EarlyStageVC

The Teqlo Adventure

Few VCs admit to their misfires, though misses are more common in this business than hits.  One of the reasons I write this blog is to add some transparency to an all too opaque business of private equity.  It has been a while since I talked about Teqlo.com here.  Some of you may be aware there have been some changes recently. Others may have been to the web site recently and said “huh?” or, more precisely, ‘WTF?”

I figure the only authentic thing to do is to talk about this again, even when it is in an ambiguous period of re-birth.  This ugly period is a re-tooling of the premise of the business to give it more clarity of purpose.  It’s not fun being in the sausage phase.

First, let me admit we went down a mashup rat hole. We have a general technology for snapping together web services.  "Because they can" is an insufficient answer to "why do people want to create mashups?"  We failed to commit to solve a specific problem for a specific market, preferring instead the broad appeal of generality.  This has changed. 

No one led us down this rat hole.  We led ourselves.   When we realized we had to make a radical shift, we had to reignite the fire with limited fuel.  We made personnel changes because the fuel demanded it, not to penalize or blame anyone.  So we did the right thing.  We cut, refocused, questioned everything, and sharpened our edge. 

The first thing we did was toss out any pretense of solving everyone’s problem.  There is an old proverb that I just invented for this situation --  “The boiling of the ocean begins with a single puddle.”  We had to define our puddle.  So we did.

A friend of mine told me a few weeks ago that Snapfish is driven by a product team that thinks a hypothetical mom named Emily is their user.  Their design mantra is What Would Emily Want?  We went out and defined our Emily. 

The next thing we did was develop a hypothesis of the ways in which web application integration would please that Emily i.e., what is her pain?  What is she trying to do? What web services does she use to do it? And how does she cope with using 3-5 discrete web applications to get something done?    What  does she do now?  Then we went out and talked to a small army of Emilys. Arrgh!  This will strike everyone as obvious and necessary.  It is. And we hadn’t done it before because we were too busy building.

Along the way we re-learned something. Name your user.  Ask her what she wants; she will tell you, and often she will surprise you.  So we did and they did. One clear consequence is that you will see more emphasis on a configurable application, not a bucket o'widgets that snap together.  Leading with "it's so easy to build what you want" is like making a diet fun – it is still a diet, no matter how much more fun it is. You only do it when you must.

So now the Company is heads down executing what we think is a re-jiggering of the basic components.  We are packaging to solve a problem - not all problems.  Nor are we packaging to provide “examples” of how you can use Teqlo to solve a problem.  Nope.  We have picked a customer, listened to what they want, and are hacking away to get to market.

We now have an Emily in mind, a clear sense of who our natural distribution partners are, what’s in it for them, and how this little puddle becomes a pond and then a lake.  We dream of an ocean, but are navigating the puddle.

I'll tell you this much about the new direction - Web-based workflow.  Teqlo is ideal for making a pre-packaged process made from web applications and stitching them together to get something done.  There is no market for Cut-and-Paste, but Cut-and-Paste is the wow factor in Microsoft Office. There is no market for reconfiguring web applications, but reconfiguration is the wow factor in workflow for specific problems.  Without giving away the punch line, I'll point out that workflow is what's missing from the world of on-demand software.

The site itself has not changed.  It is still as confusing as it ever was.  That is not important, yet.  Over the next few [weeks] [months] the site will begin to molt.  We will shed the mashup cocoon and emerge as very different butterfly. (We may even re-brand the site to clarify what this new application is.) This butterfly will not offer you the universal promise of integration of all web applications. This butterfly will promise a specific user community a way to meaningfully improve the way they use the Web in their daily lives.  And if we do our jobs well, it will also be clear how we make money, not an insignificant question.

Of course, it might still be wrong, but that's the adventure in adventure capital.

A Special Interest in Targeting the Blogosphere

One of the more interesting aspects of being a VC is the seeing the change in the entrepreneurial zeitgeist as it flows through our deal funnel. Startup activity is a form of collective consciousness.  I am repeatedly surprised by the co-occurrence of similar ideas from startup teams who have no connection to each other.   

This vantage point also provides a perspective on the go to market process as seen by entrepreneurs.  I’d like to discuss one pattern I have seen played out repeatedly over the past year.  It is summarized in the following exchange:

VC: So tell me, what’s your go to market strategy?
Entrepreneur: We are going to target bloggers, because they are early adopters.

I have heard this from prospective business partners as well as my own portfolio companies.

• This was an insightful answer in 2003. 
• It was an adequate first step in early 2005.
• But it is meaningless in 2007.

Today there are over 57M blogs (including spam). That makes the blogosphere the 24th largest country in the world, ahead of South Korea and only slightly behind France, the U.K., and Italy.

Consider the following substitution:

VC: So tell me, what’s your go to market strategy?
Entrepreneur: We are going to target [the entire population of South Korea – every man, woman, and child] because they are early adopters.

That’s not a target; that’s a universe. The only person who should be taken seriously when they say targeting a population of 57M is Kim Jong-Il.   Everyone else needs more focus. So let me offer a way to focus the answer. The target is the pivotal fraction of that universe that is critical in achieving your goals.  Even if it’s 0.1% of the blogosphere, that’s still 114,000 bloggers!

What is really a target in the context of this go-to-market question? A target has at least the following properties:

• - It is relatively homogenous in its perception of and response to Newco’s product (that’s why it’s a target and not a set of targets)
• - It is addressable by a limited number of actionable sales or marketing decisions (that’s why you can focus on them)
• - It offers some strategic or operational advantage over alternative choices (they are the most relevant population.)

How should we think about bloggers in this context?  Are they the media? Are they customers? Perhaps.  But bloggers are also just another form of indirect distribution.  They are the value-added resellers of the 21st Century, taking a widget here and a gadget there, to differentiate what they have to offer to their ‘customers.’ Your challenge is to be that widget or gadget in their blog – to have them integrate you into their online product.

So how will you define, attract, motivate and retain your online channel?  That’s the question that is running through my head when I hear “target the blogosphere.”

Fortunately, value-added reselling is a time-honored method of building a business.  There are even some parallels from the recent past. Return with us now to the thrilling days of yesteryear.  There used to be interesting organizations called software companies and, they, too, used indirect distribution.  They roamed the earth freely, devouring budgets with abandon, until the comet hit in the year 2000.  We can learn lessons about successful methods of indirect distribution from the fossilized records they left for us.

Lesson One:
Match the channel with the product. Understand what skills, motivations, reputation, resources, and reach a reseller must have to deliver your product to their customer.
Webspeak: Segment the blogosphere and profile your intended community.

Lesson Two:
Segmentation only matters if you can actually figure out how to attract, qualify, recruit the right partners.
Webspeak: Know how to find these people on the Web; what they read, what search terms they use, etc.

Lesson Three:
Try to get adopted by some existing network of resellers, rather than build your own.
Webspeak: Find existing communities of interest or purpose.

Lesson Four:
Indirect distributors don’t do missionary work for you.  They piggyback on your initial success and amplify it.   
Webspeak:  Use guerilla efforts to lead to (what usually only in retrospect appears to have become) viral marketing or network effects, i.e. success.

Lesson Five:
Give the channel a real ROI.  Demonstrate how they can achieve their goals through you. 
Webspeak: Affiliates.

A lot of the Web 2.0 conversation (and the echo) is about democratization and access.  It is mostly applied to content and media.  Perhaps a more important consequence is that it is the democratization of distribution.  As we have learned all too well, small, homogeneous, and motivated communities called special interest groups can drive democracies.

What’s your go-to-market? How will you find your special interest group in the democratized world of online distribution?

Who is Google's Next Victim?

A few months ago I posted the following

Google has built a stunning platform for the rapid development and deployment of applications on a worldwide scale.  They have repeatedly taken revenue-generating software categories and made them free, media-supported businesses.  This leverages their economies of scale in delivery and their ability to aggregate, segment, and monetize audiences.   Free is a very effective appeal for a CFO or small business owner looking to reduce IT expense. It may not work for Exxon and GM.  But it doesn’t have to.  If it works for millions of small businesses around the world, it works.

Google is rumored to be working on a slew of new applications for delivery later this year and early next.  I have no idea what they may be or if they really are.  But I would speculate that some are targeted at business use cases that revolve around people, time, content, and communication.   After all, they have Google Home Page, Calendar, Writely, and Gtalk/Mail today.  It is not hard to begin to package them as business process applications and collaboration portals.  Google already has a significant developer community using Google’s APIs for creating mashups with other web services. Motivating them to redirect toward business use cases is a natural extension of  the present. Once you own the process, you own the Control. If the View is the Web, Control is free web-based application, Model will follow.

It is completely conceivable that the future of Web 2.0 in the Enterprise looks a lot like Google 2.0.

Yesterday Google announced it has acquired Jotspot and is making their applications free.  Hmm... So Google is squarely going after horizontal business applications with the Googleplex.  Where do they go next?

Google isn't really trying to capture Microsoft's market value.  I think they are focusing on everyone else first. It is now well understood that Ebay's market cap is squarely in their gunsites with Gpay, Gbase, and Adsense.  Who is Google's next prey?

If I were Eric Schmidt, I'd be salivating over an Google-delivered Intuit killer.

And why not?  It is both consumer and small business focused.  It has high value user data that is suitable for targeting.  It is the ultimately sticky application.  It further leverages Gpay.  It further leveages the small business productivity applications.  The core user base of Adwords and Adsense probably already use Intuit (Quicken or Quickbooks) for accounting. Google could close the loop between marketing, fulfillment, and payment with GBooks.

So while Google is busy re-inventing the media business with targeting and delivery technologies, they can, should, and probably are looking to find applications to inform that targeting system.  What better source of targeting data than where individuals and business are spending their money?

Critical Strategic Questions for Riya

As many of you know by now, Munjal Shah is the CEO of Riya.  Riya's been an interesting illustration of the use of transparency to enhance visibility.  Munjal continues his series on the metamorphosis of the business.  He got a little "ink love" on the topic from the Wall Street Journal last week by Becky Buckman in her article about the Web advertising market.  Here he talks about the Board meeting we had a few months ago in which we basically said "Yeah, you're right. Go for it."   

What Munjal doesn't mention in this write-up is that he didn't just announce this proposed change at the Board meeting.  The Board meeting was an in-depth review of the thoughts he had shared in conversations he had with each of us the two weeks preceding the meeting.  By the time of the meeting we were all (1) aware of the issues and (2) aware of his proposal.  Consequently, we came prepared with a few focused questions, not off-the-cuff reactions.   More importantly, we came prepared to make a decision.   

Three hours later we emerged, united in our go forward plan.

This is the back story about how to lead a process of change -- board level or any other team.  Bring everyone  with you along  the way. Don't think you have to have the "complete answer" before you engage others who are critical to your success.  Leadership isn't about having all the right answers.  It more about having all the  right questions.

Venture 2.0 - Preamble

This the first in a series of posts on the idea of "Venture Capital 2.0."  I thought it was appropriate to first set the stage of Venture Capital 1.0 as the point of contrast.  This first post is obvious stuff to those of us who have been in the business for a while, but less so for the casual observer.

Venture Capital 1.0 - The Cycle
The venture capital business has always been a ‘hits’ business.  One of my first blog posts (about a year ago) was on the "long tail of venture capital." The average venture investment generates a negative rate of return, but the outliers like Google, Microsoft, Cisco, and Apple have given information technology (IT) venture capital its superior rate of return.  The IT venture capital industry has always been cyclical.  For forty years the cycle has repeated.  Outsized rates of return attract capital, increasing valuations, and depressing returns.  The depressed rates of return created capital scarcity, laying the foundation for lower valuations, better rates of return and a repeat of the cycle.  Public markets have played an important role in the process, providing both the public appetite for new issues, as well as currency for acquisitions of venture-backed companies by public technology companies.

The IT venture capital industry today finds itself in a form of ‘stagflation.’ The absence of interest by the public market has made liquidity difficult to achieve, making the 2000-2005 period a particularly depressing one for those who are incented by capital gains.  At the same time, the interest in U.S. venture fund investment by non-U.S. firms is at an all time high, inflating the size of funds and increasing competition.  Venture capital fees remain at a premium to most other asset classes, but not the returns.

Venture Capital 1.0 - Key Success Factors
Success in IT venture capital investing has been a form of capital and information arbitrage for much of the period up to the late 1990s.  The scarcity of risk capital and the scarcity of insight about evolution of technologies and technology markets made it possible for astute venture capital firms to transform access to capital and superior technological insight into superior returns.  For example, as Moore’s Law was driving the electronics industry to the mantra of smaller, cheaper, faster, Sequoia Capital built a franchise reputation in semiconductor venture investments, based on the experience of its two founders, Don Valentine and Pierre Lamond, both early veterans of National Semiconductor.  A more recent example is ComVentures’ growth and success in the late 1990s.  Seeing the triple effect of telecommunications deregulation, global Internet growth, and ever-changing technologies and standards, the principals at ComVentures capitalized on their market and technological knowledge to raise several early successful funds.

Success begat success in the venture business.  Since venture investments have had payoff characteristics like options, i.e. limited downside and infinite upside, the key to the business has been "deal flow."  Deal flow is about seeing as much of the total distribution of deals, to generate a larger set of 'long tail outcome' candidates.  Success made IT venture capital business a first-order Markov process, where the probability of the getting the next hit was enhanced by having a previous hit, precisely because of the desire of all entrepreneurs to affiliate with "known winners."  The two masters of this phenomenon have been Kleiner, Perkins, Caulfield & Byers and Sequoia Capital.  Both parlayed early successes into institutional franchises. Other firms, many as old or older, have been less effective at sustaining the self-reinforcing dynamic of brand and success.  The sequential evolution of the IT "food chain" from semiconductor (Intel, National) to systems (Apple, Sun, Dell) to software (Microsoft, Oracle) to services (Yahoo, Google) has been the underlying order.

As the U.S. venture capital industry posted record rates of return in the late 1990s, the industry attracted record levels of committed capital that remains in place today.  Despite the abysmal performance of the industry from 2000 to 2005, many firms have been able to attract investors and avoid the re-equilibration and shakeout that has been predicted for the past five years.  It seems that limited partners have become inured to the venture capital cycle, expecting a repeat of the historic boom/bust experiences of old, and to average their rates of return over the next few cycles. 

A belief in forward-averaging the returns assumes that history will repeat.  The thesis of these essays is that the venture cycle has fundamentally changed for Information Technology and that formulae that worked over the past 20-30 years no longer broadly apply. 

• Globalization is both a risk and an opportunity with venture branding.
• Capital is no longer scarce, nor is access to venture capitalists.
• Information technology is no longer rarified and, in many cases, it is inexpensive.
• Global 2000 Enterprises, once the 'go to' customer for any fledgling IT startups, no longer have the risk profile they once had for IT innovation.

As I said, these observations are not new, nor are they particularly insightful.  And some firms are already responding.  The move to Cleantech is a move to exit IT (or diversify) to find alternative industries.  The move to build Indian and Chinese outposts are brand extensions.   

Presumably the Limited Partners who invest in venture funds have more incentive than anyone to develop an investment thesis about Venture Capital 2.0.  The next post will concentrate on the barriers to doing this effectively.

Business Model, Schmizness Model

The term “business model” has bothered me for a long time.  I have always found it to be a glib method of characterizing a company’s relationship with its various constituencies, e.g., customers, suppliers, competitors, etc.  The problem isn’t really the concept.  The problem is that it’s a complex, multidimensional structure that doesn’t really lend itself to a summary sentence, at least not if you really want to understand the business.  Yet it one of those economic terms that has entered the popular lexicon as the rise of business schools in the 1970s and 1980s mainstreamed “businessperson” as a profession (like engineer, doctor, or lawyer).

Wikipedia does a decent job of summarizing the cacophony of ideas that are embodied in the term business model.  I won’t recount them here.  The reason the question “what’s your business model?” bothers me it that the inquirer often judges the answer based on its parsimony, as though simple is prima facie evidence of good.  Occam’s razor applied to business strategy. 

I myself will sometimes ask others the question, but I use it to test for complexity, not simplicity.  I use it as a Rorschach to see how deeply the respondent has thought about the market and which aspects of the business appear most salient to him or her. 

In preparing for this entry, I started to ask myself how do I think about a business model? And how do I test if business models are complete, coherent, and compelling?  When I worked at Bain in the early 1980’s the firm then specialized in ‘strategy’ and ‘business definition,’ equally amorphous concepts. (Amorphous is good when you bill by the hour).   We used to refer to three tests to define whether two companies were in the same business – similarities of cost structures, competitors,  and customers. 

So I sat down and drew this little graphic for myself to try and outline the key concepts that seem to appear in the “business models” of companies that I see in my practice.  I don’t claim this is complete or some form of ‘ground truth.’  It is a snapshot of the concepts that I most readily gravitate toward when I think about “what’s your business model?”   I am sure I have left out huge chunks that will become obvious when I go to my next deal pitch meeting tomorrow. 

 

I am not going to explain every facet.  Most of it is self-evident (I hope).  However, a couple of things are worth noting.  First, at the center are the terms “lever” and “return on equity.”  I think of all these bubbles as knobs or levers in the machine that is a business.  Not all are equally important, but all are impactful choices that Management has made about the business, even if the choice is to ignore this facet.  Second, the objective I want to maximize is return on equity, not growth, not revenue, and not necessarily even market share, though these may be part of what generates ROE. 

I have enumerated some of the common choices more for illustration than prescription.  I should point out the category of “enterprise asset” because I think of this as a separate objective beyond barrier to entry.  The “enterprise asset” is that intangible that is the difference between book value and enterprise value.  It is the reason why an acquirer is drawn to the business beyond the NPV of the earnings stream.  It is the strategic value or what accountants call goodwill.  This box is particularly important in early stage investing, as the exits are so often around acquisition.  The business should have a clear definition of its ‘residual value’ to a potential set of acquirers.

Hopefully some will find this useful as a checklist.   There is nothing Web 2.0 about this framework.  And there shouldn’t be.  Business is applied microeconomics -- Web 2.0 or pest extermination (perhaps a poor juxtaposition – I need an editor.)  Anyway I feel better for having shared my quick and dirty model of a business model.  Thanks for listening.

So, quick, what's your business model, anyway?

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P.S.  I woke up this morning realizing I had overlooked where to place "advertising" in the mix. (Doh!)  This is a big enough oversight that I thought I better modify this before I get blogwhacked.  I think of advertising and cost per action as "transactions."  The reason for this is that advertising is really a form of variable micropayment, i.e., an attention tax.  It scales with an action -- page view -- so it is a form of transaction to me. 

Investing at the Intersection of Opportunity and Serendipity

We just made a new Series A investment in a company called Abgenial Systems.  Dan Primack and Matt Marshall will pick this up soon enough.  So I thought I should get out in front and discuss this a bit. Pardon me for being a bit oblique in what I am about to describe, but it is hard to strike a balance between transparency and pre-announcement when dealing with early stage investments.  I don’t want to pre-announce or hype what they will do, but I do want to describe how we came to make the investment. It wasn't the usual "show us your Powerpoint and wait for the white smoke" dialog that characterizes most entrepreneur/VC interactions. 

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About a year ago I became interested in the phenomenon called mashups.  VCs try to find Big Ideas that transform existing markets or create new ones. This seemed like a Big Idea, but packaged in a Small Box.  I started thinking about something I eventually came to think of as The Recombinant Web --  a half step between Web 2.0 collaboration and the Holy Grail of a Semantic Web.   After all, the motivation of mashup creators was to recombine otherwise useful silos into new, ever more useful experiences.  Today’s web services are kind of like old, single-tasking PC applications.  They exist largely isolated from each other on a common presentation screen.  Then it was the CRT.  Today it is the browser window. 

The “integration” of Google’s web services or Yahoo’s web services is reminiscent the “integration” that existed in Lotus Symphony, the short-lived successor to 1-2-3.   I especially like this description from 1985  because some things never change. A hit application spawned visions of a platform...

Lotus designed Symphony for access by other programmers. Hooks inside the software help developers write applications for the Symphony environment. Add-in applications directly from Lotus also are expected. Obviously, Lotus wants Symphony to be your only program. Whether this idea is valid depends on several factors, not the least of which is how well the package works with the expanded RAM of such computers as the IBM PC AT. With up to three megabytes possible, Symphony memory problems could become a thing of the past. (Creative Computing, February 1985, p.88)

Sounds vaguely familiar.  "Hooks inside the platform" - the 1985 version of API, and "up to three megabytes possible. Memory problems could be a thing of the past." - the 1985 version of the infinite resource of the Googleplex.

Mashups emerged from the current developer community as a way to exploit the Web as that platform and break  down the stack of proprietary, but "integrated" web applications from GYM.  But “mashups” have lots of limitations as a methodology. Over time I distilled the issues to three fundamental objections. 

• First, the author/user distinction doesn’t scale.  You can’t possibly know what web services I might want to combine nor how.  Only I do.  I want to program the web.  I don’t want you to do it for me any more than I want to go to a site that lists all known queries to search the web.  A corollary to this point is that will be few (no) mashups that are viable standalone businesses, at least not at a scale that has an interesting economic consequences for an investor.


• Second, there is only so much "bookkeeping" that can be done efficiently in the browser. Integrating in the browser is like cooking on a camping stove. It's possible, but it wasn't designed for an elegant and synchronized multi-course dining experience.  Complex and interesting re-combinations are not what browsers and AJAX were designed to support.   

• Third, the idea of users combining arbitrary web services seemed too unbounded and too early. It seemed wrought with lots of nasty issues like service availability/fail-over, financial models,  data formats, and a small issue of programming, programming, and programming.

I started blogging about mashups with the intention of learning-by-publishing.  The more I wrote, the more I learned. The more I learned, the more convinced I became that these issues required a fundamental re-think of how to approach integration. For the concept of re-mixing to become mainstream, It had to be capable of handling sequencing of web services and flows of data, but with a user interaction model as simple as point and click or cut and paste.  A tall order.  The more I stared at concept of "mashups," the more convinced I became that the concept was too parochial.

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Three or four years ago my friend Pete Kolstad introduced me to Rafael Bracho.  Rafael was a co-founder of Active Software and a pioneer in the 1990’s evolution of enterprise application integration (EAI) software.   Active Software went public with Rafael as CTO and eventually merged with WebMethods.  Somewhere along the way, the original EAI vision of simplified application integration became bloated by layers upon layers of standards, registries, modeling languages, protocols, etc. and promise of nimble enterprise services-oriented architectures (SOA) was DOA.

We were looking at an EAI appliance company about 18 months ago and I asked Rafael to help us with the diligence. Luckily we lost that deal to another VC firm  (it since has not gone well).  Afterward, by pure serendipity for both of us, Rafael started telling me about a technology he and a partner had been working on for several years under the name Abgenial Systems.  It was a radical re-think of how to integrate applications.  It was so radical, in fact, that we didn’t understand where to use it, nor did the other VPs of Software Development that we asked to look at it.  By starting with a new conceptual model for what integration and interoperability would mean, Rafael and his partner Jacoby were able to simplify the enterprise integration problem to the point of near triviality.   

I was stumped as to how to make this an interesting business.  WebMethods, Vitria, Tibco were yesterday’s news.  Who cares if you could steal share from these guys? They were locked in a fight to the death on near-free software, bundled with low margin consulting services, and rewarded with market caps running at 1X revenues. 

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My most important observation from immersing myself in the concept of mashups was the recognition that mashups were just another form of application integration, done client side rather than server side.  That launched me in to seeing a potential unification of innovative consumer applications with stultified enterprise applications.

All of a sudden the idea of Abgenial pivoted.  Last Fall, Web 2.0 was white hot on “collaboration and mashing” and Enterprise Software was moribund with “legacy vendor consolidation and broken distribution models.”   Software as a Service was the VC industry’s  Great White Hope, combining Web distribution with Enterprise functionality. (Read this as low cost of distribution and tangible value.) Google, Microsoft, and Yahoo were increasingly veering towards web applications (calendars, maps, photo sharing, etc.) – free form of SaaS.

The Abgenial Pivot was to see the dots were connected.  Consumer web….enterprise web…..Saas….legacy apps…. Mashups….SOA were all variations on a theme and that theme was <hype>Programming the Web</hype>.  It was then that I went to my partners and asked to provide a $250K bridge loan to blow away the haze and find the business in this combination of market intuition and technology.

We did. 

And then we screwed it up.

Thinking that the real innovation here was software, we designed a software business.  Sell a product and make money.  A time-honored tradition.  We approached a bunch of VCs whom I know with (1) a team with a record of success (2) real, protectable technological innovation and (3) a short productization plan.  No bites for a co-investor in Series A. The market said, Wrong! Software Still Sucks.

We went back to the Business Model Drawing Board to re-consider how we could accomplish this grand(iose) vision of programming the web, but with a more palatable adoption model.  In retrospect, I think the first pass of delivering the technology as software was a default option.  It was easiest because this is what the team had done before, not because it was what the market wants today.  So, of course, we moved to hosting -  but hosting what exactly?

We went through several theories of what to deliver, looking at various other companies as role models.  We flirted with being a "better this" or a "better that" but constantly came back to the belief we could be so much more than a Web 2.1 company, precisely because the technology was so radically better and different than anything we had seen. Along the way I managed to get confirmation of this point from folks I knew at Salesforce, Microsoft, Google, and Yahoo, as well as the single most-informed thinker on Web 2.0 software architectures I have met - Dion Hinchcliffe.

I was stretched with my partners.  We were thrashing.  We knew we had something Big, but somehow it was the Business We Dare Not Name. Technology, Platform, Application, Solution -- these are all gobblegook businesspeak that don't define anything concrete. 

Then we had a breakthrough.  Oddly enough it came at meeting at one of the largest software companies back in May.  Rafael and I were both there schmoozing and being schmoozed.  A few conversations into the day, a light went on for both of us.  All of a sudden the fog lifted and it was clear to both of us how to go to market and the natural business model. It was a kind of a Steve-Jobs-in-Xerox-PARC moment.

That stunning moment of clarity was enough to get my greed glands going. I no longer wanted a co-investor.  VCs alternate between fear and greed.  Now that the opportunity, differentiation, value proposition, and path to monetization are clear the next steps are about establishing proof and building a team. I outlined the concept to my partners and we agreed fund this post haste.  We closed Series A two weeks later. The team is hard at work building out the business.  Soon we will begin looking for some senior management, including a world class CEO (hint to reader).

Abgenial isn't really in stealth mode. It is not a state secret, but it is clearly in gestation and explaining it is just a distraction right now.  One thing I have learned after 25 years in software is that innovative software defies description. It has to be seen to be understood. Imagine Bricklin and Frankston describing Visicalc before you saw it.  Imagine Ray Ozzie describing Lotus Notes before you saw it. So please be patient.  Abgenial will emerge from the shadows soon enough, and then you'll see why this Aha! was so hard to find, and so obvious once we did.

Chance favors the prepared mind.  Blogging as a form of thinking out loud definitely helped me prepare mine for this one. 

A Vast Improvement for Classifieds, Mashups, and the Web

A few months ago I noted the release of Google Base as a pivotal moment in the maturation of the Web.  I said the move from unstructured to structured data was an important improvement in making the Web usable and re-usable. 

I have also discussed mashups as an important, lightweight development paradigm for making this reusability possible.  Thus far the mashups I have seen have been features, mostly visualizations of someone else’s data on Google or Yahoo maps.  The owners of the primary data have Web 1.0 business models, including Google Base.  The Web 1.0 model is “all your data are belong to us.  So come to [oursite].com if you want to see it."   Consequently, mashup innovation stops at the edge of what’s  really interesting, because mashup developers can’t rely on re-mixing those data and building really great destination sites.  This conflicts with the walled garden business model of the data aggregator.  Hence, restrictive licensing models.

Well, now there is about to be a Vast improvement. 

Vast has been in development for about a year, creating what I think of as the first inverted portal.  Now the preview release is up, showing the first three "applications" of the technology. Vast crawls the web for data and extracts that data in vertical categories.  The URL Vast.com is a demonstration site, not really a destination site.  The real destination site is everyplace else on the web – blogs, discussion boards, microsites, social networking sites, etc.  Anyplace where content creates context.

Vast.com looks like a classic classifieds site, but it is not.  It is not a data aggregator.  It is a data disseminator.  It is a hub targeted to the developer community to enable the mashup of structured data in a reusable form.   And it’s not just about classifieds.  It’s about adding structure to content. But the first application of structuring the Web is to take free-form descriptions on the Web and make them structured, searchable listings, i.e. classifieds.

What’s different from the aggregators besides the business model?  It is the data itself.  The data do not come from feeds.  They come from crawls of primary data sources – cars listed on dealer sites, jobs posted on companies’ web sites,  personal profiles listed on blogs, personal web sites, and dating sites.  As a result, the data are Vast – millions of cars, millions of jobs, and millions of profiles, with more categories of objects to come.

This is the true long tail of listings. The user benefit is obvious -- find the exceptional value.   Like the old joke -- why is it always that you find something in the last place you look? -- the exceptional value is always in the long tail. 

You don’t see a lot of end user features on Vast.com – no AJAX widgets, no mapping, no integration with reviews and ratings.  What you will see a Vast amount of data.  If you have a web site about Miami – create Miami-only view of the data.  If you have a Mercedes-Benz discussion site, create an M-B specialty classifieds component.  If you think you can do the next HotorNot.com, build it.   You can even build the next Vast.com on the API.  All the features you see are available in the API for free.

I don’t think of Vast (or Riya) as just Web 2.0.  Web 2.0 is largely about tagging, social annotation, and sharing.  I think of Vast and Riya as bricks in the road toward a Structured Web, beyond Web 2.0. Vast does for free form text what Riya does for images – extracts structure for reusability.  There is some additional discussion of Vast here, here, and here. 

Vast is not a walled garden.  It is  “All your data are belong to you.”  Have at it. 

Writely - The Back Story

Sam, Steve, and Claudia have done it.  Writely is now part of Google.  Here’s the back story to this ‘overnight success’ that every Web 2.0 developer should know.   Overnight success is part of the Myth of Silicon Valley. This overnight success is twenty years in the making. And I think it means the business-as-feature GYM shopping spree is going to slow down from here.

Back in July when Sam and I were having coffee, he asked my opinion about a bunch of ideas he, Steve, and Claudia had been working on.  One was “Flickr for Documents”.  That afternoon they began to focus on what became Writely.  So you could (erroneously) conclude that this was another Web 2.0 one hit wonder with a nice UI  and LAMP after a few months.

I’ve known Sam and Steve for about nine years.  They have been in the application software business for nearly 20 years.  Two important themes arise from this.  First, they aren’t generic applications software guys.  Every major product they have shipped has been about “documents” but on successive platforms. 

1. They were the authors of FullPaint and FullWrite  -- the largest selling third party word processing and painting apps on the original Macs.
2. They developed the first cross-platform (Mac, Windows) WYSYG HTML editor which came to market as Claris Home Page.
3. They developed the re-design and built the underlying platform to Macromedia’s re-write of DreamWeaver.
4. Now they have built Writely.

I’ve seen them build two major sources of expertise in this concentration.  First, they understand the user problem so deeply that they can blend the advantages of each new platform with ‘document authoring problem’ to really build a platform-native solution, not a clone of someone else’s work.    Second, before tackling the development of the application, they develop a library of services and tools that they know will be required to bang out the kinds of features and performance an authoring application requires. 

The first advantage is their intuitive “MRD”.  The second is their secret sauce for rapid application development.   Both benefit from having been repeated over multiple computing platforms. So what appears to be 7-8 months of effort is really built on years of experience expressed in a continuously evolving code base.   

Personally, I think purchase by Google this is the market “top” for Web 2.0 feature acquisitions. The bar is raising for Web 2.0 entrepreneurs. Few Web 2.0 companies have this sort of prior art.  Put another way, most Web 2.0 companies really are six months of engineering on a LAMP stack.  From what I know of Sam and Steve’s ability to time the market’s hunger for product acquisitions.  I’ve learned they are the Warren Buffet and Charlie Munger of software.

Microsoft - The New API Price Leader?

There was a lot of conversation today at Mashup Camp about (1) the inevitability of key Web services being re-mixed into interesting new applications and (2) the frustration that business models of the API providers are unclear, at best. This is not going to change until the market forces a change. Here’s one forcing function to consider.

My friend Naval Ravikant had a clever post recently about how Microsoft could take a whack out of Google by adding an AdSense blocker feature in the new version of Internet Explorer. While partially a joke, the idea illustrates how MSFT could leverage the difference between its business model and Google’s to the detriment of Google. However, it would probably be anti-competitive. Just blocking ads per se doesn’t create affirmative value for Microsoft. What I am about to outline does.

A major reason that YHOO and GOOG have not published business models for their web services is that their businesses are based on “direct sales” not “indirect sales.” APIs are indirect sales. End users coming to my web site are direct sales. A change in channel strategy is always disruptive in any business, particularly high P/E businesses that missed their numbers once already, as YHOO and GOOG did last quarter. It makes them even more resistant to disruptions from the number three competitor.

MSN is the clear and distant third in the consumer Internet. Microsoft’s core business remains (1) enterprise-focused and (2) developer-centered. Thus far this sensibility has hampered Microsoft’s ability to build a compelling end-user franchise, as least measured by YHOO and GOOG standards. So why not invert their consumer model and move to an API-centric strategy? And what if the APIs were free and unlimited?

MSN has a web services stack largely equivalent to GOOG and YHOO – mapping, instant messaging, search, etc. Why not center the value proposition to attract developers rather than end users? Make the APIs for all of MSN services unlimited and free. That will attract developers from Google Maps and Yahoo search in droves. Have MSN take the lead in the next generation of the Web by turning MSN into a developer-friendly platform. Build the Web around Microsoft APIs, just like the desktop is built Microsoft APIs. So far this sounds like Naval’s idea – eviscerate YHOO and GOOG by enabling developers without benefit to MSFT. So where’s the beef?

If developers adopt MSN services as their content platform, it’s a short leap to get them to adopt MSFT tools as the development platform. (Certainly not all, but a lot). More importantly, as enterprises adopt web development methodologies (mashups, RSS, etc.) to support their own IT, it’s a natural to drive MSFT software products as the internal platforms. Turn Office 12 into the user interface. Turn Biztalk into the mashup engine. Drive the enterprise to integrate business information with MSN services, e.g. mashup major customers and sales locations onto MSN Maps via MSFT CRM. Use the consumer web to drive the adoption of the MSFT tools and infrastructure stack into the enterprise.

The core of this strategy is to stop chasing GOOG and YHOO with consumers and recognize that IT developers are consumers too – consumers who hack. Get them to hack the MSN version of the Web and accomplish two objectives. Put pricing pressure on your competitors and extend your enterprise franchise in one fell swoop.

MSN has a wonderful strategic opportunity. Who’da’thunk?