things didn't work out, you could always go "Back to Banking". What's different now is that several of the banks are themselves gone (Lehman, Bear Stearns) and others are laying off (Morgan Stanley). For the first time I believe there's a new perspective where, short-term compensation aside, tech startups are not necessarily more risky than staying in financial services.  With this fresh perspective, I believe the NYC tech community has a more balanced view of risk and reward that makes the tech community more long-term focused.

4. Community Building

I'm impressed by the amount of community building I see going on in NYC. As mentioned, I was in town to attend Gridley 2013 as well as the JEGI (Jordan Edmiston Group) Conference. In both cases, members of the firm reached out to me proactively to attend, as well as made time for introductions and connections to other companies. I saw a real "can do" attitude in hooking Buzzient up to at least one flagship firm and reknowned investor.  Extremely refreshing attitude and one of the reasons why I believe startups from all over the world are seeing NYC as an easy place to get established.

I'll have another chance to evaluate the ecosystem Jan 30 when Buzzient will present as one of the SIIA Class of 2013 at SIIA Breakthrough:

http://www.siia.net/iis/2013/previews.asp

If you happen to be at Chelsea Piers (Pier 60) on Jan 30th, please come by and say hello!

 

The Series A Crunch is a hot topic now in entrepreneurship circles. Over 1000 companies are facing their own "fiscal cliff" of being unable to raise a subsequent round of capital post their seed rounds.

I posit that in order to get past the fiscal cliff, companies need to focus on a few core fundamentals:

1. Romeo Tango Bravo: "Return to Basics", or rather, focus on your core competence as a business during this challenging time and eliminate everything else. Many companies have increased their burn with premature scaling and additional expenses. NOW (if you haven't done it already) is the time to cut expenses to the bone. Kill the office, drop the service providers, reduce the over-provisioned AWS servers. Have employees transition to 1099 consultants and pay them for performance. Return To Basics.

2. I to the Power of WE: Time to use your network like never before. The only way you can scale without resources right now is to leverage the collective networks of the people you know, and not in an accidental way. Make tapping into your network 25% or more of your time every day. Ask for deals, ask for help raising capital, ask for freebies. Get your message out to the people who trust you and know you, and the people they know.

3. Customers First: Yes, the cliff is about inability to get synthetic capital into your company, but now is not the time to forget organic capital. Ask your customers to help. Get annual prepays up front to offset the cash flow gap. Scrutinize your CAC and Customer carrying costs; if your customers cost you more every day then they pay, you have to change the balance. Time to throw the unprofitable models used to get VC interest ("up and to the right, even if we're losing money") away, and get back to the basics of any business. You have to bring in more cash than you spend. Period.

Last, recognize that this is not an abnormal event. This is normal business and market forces are doing their thing. Don't get wound up in believing this is a special time in financing; in fact if you leave the world of tech and spend time with companies in other sectors, the "Series A Crunch" is called "Regular Life".

Deal with it.

With all the discussion of Series A crunch, I think it's worthwhile to examine another potential phenomenon: The coming Angel Shakeout. It's been mentioned before, but the explosion of Web 2.0 has created a class of angel investor who a)expects products to be built on the cheap, b) probably doesn't have much operating experience, so not aware of downstream problems when you do (a), c) has unrealistic expectations ("Can I make $1M off a $25K investment in < 2 years?"), and most important, d) has no stomach for sustaining their ownership position as companies begin to raise larger rounds of capital. Not saying that for (d) angels should have the capital to invest pro rata in successive rounds, but many I've encountered don't have ANY capital for a later round. Meaning that by definition they get diluted.

Knowing this, I'm starting to see more and more angels asking companies to do screwy things, not to improve the chances of success, but more aimed at financially engineering the outcomes.

Entrepreneurs need to be wary of this, and find the angels who really are trying to help you build a business long-term. These angels might not have the deep pockets to invest pro rata long term, but the best angels will still work the phones to get other investors in the deal, even if it means they're diluted.

Every entrepreneur should aim for a Don Lucas; Lucas was Ellison's first angel investor at Oracle and years later is still involved with the company.

The Big Whiff; Facebook IPO and the Boston Investment Community

This post has been a long time coming. Maybe it's the historic date itself, the wooziness from a stomach virus, or the realization that you rarely see such a stark contrast between success and failure.

Namely, the Facebook IPO, valuing the company at $100B, exposes the sharp distinctions between the Boston and Silicon Valley investment communities. In effect, the inability of the Boston investment community to put even a sliver of investment in Facebook, a company that started here, is probably one of the largest squandered opportunities in business.

Facebook raised over $2B in the march from dorm room to IPO. Not a single dollar is from a Boston angel investor, venture fund, hedge fund side pocket, or corporate strategic investor. Not $1. The closest claims are the west coast office of Greylock and the trivia that Jim Breyer of Accel grew up in Newton, MA. That's it.

Not being a baseball guy, I may have my analogies wrong, but this reminds me of Babe Ruth. The Boston Red Sox undervalued Babe Ruth and traded him away to the Yankees. The Babe went on to a storied carrier, and 80+ years later the Red Sox finally won something. Boston had first crack, but just whiffed.

The failure doesn't just end at the first up at bat, the Seed/Series A, but in every successive round. Whiff, Whiff, Whiff.

The question is why?

When I first came back to Boston in March 2006, I saw major cultural differences with Silicon Valley. These differences were based on my having had ~20 years experience in high tech as an early employee, entrepreneur, CEO, Limited Partner, and even VC associate. That experience was in areas as diverse as SF/The Valley, London, Paris, Atlanta, and DC.

At the time, I compiled my ideas into a short deck:

http://www.slideshare.net/tbjbuzzient/boston-vs-the-bay

Now, obviously many of the points raised in this presentation have changed. There still do remain, IMHO, some fundamental differences in the regions that led to this outcome.

1. Risk Tolerance:

Frankly, Boston has essentially none when compared to the Valley. Sorry, but that's just the way I feel. Even the "risky" deals I've heard certain investors beat their chests about have some sort of hedge, financial or otherwise. I've had conversations with a ton of investors who are really growth/momentum investors in VC clothing.

2. The Outcome, not the Process:

I've never been exposed to as many so-called investors who really are interested in multiples of Revenue/EBITDA and not actually building a company.  The shift to SaaS in the software industry has created an even better cover for this behavior, with companies being reduced purely to CMRR, CAC, CLV and assorted other metrics. I don't know any successful Valley entrepreneurs who started a company to maximize CMRR or CLV. The Process of building a great company is what drives the best entrepreneurs I've known; their investors thus support that belief system and help the entrepreneurs BUILD companies vs. harvest the financials.

3. Clubbiness, not Competition:

Boston investors seem way more driven by colluding with whom else might be in the deal, vs. originating a deal and having to compete.  There is far less outright competition between Boston VC firms to invest in new deals. So, that creates a slower tempo, less risk-taking behavior, and little desire to do something out of the box.

There are plenty of other factors that I will analyze in successive posts. I'll also make a series of suggestions on how to avoid whiffing on the next big pitch.