Nantucket Conference 2008

The final agenda for this year's Nantucket Conference has been published. As a prior participant, I wanted to make sure that readers knew about it. Highlights of this year’s agenda include IDG CEO Pat McGovern, IDEO CEO Tim Brown, Maven Networks CEO Hilmi Ozguc (a General Catalyst company that was recently acquired by Yahoo), Bob Metcalfe, and EnerNOC CEO Tim Healy. The sessions are always well organized and moderated but the networking over drinks and dinner is the best year-round in NE. I like this year’s “Game Changers” orientation and mix of cleantech, software, Internet and other companies, VC, markets and entrepreneurs. Too bad industry events that week will keep me on the road. Check it out here.

My love affair with the OLPC's XO laptop

I have to admit I’ve fallen in love. (Sorry ladies, it's not that kind of love: I’m as constant as the Northern Star with respect to Susana.) My love affair involves a laptop. It happens so infrequently because there have been so few great breakthroughs in personal computing technology since I hauled around the Compaq Luggable in 1987.

I'm not saying that because I’m a curmudgeon; I can fall in love with technology. To prove that point, let me admit that I’m a little bit giddy while writing this.

Here’s why: For the last week I've been using the “$100 laptop” by the folks at the One Laptop Per Child foundation (OLPC). OLPC founder Nicholas Negroponte gave one to Susana and me. Nicholas invested in MessageMachines, and I greatly admired him as an entrepreneur and an IT intellectual before he gave me the XO.

The XO laptop -- it's called the XO because if you turn the logo 90 degrees, it looks like a child -- runs on Linux with a wide-ranging suite of open source applications for basic laptop users. The combination of an open source operating system and applications is the best means yet of lowering the total cost of ownership, which is open source software's (OSS) primary consumer benefit. Then there's the built-in wireless connectivity that helps bridge the digital divide by giving children worldwide access to a network-ready laptop. This fact alone makes Negroponte worthy of a Nobel Prize.

What's interesting is that this OSS-based laptop will absolutely lead to proprietary software and hardware sales. While the XO doesn't come preinstalled with Microsoft XP or Vista, children and their teachers will need more sophisticated software applications, networking and hardware capabilities over time, so they'll graduate to higher-end hardware. There’s no CD/DVD drive in the XO at all, for example, and no hard drive and only a 7.5-inch screen. As the children grow up, they'll naturally migrate to proprietary products, which are fine with me. To adapt a phrase from Richard Stallman, I believe “the future is hybrid,” as opposed to purely open.

More on the XO's openness: I discovered a button located on the keyboard that allows children to view the source code (what XO refers to as the “programming”) behind certain applications. The XO laptop’s highly accessible and flexible user-interface, called Sugar, also promotes sharing and learning. This makes the XO a true OSS machine, from its philosophical underpinnings all the way through its uncomplicated functional capabilities available with one touch of a keyboard button.

My favorite feature is The Neighborhood, which provides, to quote the documentation, a

View of all the connected XO laptops within a child’s community, and what activities they are sharing. Each child is represented by a different color. If there is a shared document or activity being collaborated on by a number of children, it will show up within this view.

The Neighborhood provides an easy-to-use view of the network meshwork in the neighborhood, but it also helps facilitate interactions with immediate “friends” and the building of a community. When combined with The Friends, The Home, The Activity views and Browse, XO provides all the elementary functionality of a desktop plus a means of stepping up to more advanced applications, such as SynthLab a mini-lab for acoustic- and electronic-circuit construction.

For an adult, it takes a short time to adjust to XO's looks. It has a shiny green-and-white plastic outer cover, a handle and two leaf-like antennas. It looks like DreamWorks went out to create Shrek’s personal laptop based on a Fisher-Price design.

The XO is spill-proof, rainproof, dustproof and ruggedized for impacts due to being dropped. There is no fan on this little wonder, it’s as silent as a Caribbean wind gust and it weighs just 3.2 pounds. It gets six hours of heavy activity or 24 hours of reading battery life from one charge. (The battery is made of innovative lithium ferro-phosphate, costing $10 to replace and is good for 2,000 charges, compared to 500 for a regular laptop battery.) It has a nifty built-in video camera and a screen that rotates into a tablet configuration. It also has a microphone, memory card slot, gamepad controllers and graphics tablet. The XO is the complete personal computing laptop for children and adults.

There's just so much to love about the XO laptop. I look forward to seeing how it will give new hope to the children of the developing world. In 10, 20 or 30 years, I believe we'll witness a new generation of IT leaders who are getting their start even now on these small green-and-white machines.

I really hope the Nobel Foundation is paying attention.

Why you should shun VC conferences

I've received a number of phone messages and direct mail solicitations for the Venture Capital Workshop and Conference, which will be held in New York City on Tuesday, March 4, and in Boston on April 8.

I was surprised to get invitations to this type of conference for two reasons. First, because Black Duck Software is not an early stage venture, and we don’t need the money. And second, because I thought this form of investor jamboree was dead. Maybe that was wishful thinking. It seems like such a '80s thing to do.

The appeal is of these conference is that – for a fee – an early stage company can find a room full of eager venture investors who want to hear an investor pitch. This beats having to make individual pitches on Winter Street in Waltham, MA, or on Sand Hill Road in Palo Alto, CA, or in front of standalone VCs on the east and west coasts.

I think these conferences are a total waste of time and money for entrepreneurs seeking venture capital. Let me tell you why.

You remember that room full of VCs? Well, it actually contains an audience consisting mostly of other parties with other interests. Or undesirable investors. One quarter of the room is occupied by other entrepreneurs waiting their turn to make a pitch, listening to pitches to polish their own. Approximately one half are accountants, attorneys, business brokers, consultants, and others who will try to sell you their services. And the remaining quarter are junior, ill-advised, or simply stupid investors. (A slightly old but still relevant description of an entrepreneur's experience at a venture conference can be found here.)

My Dear Brothers and Sisters: There is a better way.

First, do a Google search of your area VCs. Type in, for example, “Boston venture capital”. VCs like to invest locally, no matter what they say about doing remote investments. Traveling is not fun, detracts from their current investments, and cuts into sourcing time. If you are located far away from the center of VC clusters (Silicon Valley and Boston), then use Google to vector in on some closer locations. Also, I would recommend getting at least one advisor who has been VC-funded and network your way into a VC pitch.

Second, call on a partner in the firm with an interest in your venture area. If you do not know any partners in the firm personally, you have a choice: Cold call them starting with their executive assistant (the key to scheduling any partner), or identify a principal or associate. Get their names from their website.

Alter your approach according to your audience. With a partner, you should go in assuming you have one shot. With a principal or associate, come prepared to encounter stupid questions, but your aim is to make them your evangelist inside the firm. In either case, you objective is another meeting.

Finally, bring a great story -- your total addressable market, growth plans, and other elements of the business. Answer the question: Is this a billion dollar idea? If it isn't, how can it built to be?

Whatever else you do to attract the attention of VCs, don’t waste your valuable time and money at a venture conference. You're far better off taking that time and money and churning it into your business.

Start it up – or not

Marc Andreessen is a guy who knows a thing or two about IT startups – first he founded Netscape, then Opsware, and now Ning. According to Andreessen, there are good reasons to do an startup company, and then there are not-so-good reasons.

The good reasons? You can probably guess what they are. Doing a startup gives you the opportunity to:

• Control your own destiny
• Create something new
• Impact the world
• Work the way you like, with the people you like
• Make $$$

These reasons, to a greater or lesser degree, fan the flames that burn in the hearts of visionaries who found companies. But they're just the beginning, and the devil (and the profits) are in the details.

Simply stated, it takes more than greed or idealism to do an startup. As Andreessen points out, you still will need to:

• Take the emotional strain that comes with the ups and downs of starting a new venture
• Want to make the decisions. No autopilots need apply
• Accept rejection. After all, a lot of VCs – and more than a few of your friends and relatives -- will call you nuts. Some won't even be that nice
• Convince talented people to leave cushy jobs to take a chance on your new venture
• Work long hours with little immediate reward
• Accept a new corporate culture where job descriptions evolve faster than teenage fads
• Walk on the sunny side of the street, resisting the temptation to fear the worst

Even this isn't the complete list. “I haven't even talked about figuring out what product to build, building it, taking it to market, and standing out from the crowd,” Andreessen writes.

No, this isn't a line of work for the faint of heart.

After finding inspiration on a beach in sunny Mexico, I started Black Duck Software for all the standard reasons you do a startup. Now, nearly five years later, I'm proud to say we have almost 400 customers, we operate in eight cities with either offices or sales reps, we have 81 great employees, and we are defining a new market as the market leader.

Steve Jobs, co-founder of that little hardware startup known as Apple, had it right when he said the journey is the reward.

Scott Kirsner Event

Held a fireside chat with Scott Kirsner, Innovation Economy columnist for the Boston Globe, with a great audience of entrepreneurs and VC held at the Vilna Shul.

We discussed Scott's article on why Facebook was funded in California and cultural differences between Silicon Valley and the Boston-area. At one point David Aronoff complained about the level of whining by members of the audience.

Dan Bricklin blogged the event, including a podcast.

California Dreamin’

This weekend I attended IDG Ventures’ “Catch the Wave” retreat (Version 4.0) in Kennebunkport, Maine. It was very nicely organized and geared toward fun activities and networking.

While it seems like there’s always an event like this going on in California, why are there are so few events like this one held in the Boston area? Are we New Englanders so conservative that it affects not just venture valuations, but also our socializing? Seems so.

My good friend Scott Kirner's new blog kicks off with an apropos theme: “Five Things Boston Could Do to Encourage More Consumer-Oriented Tech Activity.” Scott and I belong to an unofficial club of entrepreneurs, journalists, VCs and others who provide analysis and support towards encouraging entrepreneurship in the Boston area. It seems like such an uphill effort. Fortunately, IDG, General Catalyst and a handful of other VCs and vendors have aggressively embraced “consumer plays” and “California ways” – a small but noticeable contribution to making it more of an easier effort.

At the IDG Wave retreat I met Kimathi Marangu of mallnetworks, who schooled me in the ways of “letting go” – what a California concept! As a father of two beguiling children, I thought I knew what this meant, but it turns out that in order to truly “grok” consumer plays, one has to aggressively “let go.”

Personally letting go means switching off the enterprise customer venture development orientation. Consumer plays are automated middlemen who facilitate tiny transactions and activities that large consumer companies are unable or unwilling to do until the economics make it clear they must.

Mallnetworks’ value proposition is based on optimizing the economics of affinity programs for companies with credit card and mileage programs, retaining more customers longer and then taking a fraction of the economic value generated from longer-term loyalty and paying it out to mallnetworks. It's a great idea, but difficult to model and scale. Still, Kimathi will do it if anyone can.

So all you New England entrepreneurs out there can take a lesson from those on the left coast: There are consumer venture waves to be caught if you can learn to go with the (cash) flow.

Value of Open Source Investments

How much is an open source investment worth? $2.05bn have been invested in open source since 2000 could be worth as much as $30.7bn today.

http://www.businessreviewonline.com/os/archives/2007/07/many_happy_retu.html

$4.1 Billion for Vitaminwater

Coca-Cola Co. announced yesterday that it will acquire Glacéau for $4.1 billion in cash. The company, also known as Energy Brands, is the makers of Fruitwater, an energy drink called Vitaminenergy and Smartwater. Glacéau was founded by J. Darius Bikoff slightly less than a decade ago after he discovered that he liked drinking water with a vitamin C tablet after he daily jogging or weekend races. With the help of beverage experts, Mr. Bikoff started mixing his own water-based beverage, spiked with vitamins, which became the popular and yummy Vitaminwater.

According to the NY Times: “While the price tag is substantial for a company with earnings in 2006 of about $350 million, analysts said the cost in avoiding the deal, given Coke’s relatively weak position in noncarbonated beverages, could also be high.”

It would be Coke’s largest acquisition ever, and Coke will need to use debt to finance the deal because the purchase price is more cash than Coke had on hand at the end of last quarter.

Nicely done, Mr. Bikoff.

A Short History of Venture-Backed Software Startups

IMHO there have been three periods of software and related venture investing: First, during the late 70’s and most of the 80’s when the industry foundation was established and initial growth realized; second during the Internet bubble, and third, during the post-bubble period.

During the first phase of venture investing, startups absorbed little venture capital and going public was the primary exit. VC Arthur Rock, for instance, invested just $37,500 in Apple. Technology investments were made in the absence of standards, distribution channels and markets – important stuff that was invented along the way. VC “overinvesting” occurred for the first time (establishing the lemmings analogy) in an investment environment where intuition played a big role alongside a semblance of business metrics. For example, there were 150 disk drive manufacturers at one time. Startups during this period were often managed by veterans doing their first gig after leaving IBM, DEC, HP, Fairchild, Data General, Prime and others. There was a reasonable expectation of doing a “double flip”: Going public, followed by being acquired by a larger company.

In the 1990s startups absorbed larger amounts of venture money and painful recaps occurred frequently in later rounds. The management lifecycle of these companies changed: Startups were founded by technical people who were short on management (read, for the most part, sales and marketing) and/or people skills. Figuring out the business was the primary objective after funding and business basics were ignored until financial circumstances demanded a reality check. In the late ‘90’s, 2000 and 2001, IPOs no longer required profitability. Growth was the driver and profitability took a back seat as primary business measurements of the startup vehicle. VCs acting as board directors often removed founders and inserted their “own” CEOs from a stable they maintained. VCs became not only king makers in the startup world but also rock stars in their own right. Recall Bob Davoli’s cover shot in Business Week during the height of the Internet boom.

During the post-Internet bubble downturn, industries (telecommunications, for example), startups (Bowstreet, for example, founded in 1998 and in the beginning receiving $140 million in funding raised $7.5 million in new capital in 2004) and venture capture firms restructured in fundamental ways. With black eyes, VCs and entrepreneurs alike engaged in a search for the next big thing. Fewer bets were made. Portfolios were cleansed and history rewritten (some VCs said they never made Internet investments); some VCs returned capital to their LPs; some raised less money; some changed their investments focus, and some closed or combined with other funds. This restructuring took several years but eventually millions, in fact billions, of dollars flowed back into VC by 2005 and 2006.

While re-funding of venture capital firms happened the economics of venture capital shifted: The magnitude of the return on the one deal out ten that was super-successful became less. The mostly likely exit was acquisition, not an IPO. Almost all exits resulted in moderate returns for the investors. In addition, a blockade had been erected around IPO’s in the form of corporate governance. Sarbanes-Oxley (SOX) was created to address the excesses of investment bankers AND venture capitalists. While SOX introduces accountability on both Boards and CEO's, it also imposes onerous legal and accounting expenses and processes on startups, entrepreneurs and venture management. The SOX-based Board of Directors is more active and renders a CEO less independent, effectively making a CEO a member of middle management. This is not attractive to most startup CEO's.

Today’s software startups no longer require huge amounts of capital and people. That is one of the attractions of Web 2.0: Put in a few dollars, flip the companies in a year or less. These companies have a technical and business founder. The rank and file come with various backgrounds and experience. Resources are sparse at first but that does not matter because time-to-market is fast and cash-flow follows. These companies either sell directly to customers along the Internet’s “long-tail” or use a mix of inside-and-outside sales forces – with an emphasis on the latter. None of these companies will go public. There may be an opportunity for a "roll-up" but more likely these ventures will be purchased by companies who need Web 2.0 technology to remain competitive. It should be clear to everyone that YouTube, purchased by Google for $1.65 billion, was the exception – the only video-downing site. There will many more pretenders, but most of the exits of this startup vintage will in the tens or low hundreds of millions.

The Next Big Thang

I ran into someone from the days immediately after leaving Microsoft who did a very successful VC-backed startup that went public and was eventually was purchased. He bailed and is now turning his attention to his next venture. He's thinking about a Web 2.0 venture.

My initial reaction to his area of venture interest was "Oh no, not another Web 2.0 venture." This is based partially on the numbers of entrepreneurs who are flocking to this corner of the software/Internet industry, the horde effect of the VCs in funding these ventures and overlooking other opportunities, but also my skepticism based on my lack of confidence in the business models of these ventures. Web 2.0 certainly offers technology that helps realize the business opportunity of the long tail where there are millions of niche markets which can be served by individual proprietors on the Internet. The technology, however, is not the issue; the issue is the business model. IMHO, Web 2.0 "freemium", subscriptions and the advertising model don't readily lend themselves to VC-outcomes -- except for a few first-mover companies, like YouTube and MySpace. Google is certainly a successful Web 2.0 company, but it is already public.

Note to self: I shouldn't be skeptical. I am, after all, the one who forged ahead when most of the VCs who I initially talked to expressed skepticism about Black Duck Software's business model. (One idiot tried to convince me that I should adopt a license model because the up-front cash was better.) I will endeavor to be positive about Web 2.0 startups in an effort to support my entrepreneurial brothers and sisters.

I was listening to my iPod today and the song “Non, je ne regrette rien" came up. This song was written in 1956 but is best known as a recording made by Édith Piaf in November 1960. The title of the song translates as "No, I regret nothing". I found out from Wikipedia that Piaf dedicated her recording of the song to the French Foreign Legion. “At the time of the recording, France was engaged in a military conflict, the Algerian War of Independence (1956–1962), and the Legion—who had backed a temporary putsch by the French military against the civilian leadership of Algeria—adopted the song when their resistance was broken in April 1961, singing it as they were ordered at gunpoint aboard evacuation vehicles.”

I think entrepreneurs and venture-backed CEOs should adopt “Non, je ne regrette rien" as our theme song.