Head in The Cloud(s)

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.

Enterprise is Back and Sexy as Hell

This was also posted at buzzient.com/blog

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For those of us brought up in the enterprise software (#EnSW) era, it’s been a long time coming. Ever since the emergence of B2C commerce, many of us have had to take a back seat to sketchy online consumer businesses which, though they make our lives better, are not necessarily feats of engineering or substantive importance to corporations, big businesses. Remember online dog food ordering? You get what I mean.

After the dot-com crash, there was a glimmer of hope for us enterprise software folks. As consumer internet investing seemed to be going the way of the platypus, companies such as Salesforce.com, Successfactors, and NetSuite emerged with internet-delivered business software which served the needs of fast-moving young gazelle companies as well as maverick departments inside larger enterprises. These Software-as-a-Service (SaaS) pioneers blended the best of the internet boom with the pragmatic problem solving required of enterprise solutions.

However, the re-emergence of the enterprise began to be overshadowed in 2003 by something new: Web 2.0 and social networks. All of a sudden, it seemed like the world took a great step backwards to 1999, as companies just needed to add a “-ster” or “-ly” to their name in order to raise capital and capture mindshare. Just type a few words into your Web 2.0 name generator and you were on your way:  Web 2.0 Name Generator

Some of these companies were legit innovators and eventually market leaders. Many were not, but collectively they served to reinforce the notion that software had evolved away from being hard and difficult to build and deploy to being a gossamer, effortless use of a few open source libraries and some scripting. That the real purpose of software was to power consumer or small-medium sized business (SMB) interests and not cater to the needs of larger enterprises.

Many venture capital investors loudly proclaimed that the “Enterprise was Dead!” and they "wouldn’t invest in any company which required a business decision maker to be involved". Any investable company had to be tailored to the needs of the SMB user, someone willing to swipe a credit card for a few dollars to bring your product into their sole proprietorship, or into their cubicle, bypassing the scrutiny of the CIO.

Things have changed, though. In the last six months, there has been a resurgence of interest in big company software, particularly around managing unstructured social data and customer experience management. It’s as if investors, analysts, entrepreneurs, and even consumers have woken up and realized that there must be more to high tech than yet another photo-sharing social site which enables me to text my feelings to my followers and their puppies (or something like that).

What I’d like to highlight is that during this long nuclear winter for Enterprise Software, during these multiple head-fakes where it looked like the world would turn serious again, then blinked and went all consumer Web 2.0-y on us, that real enterprise software companies kept chugging along and building value. The SaaS upstarts previously mentioned continued to grow, and ultimately went public with market caps in the Billions. At the same time, a next wave of enterprise software companies emerged which resisted the urge to go consumer and are now poised to lead a new “golden generation” of business software. Jive, Marketo, Lithium, at the application layer, as well as others such as Vertica, Splunk, Cloudera and Couchbase pioneering Big Data.

Of all the new players though, the one that stands out in my opinion as epitomizing the "Rebirth of Enterprise Software" is Workday.

If there's any proof that yes, you CAN go home again, it's Workday. Workday provides cloud-based Human Capital Management (HCM) software for running payroll, recruiting, and general financial management. For those who don't know, Workday is the reincarnation of PeopleSoft.  PeopleSoft, which was acquired by Oracle for $10B in 2005 after a hostile takeover by Oracle, was known as one of the best companies to work for in software.

Founded by Ken Morris and David A. Duffield ("DAD")  in 1987, PeopleSoft came to the fore as an innovator for a number of reasons:

1. Culture: PeopleSoft had a unique culture for the software industry of the late '80s. As opposed to what was then the slash-and-burn culture of many fast growth players of the time, where customers were left holding the bag on uncompleted products and employees churned at a high rate, PeopleSoft was extremely popular with both customers and employees. A lot of this came right down to the founder, who treated both constituencies like family.
2. Tools: PeopleSoft's products were designed for HR management, but one of the keys to their success was their easy to use, web-based toolset which enabled end users to configure and change the look and feel of departmental applications. In this respect, PeopleSoft foresaw the movement towards more consumer-driven UI design vs. the tradition vendor-centric UI approach.
3. Location: By locating in the more bucolic settings of Pleasanton, in the SF East Bay's 680 corridor, PeopleSoft was able to establish a virtual lock on recruiting from a number of talent pools: UC Berkeley and Lawrence Livermore National Lab to name a few. Basically, any strong technology person who preferred the East Bay to the Peninsula for family, lifestyle, or weather reasons would have considered PeopleSoft. This talent pool enabled PeopleSoft to compete head to head with Oracle, SAP and other much larger companies for years, and finally culminated in Oracle having to make a hostile bid in order to enter the HCM market.

When pushed out by Oracle after the acquisition of PeopleSoft, Duffield could have just put his heels up and relaxed. Already extremely wealthy and with nothing left to prove, he could have devoted the bulk of his time to his already considerable philanthropy efforts. Instead, he and former PeopleSoft executive Aneel Bhusri started Workday a scant two months after the acquisition of PeopleSoft. By timing their recruitment of their old team to the expiration of non-competes and non-solicitation agreements they were able to successfully "put the band back together". And customers?  Customers fell over themselves to do business with the new company taking HCM to the cloud. In a scant seven years, Workday grew from idea to IPO and market cap of over $8 Billion. Oh, and the deals they do? Straight up enterprise subscriptions with average sales price of over $400,000. Not something that would be put on a credit card. In fact, it smells like enterprise software to me, and that sort of growth and deal size is sexy as hell.

 

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.

 

 

 

 

Zuckerberg in Boston, or "Yet another one that got away"

The last week, Boston has been abuzz with the news that Mark Zuckerberg was coming back to "visit". In one of his various interviews, the founder of Facebook remarked that "if he could do it all over again, he'd have stayed in Boston".

Almost immediately, select members of the Boston technology community seized on that statement as proof of Boston's equivalent status to Silicon Valley. There was just one little problem that those people conveniently overlooked...

Rather, there were 2.3B problems those boosters overlooked. $2.3B worth of funding that Facebook has raised since leaving Boston; none of that from Boston angels, investors, hedge fund side pockets, asset managers, private equity or venture firms.

Instead of crowing about Zuckerberg's comments as some sort of self-serving justification of their own existence, I think that Zuck's visit should be viewed more in collective shame.

Shame on Boston for letting him get away. Shame on the local angel investor community for not getting into the deal. Shame on the VC community for not only missing the early stage rounds, but with the exception of Greylock's west coast office, not being a part of ANY successive round. Shame on the Hedge Fund and PE communities for not getting into the deal via side pocket funds in later rounds.

Download Who-owns-facebook.jpg (JPEG Image, 600x446 pixels)

For a city that is one of the major money centers in the US, this is a major failure. This was never a matter of lack of capital. This was all about lack of will, lack of vision.

As it turns out, Zuck's trip to Boston wasn't just a simple visit, but a recruiting trip. Hundreds of the best and brightest students of MIT and Harvard were pre-selected for interviews with Facebook. I look at this as the biggest talent suck in Boston seen in recent years. Some of the best talent coming out of Boston universities was just drained away to the west coast.

I would hope that this visit, and the fact that Facebook is now valued at ~$50B would serve as a teaching moment, and an opportunity for reflection. I fear that lesson will be lost in the rush to claim some hollow victory in Zuck's initial comments.

How to avoid the next one? How to keep the next Zuck from leaving? Here are my thoughts:

1. Enable VC associates to originate deals up to $100K on their own, investments in technical members of their peer group.
2. Support a standard Boston Seed Deal termsheet, pre-vetted with local law firms and VC's. This termsheet should be similar to the Series Seed terms, but adjusted for East Coast investors. One page, easily executed.
3. Boston LP's should scorecard Boston VC's on their ability not just to generate returns, but invest in companies that create jobs in the Boston metro. Given that most VC's haven't generated returns aboove the S&P the last decade, this extra requirement shouldn't cause undue alarm.

Last, no one gets fired in VC for missing a deal. In the operational world of high tech, a sales rep missing the big deal in their territory would be fired. Not in VC. Somehow that lack of accountability needs to change.

 

Oracle CrossTalk 2010

Buzzient has had a great opportunity to present during the general session at Oracle CrossTalk 2010, Oracle's Retail industry conference. We've met with top retail executives from all over the world.Social media is clearly emerging as a new channel for multichannel retailers; Buzzient's ability to integrate social media data with Oracle applications gives these retailers tremendous competitive advantage.

I'm attaching my presentation here:  http://slidesha.re/aGUIIn