not such great news for the Enterprise 2.0 world...some of the comments are quite interesting as well.
http://www.readwriteweb.com/archives/enterprise_20_apps_fall_price.php
Report: Enterprise 2.0 Apps Will Dramatically Fall in Price
Written by Richard MacManus / October 12, 2008 7:41 PM / 12 Comments
A new report by Forrester Research states that the market for collaboration and productivity web apps in the enterprise (a.k.a. enterprise 2.0) is set for a shake-up, with prices to fall in some cases by over half. Price drops will be especially sharp in blog, wikis, social networking and widgets. The only exception is mashups, which will increase in price over the next 5 years.
Forrester says the price drops will be due to "cutthroat competition, commoditization, bundling, and subsumption", with many startups and established big companies competing for the enterprise dollar.
There is still expected to be strong adoption by enterprises of web 2.0 apps, which will result in increased license revenue. However that will be offset by the large price drops.
Which Apps Will Suffer The Most?
The outlook is particularly bleak for blogging software, which Forrester says will "fall to the lowest average cost per enterprise among Web 2.0 tools" - that's bad news for Six Apart and Automattic, both of whom have been aggressively targeting the enterprise in recent years.
Wikis are also expected to fall in price, however Forrester notes that wikis have had a strong impact on enterprises so far. So there will be more competition, but best-of-breed solutions will continue to do well. Forrester says that "well-designed, intuitive, and cheap wiki technology" will do best.
We've noted over the years that it's very tough to create an easy-to-use and intuitive wiki app, therefore we expect existing best of breed providers such as Atlassian and SocialText to continue to do well. [disclosure: SocialText is a RWW sponsor]
Widgets are expected to drop in price a bit over the next 5 years, mostly because they will become far more common place than they are now. Forrester notes that traditional enterprise applications providers like SAP and Oracle will begin to offer widget solutions for their existing customers.
Social networking is expected to see a big drop, largely due to SharePoint. Forrester states that "much like blogs and wikis, social networking is likely to be commoditized quickly over the next five years." They do hold out some hope thought for "specialized tools that focus on alumni networks, new employee orientation, and cross-department collaboration", which they think may continue to get price premiums.
The one thing we'd caution here is that SharePoint so far has proven to be a complex and difficult to use beast, so we're not so sure that easy-to-use alternatives will be commoditized by SharePoint. In theory it sounds sensible, but in practice how many people actually use SharePoint to network?
Forrester sees mashups as being very early in their market sycle, so it is optimistic pricing will increase. It states that "IT departments will prioritize mashup technology as part of portal, business intelligence, and business process management software investments as well as a major component of SOA implementations."
Update: Jeffrey McManus (no relation) asked in the comments: "Who pays anything for mash-ups or widgets?" The report notes that both aren't common - just 1.8% of North American enterprises had a widget deployment in 2008, while mashups so far have been "small isolated tests, typically limited to the IT department". There are no figures given for how much widgets and mashups will grow, although Forrester says that it "never expects widgets to find a home in more that one-third of enterprises". However there seems to be decent money in it for vendors, with an average of $26,500 per implementation for widgets in 2007 and $76,500 per deployment for mashups in the same period. Examples of current mashup platforms include JackBe, IBM, and Serena Software. Forrester expects the price for mashups to "nearly double to $143,400 per engagement by 2013."
Also in the report, podcasts are predicted to remain largely unchanged over the next five years and enterprise RSS will play "a critical role as the Web 2.0 middleware, staving off major price declines."
The graph below from Forrester summarizes all of the data:
Why Will Prices Drop?
One of the reasons is that old fear of web 2.0 companies: commoditization. As innovation gets copied and 'digested', so it becomes less of a differentiator for the innovators. As Forrester puts it in the report, "for the most part, a blog from one vendor is no better than a blog from another, eroding differentiation and price premiums."
Bundling is another threat to startups, creating "a homogenous set of competitors." Forrester seems to be suggesting that most enterprise 2.0 vendors are attempting to sell a Web Office suite: "Everyone, from blogging vendors like Six Apart to social bookmarking vendors like Connectbeam, is converging on one offering: the enterprise Web 2.0 suite." This, says Forrester, will result in an "industrywide brawl, with buyers the only guaranteed winner".
The third main factor is subsumption, which Forrester says "brings Web 2.0 technology to millions of users at little to no cost." Subsumption in this case has a similar meaning to integration. It's a tactic that the big vendors - like Microsoft, IBM, SAP and Oracle - have more easily at their disposal over startups. Forrester points out that these bigcos can easily roll Web 2.0 features into their existing software packages - in many cases at no extra cost to the user. Microsoft has been doing this with SharePoint, which has lightweight blogging and wiki tools bundled into the main product.
What's more, Microsoft has managed to partner with a number of high profile but small enterprise 2.0 vendors - such as Atlassian and Newsgator. In June we profiled 9 small companies that had launched Enterprise 2.0 offerings that integrate with SharePoint technology. So this could be viewed as another form of 'subsumption', whereby startups have to partner with big companies like Microsoft in order to compete in this highly competitive market.
Even an apparently independent startup like Zoho, which seems to be competing well with bigger companies, has to a degree partnered with bigcos - their use of Google Gears has them relying on a technology produced by Google (ok, Gears is open source, but still it is a form of reliance).
Conclusion
Overall, the trend according to Forrester is that prices for enterprise 2.0 apps will fall but that demand will continue to ramp up. We at ReadWriteWeb can't argue with the overall trend, however we think that startups still have a few tricks up their sleeves when competing against bulky and often hard to use products like SharePoint. However we've always said that partnerships - with bigcos and other startups alike - will be key to startups as they engage their bigger competitors in a crowded market.
Monday, October 13, 2008
Thursday, October 9, 2008
What Startups Can Learn from Sequoia Capital’s Doomsday Plans.
some scary words from the Sequoia Capital folks...but important lessons to learn are in here as well:
What Startups Can Learn from Sequoia Capital’s Doomsday Plans.
Om Malik, Thursday, October 9, 2008 at 11:27 AM PT Comments (0)
Last evening I had reported about a special meeting held by Sequoia Capital for its portfolio companies, warning them about a fiscal hurricane that was going to hit them, and they better figure out ways to survive what could be a big downturn.
There were some gaps in the details about that meeting, but I have been able to piece together the minutes of that meeting and what they had essentially said. Since these are second sourced details, I cannot say they are a hundred percent accurate, and as a result please use a degree of skepticism. Nevertheless, I still feel confident enough to share these details.
These were the four speakers:
Mike Moritz, General Partner, Sequoia Capital who moderated the speakers. The speakers were Eric Upin, Partner, Sequoia Capital who till recently ran the ran the $26-Billion Stanford Endowment Fund; Michael Partner, Sequoia Capital, who Sequoia’s very first hedge fund and worked at Maverick Capital and Robertson Stephens. The last speaker was as I mentioned, Doug Leone, General Partner, Sequoia Capital.
Details of what they had to say are below the fold.
Moritz Musings
Mike Mortiz kicked off the proceedings by saying that there are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead instead … “we’re talking survive. Get this point into your heads.” He warned that companies need to be cash flow positive, and if they are not, then they need to get there now, because raising capital without being cash flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.
Upin Says
Upin, who know a thing or two about money and markets told the room thatWe are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem.” This comment was accompanied by many slides that showed historical charts of previous recessions, averaging 17 year cycles. He pointed out that issue here is not equity markets but the credit market and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, not a normal time and this is a significant risk not just to growth but to personal wealth.
He advised startups make drastic changes, cut expenses and cut deep but still keep marching. “Make changes, slash expenses, cut deep and keep marching. “You can’t be a general if you turn back,” he is supposed to have said. The point he hammered in was that since you can’t manage the economy, manage everything else including your business.He had some interesting advise for starts.
* Cut spending. Cut fat. Preserve Capital.* Throw out the models, spreadsheets, because all assumptions will be wrong.* Focus on quality.* Reduce risk.Michael Beckwith
Michael Beckwith’s presentation had lots of charts and data and he pointed out that the V-shaped recovery is unlikely. He also said that the cuts in spending will accelerate in Q4 and Q1 2009, and pointed to eBay as an example.
Leone’s lessons
Doug Leone, told the group that this (downturn) was a different animal and would take “years to recover.” He was clear in pointing out that:
* unprofitable companies would have tough time raising cash, so get cash flow positive as soon as possible.* Go on the offensive and pound on your competitors’ shortcomings.* Be aggressive with your messaging and be out there. In a downturn, aggressive PR and Communications strategy is key.* Decline in M&A will mean that only lean companies with sales models that work will get bought.* On a scale between Capital Preservation and grabbing market share, he advised that everyone should be only preserving capital.
Leone other tips for companies, especially the Sequoia portfolio companies were something like this:
* Start with zero-based budgeting.* Cutting deeper is the formule to surive, and this is an era of survival of the quickest.* Make sure you have one year of cash.* If you have a product, it should reduce expenses and boost sales. If the product is ready, cut the number of enginggers.* Focus on building the absoliutely essential features in your product.* Be brutal wahen it comes to marketing — anything that isn’t working, cut it.* Kill cash burn for cash is king,* Cut base salaries on sales people and leverage them with upside.* Most importantly, be true to yourself.
Thursday, October 2, 2008
Wind leading the pack of winning Clean Tech technologies
a very interesting article based on research from right here at Stanford.
http://www.cleantechblog.com/2008/10/wind-leading-pack-of-winning-clean-tech.html
Wind leading the pack of winning Clean Tech technologies
by Marguerite Manteau-Rao
Mark Jakobson, professor of Civil and Environmental Engineering, at Stanford University, performed a thorough evaluation of energy solutions to global warming, as applied to alternative vehicle technologies. His answers may surprise you.Pr. Jakobson looked at the following energy sources:
wind turbines
battery electric vehicles
solar photovoltaics
hydrogen fuel cell vehicles
geothermal power plants
tidal turbines
wave devices
concentrated solar power
hydroelectric power plants
nuclear power plants
coal with carbon capture and sequestration
corn ethanol
flex-fuel vehicles
cellulosic ethanol
and evaluated them according to the following criteria:
resource abundance
carbon-dioxide equivalent emissions
opportunity cost emissions from planning-to-operation delays
leakage from carbon sequestration
nuclear war/terrorism emission riks from nuclear-energy
air pollution mortality
water consumption
footprint on the ground
spacing required
effects on wildlife
thermal pollution
water chemical pollution/radioactive waste
energy supply disruption
normal operating reliability
Here's the outcome:
Wind comes out the clear winner. Concentrated solar power, geothermal, solar photovoltaics, tidal, wave, are good additions to the mix. Hydroelectric is added for its load balancing ability. Nuclear and coal are less beneficial. Corn and cellulosic ethanol should not be included in policy options. Hopefully, the next administration will be wise enough to follow Pr. Jakobson's recommendation . . . and align its subsidies with the right kind of technologies.
Marguerite Manteau-Rao is a green blogger and marketing consultant on sustainability and social media. Her green blog, La Marguerite, focuses on behavioral solutions to climate change and other global sustainability issues. Marguerite is a regular contributor to The Huffington Post. Since Sarah Palin's VP nomination, she has also been impersonating Ms. Palin at What's Sarah Thinking? blog
Labels: air pollution, alternative energy, energy security bill, global warming, Mark Jacobson, solutions, vehicle technologies
http://www.cleantechblog.com/2008/10/wind-leading-pack-of-winning-clean-tech.html
Wind leading the pack of winning Clean Tech technologies
by Marguerite Manteau-Rao
Mark Jakobson, professor of Civil and Environmental Engineering, at Stanford University, performed a thorough evaluation of energy solutions to global warming, as applied to alternative vehicle technologies. His answers may surprise you.Pr. Jakobson looked at the following energy sources:
wind turbines
battery electric vehicles
solar photovoltaics
hydrogen fuel cell vehicles
geothermal power plants
tidal turbines
wave devices
concentrated solar power
hydroelectric power plants
nuclear power plants
coal with carbon capture and sequestration
corn ethanol
flex-fuel vehicles
cellulosic ethanol
and evaluated them according to the following criteria:
resource abundance
carbon-dioxide equivalent emissions
opportunity cost emissions from planning-to-operation delays
leakage from carbon sequestration
nuclear war/terrorism emission riks from nuclear-energy
air pollution mortality
water consumption
footprint on the ground
spacing required
effects on wildlife
thermal pollution
water chemical pollution/radioactive waste
energy supply disruption
normal operating reliability
Here's the outcome:
Wind comes out the clear winner. Concentrated solar power, geothermal, solar photovoltaics, tidal, wave, are good additions to the mix. Hydroelectric is added for its load balancing ability. Nuclear and coal are less beneficial. Corn and cellulosic ethanol should not be included in policy options. Hopefully, the next administration will be wise enough to follow Pr. Jakobson's recommendation . . . and align its subsidies with the right kind of technologies.
Marguerite Manteau-Rao is a green blogger and marketing consultant on sustainability and social media. Her green blog, La Marguerite, focuses on behavioral solutions to climate change and other global sustainability issues. Marguerite is a regular contributor to The Huffington Post. Since Sarah Palin's VP nomination, she has also been impersonating Ms. Palin at What's Sarah Thinking? blog
Labels: air pollution, alternative energy, energy security bill, global warming, Mark Jacobson, solutions, vehicle technologies
Wednesday, October 1, 2008
How start-ups can navigate through the falling dominoes of the economic crisis
some interesting thoughts on the current situation...
How start-ups can navigate through the falling dominoes of the economic crisis
Dean Takahashi September 30th, 2008
This week, we’ve seen one of the biggest dominoes topple in the annals of financial history. It was triggered by the failure of Congress to cut a bailout deal and the resulting collapse in the stock market. The Dow fell 7 percent in its worst day in a decade and the tech-heavy Nasdaq fell 9 percent.
Today, the stock markets recovered. But the blow to investor confidence has been registered. Comparisons to the Great Depression are plentiful. I think we can assume that even if a bailout bill gets passed, the economy is going to be hurting for some time. Given that, we can make some predictions about what’s in store for tech companies and VCs.
The economy is on life support. Banks have stopped lending. Big private equity deals that depended on bank financing are drying up. Consumers aren’t buying homes. The IPO market is more shut than ever. People are looking around for safe havens. Those havens were supposed to be in overseas markets, but banks are starting to fail around the world. The intertwined world economy could get dragged down by the U.S. The question arises, whether you are big or small: How long do you fight these trends? When do you retreat? What do you do next?
As the banks shut off lending, the effect is like damming a river. Downstream, the private equity firms won’t get commitments for big buyout deals, which were engineered only with the financial clout of banks. Venture funds won’t be able to get limited partners pouring money into their next funds. A shake-out will start to happen, gradually but at a quicker pace than before, among the VCs. Those with newly raised money will outlast the ones who can’t raise new funds because of weak returns. The supply of money to start-ups will be smaller. Fewer companies will get funding. Companies will stretch out their plans and will buy less tech gear. That, in turn, will hurt the big companies such as Microsoft, Intel, and Hewlett-Packard. They, in turn, will buy fewer start-ups. That’s bad because M&A accounts for more than 95 percent of VC exits.
Quarterly sales of IT equipment to financial companies will likely fall off a cliff. For some companies, the financial sector is a big buyer, so tech companies may pre-announce lousy quarters, forcing stocks even lower. Microsoft CEO Steve Ballmer said today that the downturn will likely affect his company’s sales. Consumer demand will dry up as workers lose their jobs or their homes. Big companies will pull back from their own investments in start-ups. They will stop taking out ads, further hurting the fledgling companies who are experimenting with ad-based revenue models. Risk taking will cease. You could say this might be a cleansing fire that makes the quality start-ups stand out. Jason Calacanis has suggested in his post dubbed “start-up depression” that 50 percent to 80 percent of current start-ups may fail. The strong ones who survive will be those that rely on old-fashioned revenues, he argues.
Maybe Calacanis’ prediction is unwarranted. Mark Heesen, president of the National Venture Capital Association, says there is a crisis for the industry in the lack of IPOs. But he doesn’t think that half of all start-ups are going to go under. Granted, he says it’s imperative that a bailout bill passes and he notes that it’s hard to predict the future. But he believes there are plenty of angels who will continue to finance big ideas among the seed-stage companies. And while a VC shake-out will pick up pace, pundits have been predicting it will happen since 2000. The reality is that the death of a VC happens over a fairly long period of time.
Fred Wilson, a partner at Union Square Ventures, also says the start-up attrition won’t be as bad as Calacanis predicts. He says that venture-backed companies will still receive funding from the VCs that backed them. That was the pattern he saw in 2000 to 2003, when VCs had to use their “dry powder” to keep start-ups going with extra rounds of funding. And he notes that many seed stage companies are just getting started. They will surface with products a few years from now, after the financial crisis has ended. This logic invokes the old saw about how seed-stage companies can “fly over the storm.” Wilson still recommends that companies cut unnecessary costs and bulk up on capital. But he believes the start-ups will keep going and that we are in a down cycle, not a depression.
The course for start-ups is complex. You have to batten down the hatches but still attempt to grow. A certain kind of sales pitch works better in this environment. If you can position your products or services as a necessity instead of a luxury in this environment, you can succeed, said Avi Basu, chief executive of New York-based Connectiva Systems. His company helps telecom carriers fight fraud and billing problems, helping to recover lost revenues. As such, telecom carriers might see the investment in Connectiva’s software as a way to boost the bottom line during a recession, despite the initial expense.
But at some point, Basu acknowledges (based on his survival of the last nuclear winter), even these kinds of strategies fail. You can cruise along at neutral during a down business cycle and expect to emerge stronger during the up cycle. You can spend more heavily if you want to gain market share during the bad times. But during a Depression or a “nuclear winter,” you have to change course and just try to survive.
At some point, if the downturn lasts long enough, everyone will be driving on fumes. VC firms that collapse won’t be saving dry powder for their start-ups. In the long term, it’s hard to see how the IPO market will get off the ground again. The boutique tech investment banks aren’t there to restore the IPOs anymore, said Mark Jensen, the partner in charge of venture capital services at Deloitte & Touche. That raises the question, who will save tech? Silicon Valley didn’t truly recover from the nuclear winter of 2001 to 2003 until Google went public in 2004. Who’s stepping up to the plate next? It probably won’t be Facebook, which is dependent on ad money that is rapidly drying up.
The valley needs another PayPal, which was one of the last pre-bust IPOs that created a lot of millionaires with money to invest in the next generation of start-ups. The Web 2.0 crowd revived Silicon Valley. And Web 2.0 was started by serial entrepreneurs, which included the founders of Friendster, MySpace, Tribe, and the PayPal mafia. The latter included characters such as Reid Hoffman, who started Linkedin; Peter Thiel, who funded Facebook; and Max Levchin, who started Slide. Then there were the Google IPO millionaires of 2004, who not only drove up housing prices in Silicon Valley but also took their riches and started new companies. It was these people, newly wealthy and full of ambitious plans, who started the valley on its recovery path. They all discovered the power of user-generated enthusiasm. They created the wave of usage that has made so many more start-ups possible. They got the optimism engine running again, creating jobs and letting people bide their time until the next great idea came along.
The severe part of the downturn may only be starting now. If Congress acts quickly, then perhaps it may feel like the downturn could be shorter. But it’s easy to get dragged down by the falling dominoes. There are fundamental weaknesses in the system, thanks to burdens such as high oil prices, the Iraq war, a crumbling healthcare system, and other bailouts in the offing.
It’s hard to see to the end of the chain reaction. It will come. We’ll hit a bottom, maybe a year or two from the point of the biggest domino’s fall — the point that Jensen calls the capitulation. Then we’ll begin the long, hard slog. I sure hope there is a marquee company that makes it all turn around faster. I don’t expect it to be one of the big companies. I’m almost certain it will be a start-up. Silicon Valley has always produced such companies. Innovation is the only thing that can sprout a new ecosystem after the fire.
How start-ups can navigate through the falling dominoes of the economic crisis
Dean Takahashi September 30th, 2008
This week, we’ve seen one of the biggest dominoes topple in the annals of financial history. It was triggered by the failure of Congress to cut a bailout deal and the resulting collapse in the stock market. The Dow fell 7 percent in its worst day in a decade and the tech-heavy Nasdaq fell 9 percent.
Today, the stock markets recovered. But the blow to investor confidence has been registered. Comparisons to the Great Depression are plentiful. I think we can assume that even if a bailout bill gets passed, the economy is going to be hurting for some time. Given that, we can make some predictions about what’s in store for tech companies and VCs.
The economy is on life support. Banks have stopped lending. Big private equity deals that depended on bank financing are drying up. Consumers aren’t buying homes. The IPO market is more shut than ever. People are looking around for safe havens. Those havens were supposed to be in overseas markets, but banks are starting to fail around the world. The intertwined world economy could get dragged down by the U.S. The question arises, whether you are big or small: How long do you fight these trends? When do you retreat? What do you do next?
As the banks shut off lending, the effect is like damming a river. Downstream, the private equity firms won’t get commitments for big buyout deals, which were engineered only with the financial clout of banks. Venture funds won’t be able to get limited partners pouring money into their next funds. A shake-out will start to happen, gradually but at a quicker pace than before, among the VCs. Those with newly raised money will outlast the ones who can’t raise new funds because of weak returns. The supply of money to start-ups will be smaller. Fewer companies will get funding. Companies will stretch out their plans and will buy less tech gear. That, in turn, will hurt the big companies such as Microsoft, Intel, and Hewlett-Packard. They, in turn, will buy fewer start-ups. That’s bad because M&A accounts for more than 95 percent of VC exits.
Quarterly sales of IT equipment to financial companies will likely fall off a cliff. For some companies, the financial sector is a big buyer, so tech companies may pre-announce lousy quarters, forcing stocks even lower. Microsoft CEO Steve Ballmer said today that the downturn will likely affect his company’s sales. Consumer demand will dry up as workers lose their jobs or their homes. Big companies will pull back from their own investments in start-ups. They will stop taking out ads, further hurting the fledgling companies who are experimenting with ad-based revenue models. Risk taking will cease. You could say this might be a cleansing fire that makes the quality start-ups stand out. Jason Calacanis has suggested in his post dubbed “start-up depression” that 50 percent to 80 percent of current start-ups may fail. The strong ones who survive will be those that rely on old-fashioned revenues, he argues.
Maybe Calacanis’ prediction is unwarranted. Mark Heesen, president of the National Venture Capital Association, says there is a crisis for the industry in the lack of IPOs. But he doesn’t think that half of all start-ups are going to go under. Granted, he says it’s imperative that a bailout bill passes and he notes that it’s hard to predict the future. But he believes there are plenty of angels who will continue to finance big ideas among the seed-stage companies. And while a VC shake-out will pick up pace, pundits have been predicting it will happen since 2000. The reality is that the death of a VC happens over a fairly long period of time.
Fred Wilson, a partner at Union Square Ventures, also says the start-up attrition won’t be as bad as Calacanis predicts. He says that venture-backed companies will still receive funding from the VCs that backed them. That was the pattern he saw in 2000 to 2003, when VCs had to use their “dry powder” to keep start-ups going with extra rounds of funding. And he notes that many seed stage companies are just getting started. They will surface with products a few years from now, after the financial crisis has ended. This logic invokes the old saw about how seed-stage companies can “fly over the storm.” Wilson still recommends that companies cut unnecessary costs and bulk up on capital. But he believes the start-ups will keep going and that we are in a down cycle, not a depression.
The course for start-ups is complex. You have to batten down the hatches but still attempt to grow. A certain kind of sales pitch works better in this environment. If you can position your products or services as a necessity instead of a luxury in this environment, you can succeed, said Avi Basu, chief executive of New York-based Connectiva Systems. His company helps telecom carriers fight fraud and billing problems, helping to recover lost revenues. As such, telecom carriers might see the investment in Connectiva’s software as a way to boost the bottom line during a recession, despite the initial expense.
But at some point, Basu acknowledges (based on his survival of the last nuclear winter), even these kinds of strategies fail. You can cruise along at neutral during a down business cycle and expect to emerge stronger during the up cycle. You can spend more heavily if you want to gain market share during the bad times. But during a Depression or a “nuclear winter,” you have to change course and just try to survive.
At some point, if the downturn lasts long enough, everyone will be driving on fumes. VC firms that collapse won’t be saving dry powder for their start-ups. In the long term, it’s hard to see how the IPO market will get off the ground again. The boutique tech investment banks aren’t there to restore the IPOs anymore, said Mark Jensen, the partner in charge of venture capital services at Deloitte & Touche. That raises the question, who will save tech? Silicon Valley didn’t truly recover from the nuclear winter of 2001 to 2003 until Google went public in 2004. Who’s stepping up to the plate next? It probably won’t be Facebook, which is dependent on ad money that is rapidly drying up.
The valley needs another PayPal, which was one of the last pre-bust IPOs that created a lot of millionaires with money to invest in the next generation of start-ups. The Web 2.0 crowd revived Silicon Valley. And Web 2.0 was started by serial entrepreneurs, which included the founders of Friendster, MySpace, Tribe, and the PayPal mafia. The latter included characters such as Reid Hoffman, who started Linkedin; Peter Thiel, who funded Facebook; and Max Levchin, who started Slide. Then there were the Google IPO millionaires of 2004, who not only drove up housing prices in Silicon Valley but also took their riches and started new companies. It was these people, newly wealthy and full of ambitious plans, who started the valley on its recovery path. They all discovered the power of user-generated enthusiasm. They created the wave of usage that has made so many more start-ups possible. They got the optimism engine running again, creating jobs and letting people bide their time until the next great idea came along.
The severe part of the downturn may only be starting now. If Congress acts quickly, then perhaps it may feel like the downturn could be shorter. But it’s easy to get dragged down by the falling dominoes. There are fundamental weaknesses in the system, thanks to burdens such as high oil prices, the Iraq war, a crumbling healthcare system, and other bailouts in the offing.
It’s hard to see to the end of the chain reaction. It will come. We’ll hit a bottom, maybe a year or two from the point of the biggest domino’s fall — the point that Jensen calls the capitulation. Then we’ll begin the long, hard slog. I sure hope there is a marquee company that makes it all turn around faster. I don’t expect it to be one of the big companies. I’m almost certain it will be a start-up. Silicon Valley has always produced such companies. Innovation is the only thing that can sprout a new ecosystem after the fire.
Tuesday, August 26, 2008
[LEGAL] How do the sample Y Combinator Series AA financing documents differ from typical Series A financing documents
Good overview and advice from our friend Yokum at WSGR - pay attention here - there's alot covered!
http://www.startupcompanylawyer.com/2008/08/23/how-do-the-sample-y-combinator-series-aa-financing-documents-differ-from-typical-series-a-financing-documents-or-whats-the-difference-between-seed-and-venture-financing-terms/
How do the sample Y Combinator Series AA financing documents differ from typical Series A financing documents (or what’s the difference between seed and venture financing terms)?
August 23, 2008
Y Combinator recently published forms of Series AA equity financing documents that YC portfolio companies have used when raising angel financing. YC provides a three month startup program for entrepreneurs twice a year in Cambridge, MA and Mountain View, CA. YC typically provides $5K plus $5K per founder of seed funding for usually 6% of the equity in common stock (which, as an aside, Sarah Lacy seems to question, but in my mind seems like something that I would jump at if I were a fledgling entrepreneur).
[Disclaimer/disclosures: Please read the disclaimer on the documents and on my website. I write this blog in my personal capacity and my opinions may differ from my colleagues. WSGR represents Y Combinator and many of its portfolio companies. I represent a YC portfolio company that provides the Chatterous application and have worked with Y Combinator founder Trevor Blackwell's company Anybots. I have also represented investors that have invested in a couple of YC portfolio companies. I may update this post in the future.]
I was planning to write a post on the differences between angel financing terms and venture capital financing terms, and thought that the YC documents provided a good opportunity to explain the differences. I’ve already noticed some commentary about the documents and decided to provide some more detailed explanations and the situations that they might be used.
If you want to review annotated Series A venture capital financing documents, please review the NVCA model venture capital financing documents. (Please note that I think that the default provisions in the NVCA documents are generally fairly investor-favorable and reflect east coast practice rather than Silicon Valley practice. I will probably write a post about these documents are some point in the future.) This post assumes that you have a basic understanding of Series A financing terms. If you don’t, please educate yourself on this site, Venture Hacks and the term sheet series by Brad Feld/Jason Mendelson, among other places.
What situations should these documents be used in?
The YC documents are probably fine in situations where the investor (i) wishes to purchase equity rather than convertible debt, (ii) is otherwise somewhat indifferent on terms other than percentage ownership of the company, liquidation preference and right of first offer in future financings, (iii) is investing at a fairly low valuation (i.e. a couple of million dollars), and (iv) is only investing a small amount (i.e. a couple hundred thousand dollars or less).
In my experience, sophisticated angel investors expect to receive a full set of Series A documents with rights essentially the same as venture capital investors, so the Series AA documents may not be acceptable in these situations. I think these documents are most appropriate in a friends and family equity seed financing. However, I believe that companies are generally better off with convertible debt rather than an equity financing at a low valuation.
Why is it called Series AA?
To differentiate it from typical “Series A” preferred stock, which comes with certain expectations with regard to rights. I’ve had clients rename their Series A, B and C to Series A-1, Series A-2 and Series A-3, so that their first institutional venture capital financing was called the Series B. There is no real rule to what a particular series of preferred stock is called (i.e. Series FF for the Founders Fund invention). I suppose that YC could have named it Series YC, instead of Series AA, for better branding.
What rights does the Series AA have in the sample YC documents?
Obviously, please read the term sheet. The primary rights in these documents, ranked in order of importance in my opinion are:
Non-participating preferred liquidation preference. The investor receives their money back and the remainder goes to the common. According to WSGR’s survey of venture financings, a non-participating preferred is in around 40% of financings, with the liquidation preference in the remainder of deals being more investor-favorable.
Limited protective provisions. Among other things, the company can’t be sold without consent of a majority of the Series AA.
Right of first offer on future financings. Please note that these documents provide that the right of first offer expires five years after the financing, which I believe is not standard (but happens to be the company-friendly default in the WSGR form of documents that the Series AA documents were based on).
Information rights. The investor receives unaudited annual and quarterly financial statements.
There are situations where an investor might receive stock with even less rights. For example, if a founder contributes a significant amount of cash (i.e. enough to buy a car) to fund the company, then I might suggest that the company issue preferred stock with a liquidation preference and no other rights to the founder, as opposed to issuing common stock. The reason for issuing preferred stock instead of common stock is to preserve a low common stock value for option grants as explained in this post, and providing the stock with a liquidation preference.
What are the primary rights that are missing from the these documents that a VC or sophisticated angel would expect?
Some people have suggested that various terms are unnecessary in early stage Series A financings. See the VentureBeat article titled “Reinventing the Series A.” In the sample YC documents, there are various terms that are missing that one would typically expect in a company-friendly Series A term sheet (i.e. one from Sequoia Capital).
Dividend preference. Deleting the dividend preference is not a big deal, as almost all startup companies don’t declare dividends. The only practical situation that I can think of where a dividend preference is beneficial to a stockholder is where a company does a partial sale of assets and wishes to distribute the proceeds to stockholders. The liquidation preference would not apply in this situation, and any distribution to stockholders would trigger the dividend preference.
Registration rights. As a practical matter, I don’t think that most investors should really care about registration rights, especially in light of the shortening of the Rule 144 holding period to 6 months. (I suppose I will write a boring post about Rule 144 at some point.)
Anti-dilution protection. Deleting anti-dilution rights saves several pages of text in the Certificate of Incorporation. Given that the Series AA is issued at a fairly low valuation, anti-dilution protection is probably not that important, as a “down round” from a low valuation in the Series AA is unlikely.
Comprehensive protective provisions. The YC documents are fairly light on protective provisions compared to a typical Series A financing.
Right of first refusal and co-sale. These rights are missing. This is probably okay assuming that the founders restricted stock purchase agreement has a right of first refusal on transfers until a liquidity event. The right of first refusal on founder stock transfers in a typical restricted stock purchase agreement is in favor of the company. (Please note that when I say typical, I mean an agreement drafted by attorneys experienced in venture financings, not the boilerplate you might get from an online incorporation service.) The typical RFR/co-sale agreement in a venture financing gives the investors a right to purchase the shares if the company does not exercise its right.
Voting agreement. An optional bracketed provision in the Certificate of Incorporation provides for a Series AA board seat. In a typical venture financing, there would also be a voting agreement that governs how specific board seats will be filled. In angel financings, I typically eliminate the voting agreement anyway and simply have a closing condition that the board consist of certain persons.
Comprehensive representations and warranties. The Series AA Preferred Stock Purchase Agreement has fairly limited reps and warranties. As a practical matter, investors don’t sue companies for a breach of reps and warranties, so reps and warrants basically serve to flush out diligence issues. In an early stage company, extensive reps and warranties are probably unnecessary.
Legal opinion. A company counsel legal opinion is missing in these documents. A legal opinion for a newly-incorporated early stage company probably doesn’t add much to the due diligence process and is probably unnecessary compared to the incremental cost to prepare.
Legal fees. Each side pays its own legal fees in these documents. Venture funds expect the company to pay investor counsel fees.
Do I need an attorney to help me complete a financing if I have these documents?
Yes. Absolutely. These documents are not intended to be “fill in the company name,” sign the docs and collect checks/wire transfers. The fact that certain rights were intentionally omitted from the documents compared to typical VC financing documents is a judgment call that requires the guidance of an experienced attorney. There are always various corporate housekeeping matters that need to be cleaned up in connection with a financing. Please don’t try to use the YC documents without working with a competent attorney.
http://www.startupcompanylawyer.com/2008/08/23/how-do-the-sample-y-combinator-series-aa-financing-documents-differ-from-typical-series-a-financing-documents-or-whats-the-difference-between-seed-and-venture-financing-terms/
How do the sample Y Combinator Series AA financing documents differ from typical Series A financing documents (or what’s the difference between seed and venture financing terms)?
August 23, 2008
Y Combinator recently published forms of Series AA equity financing documents that YC portfolio companies have used when raising angel financing. YC provides a three month startup program for entrepreneurs twice a year in Cambridge, MA and Mountain View, CA. YC typically provides $5K plus $5K per founder of seed funding for usually 6% of the equity in common stock (which, as an aside, Sarah Lacy seems to question, but in my mind seems like something that I would jump at if I were a fledgling entrepreneur).
[Disclaimer/disclosures: Please read the disclaimer on the documents and on my website. I write this blog in my personal capacity and my opinions may differ from my colleagues. WSGR represents Y Combinator and many of its portfolio companies. I represent a YC portfolio company that provides the Chatterous application and have worked with Y Combinator founder Trevor Blackwell's company Anybots. I have also represented investors that have invested in a couple of YC portfolio companies. I may update this post in the future.]
I was planning to write a post on the differences between angel financing terms and venture capital financing terms, and thought that the YC documents provided a good opportunity to explain the differences. I’ve already noticed some commentary about the documents and decided to provide some more detailed explanations and the situations that they might be used.
If you want to review annotated Series A venture capital financing documents, please review the NVCA model venture capital financing documents. (Please note that I think that the default provisions in the NVCA documents are generally fairly investor-favorable and reflect east coast practice rather than Silicon Valley practice. I will probably write a post about these documents are some point in the future.) This post assumes that you have a basic understanding of Series A financing terms. If you don’t, please educate yourself on this site, Venture Hacks and the term sheet series by Brad Feld/Jason Mendelson, among other places.
What situations should these documents be used in?
The YC documents are probably fine in situations where the investor (i) wishes to purchase equity rather than convertible debt, (ii) is otherwise somewhat indifferent on terms other than percentage ownership of the company, liquidation preference and right of first offer in future financings, (iii) is investing at a fairly low valuation (i.e. a couple of million dollars), and (iv) is only investing a small amount (i.e. a couple hundred thousand dollars or less).
In my experience, sophisticated angel investors expect to receive a full set of Series A documents with rights essentially the same as venture capital investors, so the Series AA documents may not be acceptable in these situations. I think these documents are most appropriate in a friends and family equity seed financing. However, I believe that companies are generally better off with convertible debt rather than an equity financing at a low valuation.
Why is it called Series AA?
To differentiate it from typical “Series A” preferred stock, which comes with certain expectations with regard to rights. I’ve had clients rename their Series A, B and C to Series A-1, Series A-2 and Series A-3, so that their first institutional venture capital financing was called the Series B. There is no real rule to what a particular series of preferred stock is called (i.e. Series FF for the Founders Fund invention). I suppose that YC could have named it Series YC, instead of Series AA, for better branding.
What rights does the Series AA have in the sample YC documents?
Obviously, please read the term sheet. The primary rights in these documents, ranked in order of importance in my opinion are:
Non-participating preferred liquidation preference. The investor receives their money back and the remainder goes to the common. According to WSGR’s survey of venture financings, a non-participating preferred is in around 40% of financings, with the liquidation preference in the remainder of deals being more investor-favorable.
Limited protective provisions. Among other things, the company can’t be sold without consent of a majority of the Series AA.
Right of first offer on future financings. Please note that these documents provide that the right of first offer expires five years after the financing, which I believe is not standard (but happens to be the company-friendly default in the WSGR form of documents that the Series AA documents were based on).
Information rights. The investor receives unaudited annual and quarterly financial statements.
There are situations where an investor might receive stock with even less rights. For example, if a founder contributes a significant amount of cash (i.e. enough to buy a car) to fund the company, then I might suggest that the company issue preferred stock with a liquidation preference and no other rights to the founder, as opposed to issuing common stock. The reason for issuing preferred stock instead of common stock is to preserve a low common stock value for option grants as explained in this post, and providing the stock with a liquidation preference.
What are the primary rights that are missing from the these documents that a VC or sophisticated angel would expect?
Some people have suggested that various terms are unnecessary in early stage Series A financings. See the VentureBeat article titled “Reinventing the Series A.” In the sample YC documents, there are various terms that are missing that one would typically expect in a company-friendly Series A term sheet (i.e. one from Sequoia Capital).
Dividend preference. Deleting the dividend preference is not a big deal, as almost all startup companies don’t declare dividends. The only practical situation that I can think of where a dividend preference is beneficial to a stockholder is where a company does a partial sale of assets and wishes to distribute the proceeds to stockholders. The liquidation preference would not apply in this situation, and any distribution to stockholders would trigger the dividend preference.
Registration rights. As a practical matter, I don’t think that most investors should really care about registration rights, especially in light of the shortening of the Rule 144 holding period to 6 months. (I suppose I will write a boring post about Rule 144 at some point.)
Anti-dilution protection. Deleting anti-dilution rights saves several pages of text in the Certificate of Incorporation. Given that the Series AA is issued at a fairly low valuation, anti-dilution protection is probably not that important, as a “down round” from a low valuation in the Series AA is unlikely.
Comprehensive protective provisions. The YC documents are fairly light on protective provisions compared to a typical Series A financing.
Right of first refusal and co-sale. These rights are missing. This is probably okay assuming that the founders restricted stock purchase agreement has a right of first refusal on transfers until a liquidity event. The right of first refusal on founder stock transfers in a typical restricted stock purchase agreement is in favor of the company. (Please note that when I say typical, I mean an agreement drafted by attorneys experienced in venture financings, not the boilerplate you might get from an online incorporation service.) The typical RFR/co-sale agreement in a venture financing gives the investors a right to purchase the shares if the company does not exercise its right.
Voting agreement. An optional bracketed provision in the Certificate of Incorporation provides for a Series AA board seat. In a typical venture financing, there would also be a voting agreement that governs how specific board seats will be filled. In angel financings, I typically eliminate the voting agreement anyway and simply have a closing condition that the board consist of certain persons.
Comprehensive representations and warranties. The Series AA Preferred Stock Purchase Agreement has fairly limited reps and warranties. As a practical matter, investors don’t sue companies for a breach of reps and warranties, so reps and warrants basically serve to flush out diligence issues. In an early stage company, extensive reps and warranties are probably unnecessary.
Legal opinion. A company counsel legal opinion is missing in these documents. A legal opinion for a newly-incorporated early stage company probably doesn’t add much to the due diligence process and is probably unnecessary compared to the incremental cost to prepare.
Legal fees. Each side pays its own legal fees in these documents. Venture funds expect the company to pay investor counsel fees.
Do I need an attorney to help me complete a financing if I have these documents?
Yes. Absolutely. These documents are not intended to be “fill in the company name,” sign the docs and collect checks/wire transfers. The fact that certain rights were intentionally omitted from the documents compared to typical VC financing documents is a judgment call that requires the guidance of an experienced attorney. There are always various corporate housekeeping matters that need to be cleaned up in connection with a financing. Please don’t try to use the YC documents without working with a competent attorney.
Thursday, August 21, 2008
[ENTERPRISE] 11 Things Startups Should Know About Enterprise 2.0
this is a great article from Read/Write/Web - for us the particularly interesting part is what they say about VC's needing Enterprise 2.0 now!
11 Things Startups Should Know About Enterprise 2.0
Posted: 21 Aug 2008 02:40 AM PDT
Yesterday we wrote about Enterprise 2.0 from the point of view of the Enterprise, the buyer. The conclusion was that the impact of social media on the Enterprise was very big, addressing the very "nature of the firm". This post looks at Enterprise 2.0 from the point of view of the vendor, specifically startups. This is a 30,000 foot view, but we aim to get past the hype to insights you can use in your startup. Further posts in our recently launched Enterprise Chanel will drill into specific market segments, companies and technologies.
1. Subscriptions are the best revenue you can get. Subscription revenue is more recession proof than advertising and more predictable than traditional enterprise software licensing. As long as you don't mess up, you will have a low churn rate. Then your new subscriptions drive your revenue growth
2. It is much easier to get subscriptions from a business than from consumers. Sure we all love the idea of consumer subscriptions, the potential is enormous. But do this reality check. How many subscriptions do you pay for? How many current subscription costs would you love to eliminate or drastically reduce? What would your really (no, really) agree to pay for every month? We are in a serious consumer recession in the developed markets that may last a while. What was always hard, just got an awful lot harder. Selling to business is much easier, if you focus hard on the next rule.
3. The other 80/20 rule. 80% of enterprise IT budgets just "keep the lights on". Only 20% goes to new stuff. I learned this in the technology nuclear winter in 2002, when a 20% cut in IT budgets meant that no (zero, nada) new projects were approved. If you can show how to reduce that 80%, you get a better shot at the 20%. That 80% market is a replacement market. You need to know what cost you are replacing. The incumbents are looking at the 20% budget as well and they have the inside track. You have to attack the 80% to make it big.
4. "Parallel replacement" is new. The old enterprise replacement market was based on capital expenditure write offs. If the client bought a $1m license fee over 5 years ago, you had a shot at selling another license fee for something "better, faster, cheaper". In the new enterprise world of SAAS and open source, upfront license fees are the exception rather than the rule. Buyers prefer to hold onto the old stuff a bit longer until they can see either an open source or SAAS alternative. Replacement is always very risky, leaving incumbents in control and startups banging outside the door in frustration. So you need to show that you can run in parallel with the existing solution for a period until you are established enough to be a viable, safe replacement. Step 1 is run in parallel, step 2 is replace. This is what Google Apps and Zoho are doing to Microsoft office (I use both Google Apps and MS Office. Even though I use Office less frequently I own a license, so why delete it? When I get a new laptop I will decide whether I need to buy Office). To play this new parallel replacement game you need to a) offer a free entry point (the Freemium strategy) so you get traction with a low cost of sale and b) you need to show one very clear new value proposition that will tap into that 20% budget for new stuff.
5. Have one simple new "blue ocean" value proposition that any business user can understand. You need this to access the 20% of budget going to new stuff. Being "cloudy" is not a value proposition, it is simple]y a way to deliver your value proposition. The incumbent can always launch their SAAS equivalent. Your free entry level just gets you through the door so that you get a chance to upsell to your subscription; free is not a value proposition. You have to show how you will do something really basic such as either a) increase revenue with a low cost of sale or, b) reduce cost on an existing process or c) create strategic sustainable advantage in measurable ways. Most likely you will do this by enabling better collaboration/communication, both within the enterprise but also, more critically, outside the firewall to the "extended enterprise". For a startup, this has to be "blue ocean", a market that has not yet been defined by the incumbents. By its very nature, this means the market size will be very hard to define and there will almost certainly not be recognized external authority that has defined the market size. Smart VC understand that Blue Ocean strategy and precise market size estimates seldom go together.
6. SaaS ++ means that Open Source is no longer a problem. Open Source has been great for buyers but it has also taken the entry level market away in most segments and that trend shows no sign of letting up. That is bad news for a startup looking to sell traditional software with a "better, faster, cheaper plus we try harder" replacement pitch. You cannot undersell Open Source. That has forced many ventures with great software and strong teams into the dead-pool. With a "SAAS ++" offering, you can use Open Source as the base, add a bit of new code and bundle it all up with hardware and service in a monthly fee. Unless buyers really want to do all that in-house, using their dwindling internal IT staff, you have a shot at it. SAAS alone however is not a barrier to entry. Anybody can replicate it. Which means (smart) VC will/should pass. You need the "++" bit as well. That is likely to be something to do with viral, communications and network effects that create a growing user base and proprietary data coming from that base. That is the "magic sauce".
7. You need to become a very good financial and data modeler. You will need some old-fashioned face to face relationship selling to get large enterprises to understand your solution, so that the "powers that be" encourage adoption and do not seek to block it. But the business will grow one subscriber at a time and users convert to subscribers one click at a time. Modeling becomes a core competency. Modeling the costs of all the SaaS components (R&D, hardware, infrastructure software, software maintenance, system and data maintenance). Modeling the cost of subscriber acquisition using SEO, SEM, social networking, conversion from free to paid and inside telephone sales in a highly efficient funnel process that delivers the right $ per subscriber. Modeling the revenue growth with multiple what if variable assumptions. Modeling the ROI for your clients at various levels of adoption.
8. Most external market size projections do not help your business plan. Forrester Research reports that Enterprise 2.0 will be a $4.6 billion market by 2013. That is not nearly granular enough for a real business plan. You are not really in the Enterprise 2.0 market. Saying "we will get 1% of the $4.6 billion Enterprise 2.0" market is totally meaningless and will simply get you shown the door in the VC office. You are in the market of solving a specific business problem, for a specific type of customer, competing against specific incumbents and startups. That is how you need to build a market size, from the bottom up. This is particularly true for "blue ocean" strategies where the market has not been defined by an incumbent. Building the real world, bottom up market size takes real hard work and detailed market knowledge. Look for a small enough market where you can get 20% and take that to 50% share and then leverage that market to get 10% in another market. Rinse and repeat. It is an old formula, but it works.
9. You need VC, they need you but there is a disconnect. Since 2000, most VC have sent any business plan with the word "enterprise" straight to the trash. With good reason. During the nuclear winter, the enterprise IT market was dead as a dodo. Then the big incumbents got into the consolidation game and it looked like you would count enterprise IT vendors on the fingers of one hand. The cost of entry was high, needing expensive sales teams upfront and the revenue was lumpy and unpredictable. Yech. Better to back a few inexpensive developers building a free service that some big vendor would buy and figure out how to monetize. That was a great game for a while. Most VC now view it as in its final innings at best. There is a shortage of buyers, no IPO market, we are in a cyclical downturn for advertising and in a major funk figuring out how social media can be funded by advertising. So VC need Enterprise 2.0. But they have missed the early winners. Very few of the current Enterprise 2.0 startups are venture backed. This is a disconnect. The early players always find it easier to bootstrap than later vendors. Today you need capital to fund the ramp-up and to build distance from competitors as the Enterprise 2.0 market moves from "below the radar" to "early hype" phase, thus dragging more entrants into every category.
10. Vertical is not the same as Horizontal. Classic Web 2.0 services such as Delicious, YouTube and Skype are geared at mass markets. Anything that is more niche has tended to be called "vertical". That is confusing. Vertical means a specific industry such as banking, healthcare or manufacturing and sub-sets of those industries. Horizontal (applying to any industry) should mean a set of common and linked features used by a specific type of person in the company (e.g. accounts payable by Finance, CRM by Sales and so on). The general rule of thumb has been for vertical ventures to be bootstrapped and eventually rolled up into larger entities. VC tend to view vertical as too limited. Horizontal on the other hand is big enough.
11. Know how to deal with secrecy, structure and control needs. Social Media is about being open, loose, unstructured, informal and fun; no ties allowed. Enterprises are about secrecy, structure and control. Ties show that you are serious and fun is for after work. The ties and fun bit is just style. But secrecy, structure and control is real. If you threaten those, many forces within the enterprise will shut you out. It will be like the red blood cells attacking the foreign virus. On the other hand, if you go along with all the secrecy, structure and control rules of the enterprise you will lose the social media benefits of extended enterprise collaboration and innovation. Many people within enterprises understand this and some of them are in a policy-making position of authority. In general, the trend is towards loose, unstructured, "emergent business networks". So "make the trend your friend", but beware of the very strong forces of opposition and deal positively with their legitimate needs.
ConclusionWhat is your position in the Enterprise 2.0 market. Do you work in IT in a large Enterprise? Do you work for a large incumbent Enterprise IT vendor? Do you work for a startup that is going to change the Enterprise world? Are you writing about this rapidly emerging market? Do you have unique insights or research to share? We would love to hear from you in the comments and maybe as a Guest Author. Email us if you're interested in writing for ReadWriteWeb's Enterprise Channel.
11 Things Startups Should Know About Enterprise 2.0
Posted: 21 Aug 2008 02:40 AM PDT
Yesterday we wrote about Enterprise 2.0 from the point of view of the Enterprise, the buyer. The conclusion was that the impact of social media on the Enterprise was very big, addressing the very "nature of the firm". This post looks at Enterprise 2.0 from the point of view of the vendor, specifically startups. This is a 30,000 foot view, but we aim to get past the hype to insights you can use in your startup. Further posts in our recently launched Enterprise Chanel will drill into specific market segments, companies and technologies.
1. Subscriptions are the best revenue you can get. Subscription revenue is more recession proof than advertising and more predictable than traditional enterprise software licensing. As long as you don't mess up, you will have a low churn rate. Then your new subscriptions drive your revenue growth
2. It is much easier to get subscriptions from a business than from consumers. Sure we all love the idea of consumer subscriptions, the potential is enormous. But do this reality check. How many subscriptions do you pay for? How many current subscription costs would you love to eliminate or drastically reduce? What would your really (no, really) agree to pay for every month? We are in a serious consumer recession in the developed markets that may last a while. What was always hard, just got an awful lot harder. Selling to business is much easier, if you focus hard on the next rule.
3. The other 80/20 rule. 80% of enterprise IT budgets just "keep the lights on". Only 20% goes to new stuff. I learned this in the technology nuclear winter in 2002, when a 20% cut in IT budgets meant that no (zero, nada) new projects were approved. If you can show how to reduce that 80%, you get a better shot at the 20%. That 80% market is a replacement market. You need to know what cost you are replacing. The incumbents are looking at the 20% budget as well and they have the inside track. You have to attack the 80% to make it big.
4. "Parallel replacement" is new. The old enterprise replacement market was based on capital expenditure write offs. If the client bought a $1m license fee over 5 years ago, you had a shot at selling another license fee for something "better, faster, cheaper". In the new enterprise world of SAAS and open source, upfront license fees are the exception rather than the rule. Buyers prefer to hold onto the old stuff a bit longer until they can see either an open source or SAAS alternative. Replacement is always very risky, leaving incumbents in control and startups banging outside the door in frustration. So you need to show that you can run in parallel with the existing solution for a period until you are established enough to be a viable, safe replacement. Step 1 is run in parallel, step 2 is replace. This is what Google Apps and Zoho are doing to Microsoft office (I use both Google Apps and MS Office. Even though I use Office less frequently I own a license, so why delete it? When I get a new laptop I will decide whether I need to buy Office). To play this new parallel replacement game you need to a) offer a free entry point (the Freemium strategy) so you get traction with a low cost of sale and b) you need to show one very clear new value proposition that will tap into that 20% budget for new stuff.
5. Have one simple new "blue ocean" value proposition that any business user can understand. You need this to access the 20% of budget going to new stuff. Being "cloudy" is not a value proposition, it is simple]y a way to deliver your value proposition. The incumbent can always launch their SAAS equivalent. Your free entry level just gets you through the door so that you get a chance to upsell to your subscription; free is not a value proposition. You have to show how you will do something really basic such as either a) increase revenue with a low cost of sale or, b) reduce cost on an existing process or c) create strategic sustainable advantage in measurable ways. Most likely you will do this by enabling better collaboration/communication, both within the enterprise but also, more critically, outside the firewall to the "extended enterprise". For a startup, this has to be "blue ocean", a market that has not yet been defined by the incumbents. By its very nature, this means the market size will be very hard to define and there will almost certainly not be recognized external authority that has defined the market size. Smart VC understand that Blue Ocean strategy and precise market size estimates seldom go together.
6. SaaS ++ means that Open Source is no longer a problem. Open Source has been great for buyers but it has also taken the entry level market away in most segments and that trend shows no sign of letting up. That is bad news for a startup looking to sell traditional software with a "better, faster, cheaper plus we try harder" replacement pitch. You cannot undersell Open Source. That has forced many ventures with great software and strong teams into the dead-pool. With a "SAAS ++" offering, you can use Open Source as the base, add a bit of new code and bundle it all up with hardware and service in a monthly fee. Unless buyers really want to do all that in-house, using their dwindling internal IT staff, you have a shot at it. SAAS alone however is not a barrier to entry. Anybody can replicate it. Which means (smart) VC will/should pass. You need the "++" bit as well. That is likely to be something to do with viral, communications and network effects that create a growing user base and proprietary data coming from that base. That is the "magic sauce".
7. You need to become a very good financial and data modeler. You will need some old-fashioned face to face relationship selling to get large enterprises to understand your solution, so that the "powers that be" encourage adoption and do not seek to block it. But the business will grow one subscriber at a time and users convert to subscribers one click at a time. Modeling becomes a core competency. Modeling the costs of all the SaaS components (R&D, hardware, infrastructure software, software maintenance, system and data maintenance). Modeling the cost of subscriber acquisition using SEO, SEM, social networking, conversion from free to paid and inside telephone sales in a highly efficient funnel process that delivers the right $ per subscriber. Modeling the revenue growth with multiple what if variable assumptions. Modeling the ROI for your clients at various levels of adoption.
8. Most external market size projections do not help your business plan. Forrester Research reports that Enterprise 2.0 will be a $4.6 billion market by 2013. That is not nearly granular enough for a real business plan. You are not really in the Enterprise 2.0 market. Saying "we will get 1% of the $4.6 billion Enterprise 2.0" market is totally meaningless and will simply get you shown the door in the VC office. You are in the market of solving a specific business problem, for a specific type of customer, competing against specific incumbents and startups. That is how you need to build a market size, from the bottom up. This is particularly true for "blue ocean" strategies where the market has not been defined by an incumbent. Building the real world, bottom up market size takes real hard work and detailed market knowledge. Look for a small enough market where you can get 20% and take that to 50% share and then leverage that market to get 10% in another market. Rinse and repeat. It is an old formula, but it works.
9. You need VC, they need you but there is a disconnect. Since 2000, most VC have sent any business plan with the word "enterprise" straight to the trash. With good reason. During the nuclear winter, the enterprise IT market was dead as a dodo. Then the big incumbents got into the consolidation game and it looked like you would count enterprise IT vendors on the fingers of one hand. The cost of entry was high, needing expensive sales teams upfront and the revenue was lumpy and unpredictable. Yech. Better to back a few inexpensive developers building a free service that some big vendor would buy and figure out how to monetize. That was a great game for a while. Most VC now view it as in its final innings at best. There is a shortage of buyers, no IPO market, we are in a cyclical downturn for advertising and in a major funk figuring out how social media can be funded by advertising. So VC need Enterprise 2.0. But they have missed the early winners. Very few of the current Enterprise 2.0 startups are venture backed. This is a disconnect. The early players always find it easier to bootstrap than later vendors. Today you need capital to fund the ramp-up and to build distance from competitors as the Enterprise 2.0 market moves from "below the radar" to "early hype" phase, thus dragging more entrants into every category.
10. Vertical is not the same as Horizontal. Classic Web 2.0 services such as Delicious, YouTube and Skype are geared at mass markets. Anything that is more niche has tended to be called "vertical". That is confusing. Vertical means a specific industry such as banking, healthcare or manufacturing and sub-sets of those industries. Horizontal (applying to any industry) should mean a set of common and linked features used by a specific type of person in the company (e.g. accounts payable by Finance, CRM by Sales and so on). The general rule of thumb has been for vertical ventures to be bootstrapped and eventually rolled up into larger entities. VC tend to view vertical as too limited. Horizontal on the other hand is big enough.
11. Know how to deal with secrecy, structure and control needs. Social Media is about being open, loose, unstructured, informal and fun; no ties allowed. Enterprises are about secrecy, structure and control. Ties show that you are serious and fun is for after work. The ties and fun bit is just style. But secrecy, structure and control is real. If you threaten those, many forces within the enterprise will shut you out. It will be like the red blood cells attacking the foreign virus. On the other hand, if you go along with all the secrecy, structure and control rules of the enterprise you will lose the social media benefits of extended enterprise collaboration and innovation. Many people within enterprises understand this and some of them are in a policy-making position of authority. In general, the trend is towards loose, unstructured, "emergent business networks". So "make the trend your friend", but beware of the very strong forces of opposition and deal positively with their legitimate needs.
ConclusionWhat is your position in the Enterprise 2.0 market. Do you work in IT in a large Enterprise? Do you work for a large incumbent Enterprise IT vendor? Do you work for a startup that is going to change the Enterprise world? Are you writing about this rapidly emerging market? Do you have unique insights or research to share? We would love to hear from you in the comments and maybe as a Guest Author. Email us if you're interested in writing for ReadWriteWeb's Enterprise Channel.
Wednesday, July 16, 2008
[ENTREPRENEURIAL SKILLS] You Have Five Minutes: Practice
Here's a great article http://www.skmurphy.com/blog/2008/07/13/you-have-five-minutes-practice/ ...the importance of practicing can't be pushed on us enough!
You Have Five Minutes: Practice
July 13th, 2008 Sean Murphy
I am always surprised by how unprepared CEO’s and founders were to meet the time limits, typically five or six minutes, that they had been given at various conferences to get their point across: Office 2.0, Under The Radar, and Struct08 to name a few that come most readily to mind.
This is not an artificial limit.
Peter Cohan, in his Great Demo! methodology, stresses the need to get through a basic demo in six minutes. Get the audience’s attention with a glimpse of what’s possible that can help them satisfy a real business need.
On a trade show floor you have perhaps a minute to a minute and a half to capture prospect’s attention, after you’ve gotten them to stop and listen to that much.
When you meet someone at a networking event and are asked “what do you do” you have perhaps 30 to 45 seconds to trigger a conversation. This is typically referred to as the “elevator pitch.” Entrepreneurs should bear in mind that most buildings in Silicon Valley are two to four stories, it’s a very short ride.
Even if you come have arranged a meeting in someone’s office for 30 minutes, the first five or six minutes set the tone for the balance of the time. Jill Konrath’s third story in her “3 Hard Earned Lessons from the School of Hard Knocks” post recounts an actual situation:
“Sit down,” he said gruffly. “You’ve got 5 minutes. Talk.”
“If you’re busy, I’ll come,” I said, trying to be gracious.
“Nope,” he stated. ” 5 minutes. Tell me why I should buy your product. Your 5 minutes is starting now.”
I mumbled. I stumbled. I tried to engage him in conversation. I tried to explain that I needed more time. He wasn’t one bit interested. After 5 minutes, he arose and said, “Your time is up. You can leave now.”
[…] I couldn’t concisely state why he should listen to me.
I wanted to build a relationship and warm up the call. That made me feel better. He was a busy man who chose to use his time judiciously. I didn’t respect his needs.
There is really only one way to achieve this. Practice.
“It’s not the will to win, but the will to prepare to win that makes the difference.”
You Have Five Minutes: Practice
July 13th, 2008 Sean Murphy
I am always surprised by how unprepared CEO’s and founders were to meet the time limits, typically five or six minutes, that they had been given at various conferences to get their point across: Office 2.0, Under The Radar, and Struct08 to name a few that come most readily to mind.
This is not an artificial limit.
Peter Cohan, in his Great Demo! methodology, stresses the need to get through a basic demo in six minutes. Get the audience’s attention with a glimpse of what’s possible that can help them satisfy a real business need.
On a trade show floor you have perhaps a minute to a minute and a half to capture prospect’s attention, after you’ve gotten them to stop and listen to that much.
When you meet someone at a networking event and are asked “what do you do” you have perhaps 30 to 45 seconds to trigger a conversation. This is typically referred to as the “elevator pitch.” Entrepreneurs should bear in mind that most buildings in Silicon Valley are two to four stories, it’s a very short ride.
Even if you come have arranged a meeting in someone’s office for 30 minutes, the first five or six minutes set the tone for the balance of the time. Jill Konrath’s third story in her “3 Hard Earned Lessons from the School of Hard Knocks” post recounts an actual situation:
“Sit down,” he said gruffly. “You’ve got 5 minutes. Talk.”
“If you’re busy, I’ll come,” I said, trying to be gracious.
“Nope,” he stated. ” 5 minutes. Tell me why I should buy your product. Your 5 minutes is starting now.”
I mumbled. I stumbled. I tried to engage him in conversation. I tried to explain that I needed more time. He wasn’t one bit interested. After 5 minutes, he arose and said, “Your time is up. You can leave now.”
[…] I couldn’t concisely state why he should listen to me.
I wanted to build a relationship and warm up the call. That made me feel better. He was a busy man who chose to use his time judiciously. I didn’t respect his needs.
There is really only one way to achieve this. Practice.
“It’s not the will to win, but the will to prepare to win that makes the difference.”
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