Tuesday, October 31, 2006

It’s A Great Time To Be A VC

Or, rather...

It's A Good Time To Raise A New VC Fund.

The NVCA and Thomson Financial released the Private Equity Performance Index numbers for Q2 2006.

Matt Marshall (VentureBeat) wrote:

All private investors, from venture capitalists to buyout guys, are doing very well.

If you look at the table below, you'll see that the early stage venture capitalists who invested over the past ten years have averaged a whopping 37 percent return annually, according to the latest data from Thomson Financial. Those VCs have done the best among all investors.

The table is in the NVCA report.

Dan Primack of PE Week Wire has this to say:
Dow believes that VCs are blindly adhering to the following article of faith: Short-term ROI isn't very good, but long-term investment in the VC asset class will outperform most major public indices. After all, some variation of that line has been in every Thomson/NVCA performance press release that I can remember (including today’s). So “stick with us,” the VCs tell their LPs, because "we’ll make you money in the end."

The “blind” part is that such statements do not seem to acknowledge that the 10-year VC performance figures are around one year away from a harrowing fall. In fact, it may have already begun.

I have to believe that the majority of the LPs that invest in Venture Capital and Private Equity "get" this already. For "VC" in particular, the bubble bust may have been bigger than the bubble boom. I.e., it doesn't take long to get drunk and feel great, but the hangover seems to last for a much longer time.

Even if this turns out to be true, and the 10-year return averages fall significantly, does it invalidate the VC asset class? I don't think so.

So, surely, corrections are ahead for the VC asset class and the numbers will get worse before they get better. I will grant you that. But:

  1. The LPs are smart, it's their money, and they understand this.

  2. The LPs have demonstrated their faith and commitment to the VC asset class by putting increasingly larger allocations to VC (larger in the absolute, not necessarily larger in the percentage of their individual allocation).

  3. The LPs have a very long-term view of VC investments, rightly so.

So, if Dow is right (see my comments on this) and things will get significantly worse for VC, then it will become progressively harder for folks, including Sevin Rosen, to raise a new fund in the next few years. The concern is that the LPs will lose faith in the asset class. But, if the LPs are willing to invest now, then...

It's a good time to raise a new VC fund.

And, start building returns for the next 10 years of Venture Capital, which will very likely be better than the past 10 years.

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I Hate Spam: Snail Mail Edition

I Hate Spam.

Not just email or blog spam, but any kind of spam. I include junk mail that shows up in my postal mail box as well as telemarketers as spam varieties. Why can't we just make them all go away?

Well, greendimes is a startup that I like to see. They are addressing the postal junk mail problem. They have a conscience. They are solving a real problem in a significant market. They are giving back to the community.

Jon Burke of alarm:clock wrote:

Greendimes will remove members from dozens of direct marketing lists and plant a tree on every member’s behalf each month. Individual plans are either $3 per month or $36 per year, while business plans start at $6 per month. Aside from being a social nuisance, Greendimes tells us that junk mail also does considerable damage to the environment. Each year, an estimated 100M trees and 28B gallons of water are used to produce junk mail. Furthermore, paper makes up a third of the 235M tons of waste sent to landfills annually.

So, what more could you ask?

greendimes appears to be angel funded currently. I think greendimes would certainly be a match for Omidyar Networks, and hope that they can come together to help greendimes get to profitability.

But, is greendimes really a VC opportunity, or is it a better match as a non-profit 401c (3) organization? With a 10 million household penetration, they would have $360M in annual revenue. Nothing wrong with that. But, 10 million households is a lot.

greendimes strikes me as a great company, great idea, and nice small business. If they can do a good job with their early marketing, they will survive and thrive. The founders will likely do well for themselves and will enjoy the peace that comes from doing good.

But, it certainly doesn't feel like a fit for that "traditional" VC model (it won't be a stand-alone company that goes IPO, for example). But wait a minute. Didn't we just conclude that the "traditional" VC model is morphing? Hmm..

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Entrepreneurs Need To Drink… Part 2

Coffee, that is!

We purchased the Capresso MT500 (Model 440.05). I did a long write-up of the process for how we chose the Capresso MT500. Now, the results. Did the Capresso live up to the expectations? Did it brew great coffee?

First, let's review the core requirements:

  1. Brew temperature of 195+ degrees F (ideal is 195-205 degrees F)

  2. Quality construction

  3. Thermal carafe (with vacuum seal ability)

  4. Automatic timer to start the brew going in the morning

  5. Under $200

So, the key question is pretty simple: Does it make great coffee?

The answer: Yes!

I give the coffee maker 4-out-of-5 Jelly Doughnuts overall. I can recommend this machine if your core requirements match mine. Read on for more!

Here are some actual temperature readings of the water during the brewing process.

First Experiment:

  • Water Temp Used: 101 (warm tap water)

  • Time: 0 min, Temp: 101

  • Time: 2 min, Temp: 186 (measured in basket, no grounds)

  • Time: 3 min, Temp: 197

  • Time: 4 min, Temp: 200

  • Time: 5 min, Temp: 199

  • Time: 6 min, Temp: 201

  • Time: 8 min, Temp: 190 (measured in pot, brewing done)

  • Time: 12 min, Temp: 189

  • Time: 29 min, Temp: 187

  • Time: 51 min, Temp: 184

  • Time: 1 hour 29 min, Temp:181

  • Time: 2 hour 3 min, Temp: 176

So, brewing temperature is in the proper range. But, I stoked it with hot tap water. If I use my cold, filtered water, will the brewing temperatures change? The remaining experiments are done with grounds in the coffee basket.

Second Experiment:

  • Water Temp Used: 74 (cold filtered water)

  • Time: 0 min, Temp: 74

  • Time: 2 min, Temp: 181

  • Time: 3 min, Temp: 191

  • Time: 5 min, Temp: 192

  • Time: 6 min, Temp: 198

  • Time: 8 min, Temp: 185 (measured in pot, brewing done)

So, this was a bit cooler than the first test. Likely because of the two variable changes (started with cold water and brewed with grounds). As you can see, the coffee does get above 195 degrees, but only during the second half of the pot. Still, the coffee was good.

Third Experiment:

  • Water Temp Used: (Very Hot Tap Water, but not measured)

  • Time: 1 min, Temp: 200

  • Time: 2 min, Temp: 202

  • Time: 4 min, Temp: 206

  • Time: 5 min, Temp: 207

  • Time: 6 min, Temp: 190 (measured in pot, brewing done)

  • Time: 3 hr 49 min, Temp: 148

  • Time: 11 hr 15 min, Temp: 93

Not the best scientific method, but there is some data here.

  1. You can dial up the brewing temperature based on the temperature of the water that you use to fill the unit. Personally, since these experiments, I've been filling it with the cold, filtered water, and the coffee quality has been very good. If you care, then go ahead and put hotter tap water in before brewing.

  2. The thermal carafe is pretty good, but not great. Coffee is kept hot for a good two hours, but not all day. I don't think this is the best carafe on the market, but that's OK. Since it is a vacuum carafe, it keeps the coffee very fresh all day and holds up nicely to being zapped by the microwave (when you need that late-day fix).

Final comments:

  • Construction quality is very good. Yeah, it's got the usual amounts of plastic, but it has a very solid feel to it. It looks good in the kitchen.

  • We have not had a single problem with leaks that seem to be a problem for just about every thermal carafe coffee maker out there. Never a spill. Not a drop. I think Capresso got it right, which may help me justify the high price tag.

  • The gauge that shows how many "cups" of coffee you are trying to brew is small and on the far right hand side of the unit. This requires you to pour the water with your left hand so that you can see the gauge. Very hard to read.

  • The included gold filter is nice, but causes some fine grounds to slip through into the pot. As a result, we've been using the paper filters almost exclusively.

  • Brew time is pretty fast. You can slow it down by pressing the "3-5 cups" button (which may actually help if you are using very cold water).

That's about it. I'll keep you posted when/if we start having problems.

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MacBreak: The Road To 1080p


MacBreak is a video podcast for the Mac crowd. Professionally done:
The only Macintosh video show you'll ever need. Mac experts Leo Laporte, Amber MacArthur, Alex Lindsay, and Emery Wells talk about everything Mac, including hardware, software, pro apps, and tips. Shot in 1080p high def, because your Mac deserves the very best.

Alex Lindsay, Chief Architect at Pixel Corps, took care of the behind-the-scenes action:
The Pixel Corps is a guild for the next generation of craftsmen... digital craftsmen.

Alex did a great tutorial on why they filmed MacBreak in 1080p with a green screen. If you are into video, wonder about the difference between Black & White and Color TV, have never heard of "4 1 1", "4 2 2", or "4 4 4" (and wondered what your DV camcorder records in), check out this nicely done walk-through.

Download the MOV here.

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Monday, October 30, 2006

2007 Toyota Prius Qualifies For California HOV Stickers

I purchased my 2007 Toyota Prius (yes, it's White!) on September 28, 2006. I chose the Prius because I wanted a low-emissions vehicle that got great gas mileage and had the quality reputation of Toyota. One month in and I've been very happy with my purchase.

One of the side benefits of purchasing a qualifying hybrid is that you can apply for one of the 75,000 stickers that were approved as part of California's incentive program that allows certain low-emissions vehicle access to the carpool lanes with only a single occupant. However, at the time I purchased my vehicle, the anticipation was that all the stickers had been claimed. No matter. I still purchased the car.

The day after I purchased the car, however, the California Governor signed AB 2600 into law, which added an additional 10,000 stickers to the pool, and extended the HOV-lane access until January 1, 2011. I was pretty confident that I would get an HOV-lane sticker after all.

But, does the 2007 Toyota Prius qualify for the program?

It should, but the AB 2628 approved list of vehicles knew nothing about the 2007 model -- it had only been on the market for a week when I bought it. However, that approved list was updated on October 11, 2006, and the 2007 Prius was added. Note that no other 2007 model was added to the list at that time!

In the end, my stickers arrived today, October 30, 2006.

Here's the timeline:

  • 09/28: Purchased 2007 Toyota Prius

  • 09/29: Called dealer to ask them to expedite DMV license plate registration (required for HOV sticker application)

  • 09/29: Drove up to San Francisco to register for the FasTrak program (required for HOV sticker application for Bay Area residents)

  • 10/03: Dealer called with license plate number

  • 10/03: USPS overnight mailing of HOV lane application packet and $8 check to DMV in Sacramento

  • 10/11: 2007 Prius added to approved vehicle list

  • 10/13: DMV cashed the $8 application fee check

  • 10/21: "Date Issued" of stickers by DMV

  • 10/30: Stickers arrive at home -- Sticker #0803XX

I will enjoy my low emissions, my 50mpg, my $3,150 tax credit for 2006, my free city parking in San Jose, my easier commutes, and my quality Toyota.

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Can Adobe Contribute To My Blogging?

I'm a Mac.

I mean, I'm a Mac user.

And a Blogger.

A Mac Blogger in search of the best WYSIWYG blog editor for Mac OS X that will allow me to create, edit, and manage my Wordpress blogs while online and offline.

I've been using Qumana and have been mostly pleased with it. Especially given the price (free!). I wrote about my initial experiences here. Qumana has always been a bit rough around the edges, but I have found sufficient work-arounds to justify my loyalty.

The Qumana problems came with the official 3.0 release. For some reason, the Mac version of Qumana 3.0 does not display the image dialog for me. I have submitted the bug to the Qumana team, including the Java stack backtrace showing the error, but one of the Qumana lead Mac programmers has recentely quit. I.e., I am S.O.L. and on my own.

I noticed that Adobe had recently released Adobe Contribute 4. So, I downloaded the 30-day trial (for the Mac) and decided to give it a go today.

My first impression is not great.

But, let me get some time under my belt and we'll let you know how it goes.

Stay tuned!

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Firefox 2.0: It’s Not You… It’s Me, Baby

I broke up with Firefox today.

"Foxy" and I had been seeing each other, exclusively, for over a year now. So, it has certainly been a long-term relationship.

At first, it was a fast-paced romance.

Lots of extensions to try, and themes to suit the mood.

Even Greasemonkey.

But lately, things have really slowed down.

Foxy took over my memory. Leaks, they call it. My poor system was forced to swap itself silly.

It seemed like Foxy didn't want me to visit other websites; see other pages; use other apps. Was it jealousy or something else?

Surfing became a drag.

Instead of play, we took to arguing over performance.

The yelling increased. We found ourselves talking about topics when we should have been talking about the issues.

The promise of a "2.0" version appeared to be the only thing holding us together.

But, the core issues remained, even with the plastic surgery.

I was as much a part of the dysfunction as Foxy.

It had to end.

I'll go on Safari now.

Sure, there may not be as much glitz and glamour.

No Greasemonkey.

But surfing is no longer a drag. I can use other apps; see other pages.

Thanks, Foxy.

It was fun while it lasted.

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Verizon: Can You Stream My Data Now?

Verizon announced their Q3 2006 Earnings today and there are a number of things I wanted to comment on. You can find their slide pack here. Additionally, Ars Technica covers it here and Om Malik covers it here.

  1. Earnings of $1.9 billion (66¢ per share) on revenues of $23.3 billion, an increase of 25.8 percent from Q3 2005. Nothing wrong with generating nearly $2B of cash in a quarter. Hurt me with that problem.

  2. Wireless becomes the largest US Wireless company, based on revenues. Verizon is also the largest Wireless Data provider based on data revenue. Perhaps that is in part because...

  3. Wireless Data revenues nearly doubled year-over-year. Now, Wireless Data revenues are only $1.2B (14.1%) of the $9.9B total Wireless revenue bucket, but at those kinds of growth rates, and I think it will get even stronger in the next 12 months, Wireless Data services will get serious notice by the Verizon execs.

  4. Wireline Data revenues of $4.1B, up 89.3% over Q3 2005. Now we're talking. That's a significant increase in data services. American homes are hungry for it. Give it to them.

  5. Wireline Data revenue is now 32% of Wireline total revenue. And, not surprisingly, "Revenue mix continues to shift to data". That may be because...

  6. Wireline Data services (FiOS) are becoming increasingly available for sale in 16 states, as Verizon’s FTTP (fiber to the premises) network passed a total of 5.3 million premises. That's not many homes, to be sure. Verizon needs to accellerate the pace of this program.

  7. Penetration of FiOS Internet service now stands at 14%. So, if Verizon can get FiOS service to 100M households, and increase their penetration to 25%, they will have 25M subscribers to their data services. But, equally important, is their TV service...

  8. Penetration of FiOS TV service now stands at 10%. TV and Internet service is getting confusing for the folks like Verizon. Still, if they can increase FiOS availability, they will be able to deliver Video service either as data or a something resembling "cable". They don't need to figure out the answer -- the market will decide for them (but they will need to do both). Of course, Verizon will have Phone as well on top of this network (whatever "phone" means in a few years).

Verizon gets it. It's not about the Benjamins. It's all about the data. Deliver data faster and more reliably to the millions of handsets and homes, and you own a significant asset for the future.

Verizon has made a strong push to own the data path. On the wireless side, they are making ground with their EV-DO and Revision A EV-DO support. Still can't compete with Europe and Asia, but it is about the best that's out there now. On the wireline side, the FiOS Fiber Optic network they are installing will be the launch pad for what Americans will do on the Internet (inflection point: year 2010). By owning the data path, Verizon will be positioned to offer key Internet services that Comcast should have been able to do long ago. Missed opportunities.

And, the best part is, Verizon appears to be able to build out the FiOS network while still making a profit. To me, this tells me that they are not being aggressive enough with the FiOS build out. If they put an extra $2B in their pockets this quarter, they should be investing that in the FiOS network first, and the Wireless Data networks second. We'll see if they can continue to execute. Verizon should be sprinting to get the FiOS network build out done as fast as possible, especially since they are still generating cash.

Personally, I'm not a fan of Verizon Wireless -- too many bad past experiences. It is not likely that they will get me back as a customer.

However, I will definitely switch to Verizon FiOS services when/if they ever get to the San Francisco Bay Area.

And, if they offer a compelling enough package of FiOS and Wireless Data... well, they may win me back after all. Customer re-acquisition by kicking butt on the raw delivery of data.

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Wednesday, October 25, 2006

VMware as LBO Opportunity for EMC?

EMC Corp announced their Q3 2006 Earnings last week and I listened in on the call. Very closely.

With lots of reading between the lines, a deep knowledge of their markets, and exposure to the Private Equity world, I think there is an opportunity for EMC to get some serious leverage out of their VMware asset. Let me explain in my usual verbose style.

EMC announced the VMware acquisition on December 15, 2003 -- almost 3 years ago now. It was a cash transaction valued at about $625M that closed on January 9, 2004. I remember the VC AND PE buzz at the time. Most people (except VMware employees) thought that EMC paid too much. Witness:

  • 2003 was a tough year for Venture Capital. Not nearly so bad for Private Equity.

  • Still, VMware only did about $20M in revenue in Q4 CY2003 (the quarter before the acquisition).

  • EMC was expecting to more than double that revenue run-rate -- to $175M total for CY2004 .

  • Which would give the deal a multiplier of 3.5x on forward revenue.

  • At the time (2003), that was a hefty multiple, especially since it was based on over 100% CAGR, and the economy was still somewhat sluggish.

  • If the revenues did not follow, EMC would have paid more like 7.5x -- way too much for Q4 CY2003.

  • Side note: According to the EMC 2004 Annual Report, the price paid for VMware was $541M.

The Result: EMC was incredibly smart to pick up VMware when they did. They were absolutely right. The VMware employees were also right -- EMC got a bargain.

The VMware revenues did double in the first quarter following the acquisition, as predicted, to $39M. There is certainly something to be said for combining great technology with a great sales force and strong brand. Under the EMC umbrella, VMware generated $218M in revenue in 2004. VMware continued to excel but, interestingly, was never really integrated into the EMC organization. Was that because EMC is not as good at acquisitions as Cisco, or was there some other reason?

Fast Forward to the present.

Joe Tucci, President & CEO of EMC, rolled out the current EMC strategy during the Q3 2006 earnings call (see the slides for more on this) and kept hitting on a central theme: "One EMC" -- "Except VMWare", with a footnote:
* VMWare will continue to operate as a subsidiary of EMC and is not part of this restructuring.

I do find it interesting that EMC can't capitalize VMware correctly yet, but that's not the point. The point is that Tucci laid out the "One EMC" strategy, and VMware was not a part of the 8-pronged product strategy, even though it would have been very easy to include them. Take a look:

You could spin a story around putting VMware into Resource Mgt easily. You could even put VMware in the center bubble (called "Information and Virtualization Infrastructure"), but the Storage gods that own EMC would certainly become a bit scared by that (and that is their dilemma).

Clearly, the acquisitions of Documentum and RSA fit into the "One EMC" strategy, but VMware appears to be specifically uninvited. Tucci said:
We are not creating "One EMC" with VMware. Like I talked about before, running VMware as a subsidiary and giving access to that technology to even our most fierce competitors is still what we're going to do. For the rest of the technologies, we're going to create "One EMC".

And, from the looks of the VMware web site, being a part of "One EMC" does not appear to be a very big concern for them. The following graphic:

"An EMC Company" is placed below the VMware logo. They never actually merged that graphic with their logo. Also, when they acquired Akimbi Systems (disclosure: I'm a Board of Advisors member of Akimbi), it was not an EMC acquisition, but a VMware acquisition.

Tam Taulli also covered the earnings call, and he knows a bit about M&A transactions:
Then there is the VMware division. This was perhaps one of the best acquisitions in software history. It’s an infrastructure technology that allows for virtualization of IT assets (basically, getting more power from existing servers). In the third quarter, revenues for VMware surged 86% to $189 million.

How's VMware doing with respect to revenues since the acquisition:

Nothing wrong with those numbers!

In fact, eWeek Labs recently ranked VMware #7 on its list of the Top 25 Products of the Last 25 Years. With these numbers, VMware will certainly be ranked as one of the fastest growing software companies ever (I'm talking about revenue here, not valuation -- you know, the stuff that matters). We're talking about roughly a 70% CAGR here, and the numbers are large enough that that is quite significant.

Another thing to note is that if VMware does $650M-$700M revenue this year and slows to just a 50% CAGR, they will be positioned to be a $1B revenue software business in 2007. This is significant because, as it turns out, there really aren't that many $1B revenue software businesses out there.

The VMworld 2006 Conference is November 7-9, 2006, and will have 200 Breakout Sessions, 11 Labs, 80 Exhibitors, and 5000 Attendees. Yes, VMware has grown up in the last 3 years.

Sub-total: EMC got a bargain in their acquisition of VMware. But what about the VMware employees? And, is there more that EMC can get out of VMware while giving more back to the employees?

But here's the kicker. EMC is such a powerhouse that these numbers, as great as they are, are just a drop in the bucket. In Q3 2006, VMware contributed a record $189M to the EMC total revenue of $2.82B. Or, stated differently, VMware accounted for just 6.7% of EMC revenue. It's easy to see why EMC continues to focus on their storage initiatives.

However, the Q3 2006 numbers were telling. Net income for Q3 2006 was $283.7M compared to $421.7M in Q3 2005. EMC is generating less cash, even with significant increases in the high-margin VMware business. While VMware revenue is small potatoes to EMC, in some respects, the asset itself is quite valuable.

So, let's take a quick look at how EMC stock has been doing since the VMware transaction:

  • At the time of the acquisition (January 9, 2004), EMC stock closed at $14.07.

  • At the time of the Q3 2006 conference call (October 17, 2006), EMC stock closed at $12.70.

  • In-between, EMC stock was largely flat, with a high of $15.59 one-week following the VMware acquisition and a low of $9.37 on October 25, 2006.

Bottom line: VMware has advanced significantly as a company, but EMC stock has not brought any real rewards to the VMware employees since the January 9, 2004, acquisition. (Side Note: EMC stock has not been a performer for anyone in the last 5 years, but that's a different article).

Now, the VMware acquisition was a cash transaction, so the big holders like Diane Green, CEO, and Mendel Rosenblum, Chief Scientist, (who are wife/husband, by the way) certainly made out, ahem, very well. But, how does EMC/VMware attract, reward, and retain their employees when their division is doing awesome, but the company's stock is flat? And, how does EMC get increased value out of a software subsidiary that is approaching the $1B revenue mark?

I've talked about a new model for Corporate Venture Capital before, but what I propose here is different.

Hello Private Equity. Hello Leveraged Buyout.

OK, so what have we established:

  1. VMware is kicking butt.

  2. EMC is generating less cash.

  3. EMC stock is flat.

  4. VMware employees are no longer being properly rewarded for their amazing contribution.

  5. EMC does not view VMware as a technology differentiator and is willing to offer the VMware products directly to their competitors.

  6. VMware, as an EMC asset, is not generating the amount of shareholder value that it could.

  7. There is a giant market for virtualization infrastructure products over the next 10 years (OK, I didn't establish that but you'll have to trust me on this one).

The win-win is to spin-out VMware and file for IPO, either in 2007 or shortly thereafter.

VMware needs to be a stand-alone entity. They need the cash to acquire some of the key infrastructure virtualization assets that are out there now. The virtual infrastructure market is large enough to support it, and growing like crazy (at last). The opportunity to create another $1B revenue stand-alone software company should not be missed. I certainly have specific thoughts on how this would best be structured in this market, but will file them away for now.

Sure, EMC would lose the revenue and their net revenue would drop more still, but there are many ways to structure the transaction such that EMC gains some significant cash and/or shareholder value out of this move. If VMware is not strategic to EMC, and it clearly is not just by virtue of not being a part of "One EMC", then this is what it must do.

Full Disclosure:
I was brought into VMware in January 2005 to interview for the CTO position that was soon to be open due to Ed Bugnion's impending departure (which I wrote about here). I met with the VMware Executive Staff, but we never talked about any of this. I didn't get the job. Nobody did, as it turned out. And, it looks like VMware has done just fine without a CTO. Also, as I mentioned above, I'm a Board of Advisor member for Akimbi Systems, which VMware acquired in June 2006. Nothing of these matters have been discussed with VMware or Akimbi. Finally, I was Founder, EVP and CTO of Cassatt Corporation, which is currently a key player in this space.

Tuesday, October 10, 2006

Nuova Systems & Cisco: New Corporate VC Model?

So, let's take a couple steps back first.

Exactly one year ago, in October 2005, I got a call from my buddy Tom Lyon. He's just joined Nuova Systems and wants to tell me about it (and pick my brain). He sets the hook by telling me that this is the new gig for the power executive team that left Cisco just a few months prior. Hmm...

Tom and I go way back -- he served on my Board of Advisors at Allocity (acquired by EMC) and he founded a company, Ipsilon (also funded by Mohr Davidow Ventures), subsequently acquired by Nokia at which time he became the CTO of Nokia Internet Communications. And, oh yeah, we both were early on at Sun Microsystems. Tom's a better networking guy than I will ever be. He's also one of the nicest guys you'll ever meet.

Now, back a bit farther to July 2005.

Mario Mazzola, Chief Development Officer for Cisco, and three other senior executives all retire from Cisco at the same time. SearchStorage.com covers it in Cisco storage chiefs retire en masse:
Cisco Systems Inc. confirmed the retirement of four of its top executives Thursday night, including chief development officer Mario Mazzola and senior vice presidents Luca Cafiero, Prem Jain and Soni Jiandani.

All four were founding members of Cisco's Fibre Channel switching startup and "spin-in" Andiamo Systems Inc., and built the company's storage business from zero to become a major force in the industry.

But, of course, they didn't retire. They left to start a new company. It was called Nuova Impressa at that time and is now called Nuova Systems. When Tom called to invite me into the fold on the new gig, I was thrilled. So, in October 2005, I met with the four Cisco execs and a number of the other members that they had already added to their dream team. We covered both marketing and technology aspects of topics like datacenter virtualization, utility computing, grid computing, system management, next-generation datacenter interconnects, what large IT shops are buying, and the like.

From what I could glean about what they planned to build, this was going to be a company to watch. Definitely going big, high scalability, high performance, with a very nice architecture.

In addition to the four Cisco execs, they have added other exceptional talent, including:

  • Ed Bugnion (Founder & CTO of VMware)

  • Tom Lyon (#7 guy at Sun, founder of Ipsilon & Nokia Internet's CTO)

  • Ben Stoltz (Sun/Terraspring)

  • Joe Eykholt (ex-Sun hard-core kernel SMP/threads guy)

  • Peter Newman (Ipsilon switch architect)

  • Satya Nishtala (Sun Ultrasparc hardware Distinguished Engineer; did the Sun Starfire SMP system interconnect)

Very impressive.

Now, fast-forward to August 2006.

From the Nuova Systems website in Cisco Announces Investment to Focus on Data Center Development:
Cisco has committed certain technology and $50 million of funding to Nuova Systems with the possibility of up to $42 million in additional funding in the future. The subsidiary will be approximately 80% owned by Cisco, with the remaining 20% interest held by employees of the subsidiary. Because of Cisco's majority ownership interest, the accounts of the subsidiary will be consolidated with the accounts of Cisco starting in fiscal year 2007.

As part of the agreement, Cisco has the option to purchase the remaining 20% interest in this subsidiary. Should Cisco decide to exercise this option, the transaction would occur in late fiscal year 2008 or early fiscal year 2009. The potential payouts made under the call option are primarily based on the success of Nuova Systems' products sold through Cisco, with a minimum potential payout of $10 million and a maximum total payout of $578 million.

I like this model for Corporate Venture Capital. It makes a lot more sense than the usual Corporate VC approach. This is a clearly strategic move for Cisco. And, for the entrepreneurs, it takes a huge piece of the risk out of the equation and allows them to focus on the business.

This is similar, but different, to what happened with Andiamo and Cisco. With Andiamo, Cisco put in about $84M to build the business, then bought it for about $750M. With Nuova, Cisco has put in $50M, could put in $42M more, and has capped the purchase price at $578M. Those numbers make more sense to Cisco than what we saw with Andiamo.

Now, this also limits the upside potential for the Nuova Systems employees. If Cisco owns 80% of the business (post) on the $50M that they invested, that means that the post-money valuation would be $62.5M. That's a pretty high post-money, given the stage that the company is in, to be sure. But what about the subsequent $42M more of investment money? Would that dilute the employee's 20% or just fall into Cisco's 80%. I'll side with the employees on that point and assume that the employee pool will be 20% ownership at the time that Cisco buys them completely back (late 2008 or early 2009).

Result: Worse-case scenario for the employees would be sharing $10M. Best-case would be sharing $578M. So, if the $578M represents 20% of the company valuation in 2009, then the actual company valuation would be something like $2.89B. A number that big is not very likely to happen that soon for this company. But, they could credibly do a $100M payout which would be a $500M valuation by then.

However, what's great about this model is that there will be a spin-in event in the not-too-distant future for those folks. The more progress they make, the better the valuation will be. There will absolutely be cash to share. All are motivated, appropriately, to win.

I like it.

Other Related Articles:

One could see Cisco's spin-in strategy as a creative and rather intelligent way of running its business. We can't think of any major IT players that use this spin-in method as effectively. So, perhaps it's a competitive advantage.

Monday, October 9, 2006

Motocross Weekend

This weekend, my friend Bob Lakes was kind enough to invite me to join him for a ride at the motocross recreation area. I haven't ridden a dirt bike since I was a teenager and didn't have a bike or any of the gear, but Bob took good care of me. He provided the bike (the blue Yamaha YZF 250 below) and all the gear.

We hauled the bikes out to the Hollister Hills State Vehicular Recreation Area (S.V.R.A). The place was crawling with people and off-highway vehicles -- 2,400 acres with 64 miles of trails, a few tracks of varying difficulty, and several hill climbs. It's really a wonderful park.

I've been riding my sportbike for some years now, so it took me a few laps to remember how to ride through the mud and thick sand. Very fun! Especially since we had no deaths or injuries...

Bob works for Bell Sports where he does industrial design for motorcycle helmets. Needless to say, he's a heck of a motorcycle rider. Bob is married to Alexis Lakes. Alexis is the CFO of RWI Ventures. They have both been great friends.

Many thanks to Bob for the fun weekend.

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Results Are In: Venture Capital Is Not Broken

In stark contrast to my article I just submitted about Sevin Rosen Funds deciding to not close on Fund X, we note that Google has purchased YouTube for $1.65B in stock.

TechCrunch says Sequoia could take $480 million from Google/YouTube deal.

Not bad for Sequoia, especially if they really put something under $20M to work here.

Sounds like VC is not broken after all.

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Sevin Rosen Funds Delays Fund X

Sevin Rosen Funds have announced that they will not close a planned $300M Fund X this month after all. The NY Times wrote a nice piece on the story and there have been multiple blogosphere posts on the matter, which I will cover in great detail below.

I recently spent 10 months with the Sevin Rosen Funds team as an EIR. They granted me 100% transparency into their business and decision making processes. They allowed me to attend all Monday Partner meetings, two LP Annual Meetings, multiple offsite planning and portfolio review sessions, bring in dealflow, and assist with due diligence activities. I have a ton of respect for the team and feel very privileged to have had the opportunity to work with and learn from their many years in the Venture Capital industry.

Pictured above is Steve Dow and John Jaggers. In my time with Sevin Rosen, I was particularly impressed by these two gentlemen -- due in no small part to their significant careers with Sevin Rosen Funds (Steve started with SRF in 1983 while Jaggers started in 1988). Steve represents the front-office deal-making (entrepreneur) side of the house and is excellent at many things, including listening to a pitch and cutting to the heart of the matter in very concise and succinct language. Jaggers represents the back-office fund-making (LP) side of the house and is absolutely rock-solid both in his understanding of fund accounting and management, but also with his view of prospective portfolio companies. When Jaggers makes a comment, you'd better be listening, because he's right. Now, to be fair, I'm probably only saying that because I always shared his viewpoint :-). These two guys make a really great team.

Bottom Line: While Steve is the one talking to the press about all of this, you can bet that Jaggers is back there taking care of business with the LPs and is just as much a key part of the decision to stop the fundraising activities for Fund X.

One of the things I really liked about Sevin Rosen Funds was that, as a firm, they have a moral compass.

I point that out because not every firm in the VC community does.

The SRF team enjoys taking the contrarian view. Being a contrarian can certainly pay off if the timing works out in your favor. VC is a timing business. VC is also a hits business. Sometimes the contrarian view timing hits and sometimes it doesn't. It's easy to be a Monday Morning Quarterback on this stuff -- anyone can do that.

One could argue that the last 9 years of contrarian bets placed by Sevin Rosen Funds has not reaped the rewards that anyone wanted (betting big on telecom and largely avoiding the Web 1.0 Internet boom, followed by great weakness in telecom during the bust). Paul Kedrosky in Sevin Rosen: Venture Capital is Over says:
Critics will say that SR's best days are past, and this is more about pining for the days of yore. To that way of thinking, this could even be taken as a contrarian signal for venture, with a branded firm out of step with its market and its LPs. After all, most of SR's highest returns were relatively long ago, so this could certainly be viewed as simply spinning a bad situation.

Well, VC is certainly a "What have you done for me lately" industry. One could make the case that Sevin Rosen Funds has not produced a big hit of late. Why is that? Lots of reasons, I'm sure. SRF, and the VC industry, has seen significantly more change in the last 9 years than it saw during SRF's first 16 years -- the pendulum is swinging faster than ever and it may be harder to spot the best contrarian investments in an environment where the exits cannot materialize in a timely fashion. I don't know. I do know that Steve and Jaggers are very introspective and are working it out. The question will be whether SRF can adapt and find a way to be more nimble.

But, why put a stop to Fund X in the final hour? Most VC firms would have taken the money, stacked the fees up on top of Fund IX, and worried about returns later feeling comfortable with the fact that the LPs understood the risks inherent with investing in the Venture Capital asset class.

Actually, I commend SRF for backing out of the commitments if they felt like they did not have a formula to give their LPs a solid return in the current environment. We're back to that moral compass thing.

Frankly, I was surprised that SRF attempted to raise Fund X this calendar year. When I finished my time with Sevin Rosen Funds at the end of February 2006, the message communicated to me was that Fund X would likely be raised in the second half of 2007. That sounded about right to me, since Fund IX was a $305M fund that started being invested at the end of 2004 with a slower investment cycle. When I attended their Annual LP Meeting in May 2006, Jaggers communicated that Fund X would be closed this October. Surprising, but not out of whack. Kedrosky covered it in Sevin Rosen's Retooling. Multiple smaller funds is not fundamentally different than one larger fund, but does give the firm the ability to be more agile in their approach to the markets and focus of a particular fund (at the expense of more fund raising time and more frequent LP communications -- not necessarily bad things).

Fred Wilson in Is The "Traditional Venture Capital Model" Broken? comments on Steve Dow's statement that “The traditional venture model seems to us to be broken,”. Fred responds:
So we need a new approach to the kind of companies we fund and we need a new approach to how we fund them and how we get out of them. I don't see that as a "broken model", just a model that we need to tweak. The answers are pretty obvious actually.

We've got to raise smaller funds.
We've got to do less "hard tech" and more "soft tech"
We've got to figure out how to make great returns on $100mm to $250mm exits
We've got to limit our IPOs to our very best companies

I would agree that the "traditional" model is broken -- back to my comment about the amount of change the VC industry has seen in just the last 10 years. But, VC is not broken. VC is a marketplace and firms need to adapt as the environment changes. The environment is just changing really fast now.

I disagree with Dow on another point. There is never "Too much money". There is exactly as much money as the LP community is willing to put at risk. Yes, more money does make VCs have to compete harder for the best deals. Yes, the lack of strong M&A and IPO exits puts a bigger strain on the asset class as a whole. But, at the end of the day, the exits are absolutely there for the best portfolio companies, found and nurtured by the best VC firms which are funded by the best LPs. That is the VC marketplace. Evolution is at work. Competition and coopetition, and partnering for survival are all part of the mix. VC firms need new blood with motivated GPs willing to earn their keep based on carry, not fees.

My buddy Peter Rip adds to the conversation in Venture Capital 2.0: It's All A Game with a nod to the Prisoner's Dilemma and game theory which struck a chord with me (I'm currently reading the book Thinking Strategically). Peter also contributed a nice article to VentureBeat in Venture Capital 2.0 - the evidence accumulates.

Stowe Boyd in Traditional VC Model: Broken, or Just Tired? says:
I have been working as an "advisory capitalist" for some time -- working as a strategic consultant with social tool startups, and guiding product design and development with them -- and continue to be struck that VCs are not getting involved in providing advice to these startups, prior to funding. I bet that in the future, more VC firms will have people like me on board, working on an advisory basis with early startups, and then bringing the best of the bunch into a funding event to help those companies expand.

Like Boyd, I am also an Advisor Capitalist and agree that the best VCs will need to move to earlier stage investing for the best returns. What's interesting about this comment is that Sevin Rosen Funds has always been very much focused on early stage investing, including doing lots of seed and "incubation" deals. This was something that really impressed me about those guys. So, I think their model is right for the times (though they will need to adjust their segments), but Boyd raises an interesting question -- are they tired? Kedrosky points out that "Fund VII and Fund VIII apparently delivered -27% and -13% IRRs, respectively." Negative IRR means no carry. That's a long time for a VC to go without putting serious dollars into their checkbooks, and can contribute to them being tired. They may need fresh blood.

The Deal's VC Ratings in Sevin Rosen's capitulation is not indicative of VC industry problems says:
Sevin Rosen's exit is precipitated by a poor succession strategy and a failure to adapt to a new venture capital climate that now rewards international bets, a mix of a young and old partners and segment specialization. Oh yeah, its mediocre returns didn't help the firm's case.

Fair observations. Combine my earlier comment on "no carry" with this comment on succession strategy and you have an interesting mix. While I was working for SRF, they parted company with General Partner Dave Shrigley and Partners Kevin Jacques and Amra Tareen. SRF had way too many investment professionals when i started with them (upwards of 14) for the size of their most recent fund (Fund IX at $305M), so this downsizing is not surprising. Dan Primack writes today in PE Week Wire that GP Steve Domenik has announced his intention to leave as well (something that I had not heard before today). Again, all necessary for a firm focused on smaller fund sizes. I will not comment on other potential successions, but I would certainly expect to see more movement in the ranks.

Then, VC Ratings turns a bit harsh:
Despite Sevin Rosen's claims, there are few lessons from this fundraising failure that should be applied to the entire venture capital industry. This is about one firm's inability to succeed without its founders. It's about a firm's unwillingness to believe in new technology movements such as the Internet. What it's not about is the venture capital model being broken.

Followed closely by more harshness from Charlie O'Donnell in Hardware Veterans Retire... Death of Web Investment Prognosticated:
Sure, there are a lot of problems people can point to in the venture market, but these guys aren't even playing in the same world as the VCs that get talked about in the blogosphere for their high profile internet service investments. They're a bunch of hardware guys whose very long and successful careers, like the infrastructure opportunities they chased, are winding down. They've made a lot of money, and rather than try and figure out how to build the next Google, Skype, YouTube, they're letting another generation tackle a new generation of completely different opportunities.

Having been on the inside with SRF, I would have to disagree with those comments. Charlie describes it as if Sevin Rosen is going away. That's just flat out wrong. SRF is a good, solid brand with excellent LP relationships (thanks Jaggers). They may choose to redefine themselves, but they are not going away.

Finally, Matt Marshall of VentureBeat in Venture shocker: Sevin Rosen returns cash, cites “terrible” environment says:
Dow agrees there are lots of attractive areas to invest, from clean technology, to biotech, nanotech and personal health — more places than there were two decades ago. But that doesn’t mean you can make good profits from the investments, he said. In the letter, the firm wrote that the last year of fund-raising that the entire industry saw positive results was 1997. (Those funds were invested in 1998 and 1999, and saw great profits during the last part of the boom).

I don't get the need to cite when the VC industry as a whole last saw positive results. The statement may, indeed, be true, but I don't think it matters. We're back to my earlier comment about VC being a marketplace. The LPs really just care about the returns of the fund. The returns of the firm. The LPs distinguish themselves by the firms and funds that they invest in and love it when they get top-tier returns even when the overall asset class is underwater. Focusing on the VC industry might be the best thing for the betterment of the industry, but might not be the best thing for the betterment of the firm.

So, yes I highly commend SRF for doing the right thing and not closing Fund X now.

However, I don't get the reason.

I do not think that the reason was spin. I completely believe that Sevin Rosen could have closed a $300M-ish sized fund right now if they wanted to. If the VC industry was broken, it was surely broken a few months ago when they started the process of raising the new fund. And, they would have known it then and would have delayed fundraising. If they are right that the exit opportunities are not there for closing a fund now, then that can't be good news for their current fund, Fund IX, closed 2 years ago, which will be at the end of its investment period within 12 months.

As I mentioned above, I don't think it's that VC is broken. It may be that Sevin Rosen is no longer competitive with the top-tier firms (whoever they are today) and it is better to sit it out and retool for top-tier results than it would be to play, take the fees, and risk not being in the top-tier. I would certainly agree with that logic and strategy. Go dark, regroup, recharge, and come out of the gate running.

Steve Dow ends with: “We have properly diagnosed the problem, but haven't figured out for this patient what the therapy is.” Now, that, does sound like Steve!

To Sevin Rosen Funds: Thanks for doing the right thing, which was certainly harder than just taking the money.

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Wednesday, October 4, 2006

The Road To Success…

Danny Meyer is a true entrepreneur. He has recently published a must-read book: Setting the Table: The Transforming Power of Hospitality in Business. From Publishers Weekly:

Meyer opened Union Square Cafe in 1985 when he was 27 years old. It hit its stride three years later when he hired chef Michael Romano, and Meyer charts its evolution from a neighborhood to international institution. Initially cautious about expansion, he opened Gramercy Tavern with chef Tom Colicchio three years later, eventually broadening his New York City restaurant empire to 11 establishments including Eleven Madison Park, Tabla, Blue Smoke, Shake Shack and the Modern.

Can you say successful? Danny has had to satisfy a lot of customers to drive such success.

The quote that brought me to this book was:

The road to success is paved with mistakes well handled.

The quote is credited to legendary retailer Stanley Marcus (yes, of Neiman Marcus fame, who took over the family business in 1926 at the age of 21 after getting a Harvard business degree), and oh does it ring true. Startups will make lots of mistakes along the way. The best ones survive in large part due to their "response reaction" to those mistakes. We are entering a period of greater transparency in business. I think it's great, and the companies that can become more transparent and more honest with every aspect of their business will be the ones that thrive.

The food industry is certainly a service business (aren't they all?). What I like about Danny is that he doesn't think of it that way. It's a hospitality business (aren't they all?). While foodies will enjoy this book for the memoir-style, I think other business owners will get just as much out of it. If more startups could follow Danny's lead here and not think about customer service but hospitality delivery, I have no doubt that their customers will respond (and rejoice!).

Meyer makes a distinction between service ("the technical delivery of a product") and the "Enlightened Hospitality" at the core of his business strategy—both necessary for restaurant success. He notes that hospitality "is how the delivery of that product makes its recipient feel" and shares tips like hiring "51 percenters," or staff with "skills divided 51-49 between emotional hospitality and technical excellence," and the "Five As" for addressing mistakes: awareness, acknowledge, apologize, act, additional generosity.

Danny's other insights:

  • Hospitality is present when something happens for you. It is absent when something happens to you. These two simple concepts -- for and to -- express it all.

  • Context, context, context, trumps the outdated location, location, location.

  • Shared ownership develops when guests talk about a restaurant as if it's theirs. That sense of affiliation builds trust and invariably leads to repeat business.

  • Err on the side of generosity: You get more by first giving more.

  • Wherever your center lies, know it, name it, believe in it. When you cede your core values to someone else, it's time to quit.

In a related story, take a peek at Dan Meyer's Response to Restaurants Are A Service Business. Gothamist covers it in Battle of the Book Readings. The Wall Street Journal talks about it in Hospitality for Everyone. 800-CEO-READ covers it in Setting the Table. New York Magazine covers it in Danny Meyer Walks Into A Pub.

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Monday, October 2, 2006

AB 2600 Signed

I bought my new Prius on Thursday evening, September 28, 2006. Since I purchased it before October 1, I will receive a $3,150 tax credit off of my 2006 income tax. This is a nice benefit, since it doesn't reduce my taxable income -- it actually comes right off my tax bill. Had I purchased after September 30, the tax credit for the Prius would have dropped in half (still nice, but not quite as nice!). Great article at the San Francisco Chronicle.

Another benefit to buying a Prius now was that I could apply for the California Hybrid car stickers that would give me access to the carpool lanes. However, that program was limited to 75,000 cars and at the time I bought the car, the expectation was that I was too late. No worries. The car is still worth it.

Photo courtesy of chrisdigo at flickr.com

So, the morning after I purchased the car, I called the DMV at 916-657-6560 and asked how many stickers remain. Still 1,500 to hand out was the response, but they were going fast -- probably gone within the next 4 business days. To try to get one of the last ones, I:

  1. Went to the Toyota dealer and asked them to expedite my license plate registration. They were very helpful and agreed to do so immediately. However, it takes 48 hours for all the computers to talk to each other, even with an electronic submission. Time was running short.

  2. I drove my new Hybrid up to San Francisco to get a FasTrak transponder that allows my hybrid to use the carpool lanes (if I get the stickers) when going across one of the 8 Bay Area bridges. This is a required step for Bay Area residents applying to the Hybrid sticker program.

  3. Prepared a FedEx envelope for delivery of the Hybrid sticker application (and supporting documents) for delivery to the DMV in hopes of getting one of the last stickers.

However, all my last-minute running around may not have mattered...

On Friday, September 29, California Assembly Bill No. 2600 (aka AB 2600) was signed by Governor Arnold Schwarzenegger. It allows for 10,000 more stickers to be added to the program and for the Hybrid HOV stickers to be valid until January 1, 2011. Nice.

I will still send in my application as soon as I hear from the dealer about my license plate number. And, of course, will keep you all informed.

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