Silicon Valley Frontlines

Rugs to Riches - Saeed Amidi and the Plug and Play Silicon Valley Story!

If you want to get a first-hand, very intimate view of growing a successful business in Silicon Valley in the age of the internet then listen to this 30-minute segment from BBC Radio 4's In Business programme (listen online or download as a podcast). 

Actually it's the story of Saeed Amidi and his family's transition from leaving Iran prior to the revolution and, because they could not then go back, how they made their way in Silicon Valley. Saeed is now a good friend of mine as we've worked together for a couple of years at his Plug an Play incubator in Sunnyvale and the story is a great example of why Silicon Valley is the one and only Silicon Valley!

It starts with storing their family rugs in a building on University Avenue in Palo Alto - behind papered up windows - and then accidentally getting into selling the rugs after they tear down the paper. This leads to meeting successful VC's and executives of recent IPOs who want ... rugs for their mansions. Saeed buys the building (listen to how he deals with being told by Mr. Pappan, his landlord, that the building is for sale for $1 million but Pappan tells him he'll have to pay $1.2 million because he's always late with his rent) and then starts renting space to startups. Not just any startups but in part through his rug connections its to the fledgling Google, Paypal, Danger and Logitech. A few times it's mentioned that this is a "lucky building". I should think so. Foursquare is in there now! Here's a photo of the first group of Google employees in front of that building, 165 University Avenue.

Of course Saeed was not just a landlord. He was smart enough to ask for equity in each company as part of the deal to rent the space. When you look at the list you know just how smart this was!

Then the story broadens out into the bigger Plug and Play operation that Saeed has built since then, including the 160,000 square foot incubator in Sunnyvale, a former Phillips Semiconductor plant that was empty for 6 years before Saeed bought it in 2006. Plug and Play is now a vast ecosystem of startups (over 200), events, venture capital meetings, cloud computing services, Executives-in-Residence (I'm one, part time) and so on. Now Saeed is looking to broaden further, bringing startups here from all over the world - Canada, Asia, Italy, Spain, you name it - and starting to brand the Plug and Play operation into places like Singapore.

It's an American-immigrant-makes-good story. And its a Silicon Valley as the center-of-the-tech-startup-universe story. And its a we-can-help-the-world story. I love it!

Marc Andreesen - Entrepreneurial Thought Leader!

I'm startled to see how long it's been since I last wrote in this blog - almost 2 months! There's no shortage of interesting things to talk about, just a severe shortage of time to do so. I suppose it's a good thing because, frankly, I've been busier than the proverbial one-armed paperhanger. Lots of people needing help and I'm just happy to be asked to give it!

I did take time out a couple weeks ago to go see one of my favorite Valley entrepreneurs, Marc Andreesen, the Netscape, Opsware and Ning co-founder who now runs his own venture capital fund called Andreesen Horowitz. Marc was speaking at a Stanford University Entrepreneurial Thought Leaders seminar and it's always worth listening to what he has to say. In no particular order here are some of his topics and thoughts (excuse the paraphrasing). 

On the venture capital industry:

Interestingly enough, you need a license to have a gun or to drive a car. You don't need any kind of license - or indeed any specific background or expertise - to become a VC!

As an investor, most VC firms will break your heart. It's well documented that majority of VC returns are made by the top 20, 30, 40 firms and the other 700 or so will significantly under-perform the market at vastly higher risk. (He implies this is a badly broken model).

Because it's so much cheaper these days to get many companies started and ramped up than it used to be, there is a whole new layer of seed and Angel investors coming into the market and in essence displacing some of the traditional VC roles. And at the other end of the spectrum there are new firms coming into the market and investing hundreds of millions of dollars in much later stage companies like Facebook, Zynga and Groupon with the specific objective of providing liquidity to founders and employees and allowing these companies to stay private much longer than they would have historically done. (Being public is absolutely not all it's cracked up to be!)

Three necessities for a successful startup:

1. Is there a big market? An existing one, or a brand-new one.
2. Is what you bring to the market enough to provide a 10x change as a result of your product, technology or innovation. It has to be significant enough to create a brand-new market, or be able to punch through and displace existing, entrenched competitors.
3. Team. Preferably more than one technologist, and somebody who knows how to sell!

How to attract the best and brightest to your startup:

Stock options, yes, sure. But you really need a great vision. "The difference between a vision and an hallucination is that other people can see the vision!" It's a sales job. The entrepreneur must be able to create and sell that vision in a compelling enough manner to get everyone else - investors, employees, customers - to go along with it and help make it happen.

The Valley as the world's center for consumer electronics:

Marc believes that the combination of incredibly powerful chips and components, almost as commodities, and the design skills and software innovation here in the Valley is shifting the center of gravity for consumer electronics back here from Asia. Firms like Apple, yes, but also Mino (Flip cameras), Aliph, Palm, Tivo, Sling and many more. While they look and feel like hardware companies in reality their strengths are in the innovative product designs, software capabilities and related services (app stores, iTunes etc) these companies bring to the table.

For example, Aliph's Jawbone Bluetooth headset now comes with an app store where you'll be able to download apps that can do things like read you directions as you're driving, read you your email, etc.

Entrepreneurship "in the cloud":

Many of these consumer products companies - and others - are doing their software development in the cloud, particularly using Amazon Web Services. This has eliminated much of the traditional high costs - servers, software, bandwidth etc - associated with starting up technology businesses, allowing these companies to be much leaner, take less capital and scale up more rapidly.

There's lots more but you get the flavor! To see Marc's talk in its entirety look here at Stanford's Entrepreneurship Corner. If you missed his interview on Charlie Rose on PBS last year, go check it out here. 

HR Management Resources for Start-Ups and Trends in the HR Space

One of my readers asked me to talk about trends in HR, and about HR companies getting funding and M&A in that space. Very relevant for this blog as one of the great advantages of building a tech business these days is the incredible array of tools and services available to assist with that process - and there are a host of companies now doing this on the HR side.

For start-ups needing HR help, gone are the days when you needed people early to manage this function. Ten years ago in my first start-up there were very few tools to help, so people had to do it all. We had to use a broker for health benefits and do a lot of analysis ourselves on choices, costs etc.. We had to use an antiquated payroll service like ADP. We had gazillions of forms and reports and compliance things to address. We had to develop our policies and procedures from scratch or We had to use big excel workbooks for commissions, to develop compensation ranges etc. We had to buy salary data to see how competitive we were. In going from 25 to 175 people in a year and getting IPO-ready I had to have an HR Director, a manager, a comp analyst, an HR admin and three full-time, in-house recruiters to handle everything. All of which is not focused directly on developing the core value of the business. Yikes!

Today I simply turn to an outsourced service like Trinet (contact Carolyn Phelps at [email protected]) orJose Montes at Nationwide HR ([email protected]). With their help I don't need to hire any dedicated in-house HR person until I have maybe 100 people - or more. These folks will manage all of the things I mention above on a 100% outsourced basis. I get a far wider range of benefits choices for my employees, I get an HR person in my office to help when I need it, I get all my handbooks and policies, all my compliance issues handled - in the case of Trinet for $40 per employee per month. Employees enroll and sign up by themselves online. All I need to provide is a part-time person to enter payroll data twice a month. How cool is that?! You do need someone (a CFO, or Controller perhaps) to  manage the relationship, check things like Workers' Compensation rates etc. (watch this latter particularly carefully).

An IPO tip: expect Trinet to go public within the next 12 months. They're getting big (recently acquired Gevity) and keep building out their Board (Ray Bingham, Board member at Oracle and Board member at one of my prior startups, joined not too long ago. Ray is the sort of person you bring on as a financial expert to head up an Audit Committee for a public company).

One area that is still a huge problem is recruiting. If someone can find a better solution to match companies and candidates than the existing weak job boards like Monster and Hotjobs, or even DICE, then you will make a fortune. In this economy someone needs to find a better way. Recruiters are not the answer. Yet this is not insoluble with technology, surely. There are a bunch of startups trying to tackle this but nothing compelling that I've seen ... so far.

There are a number of other private or public companies that are very interesting in the HR space. SuccessFactors is a fabulous company that went public a couple of years ago that offers on-demand goal setting, performance management and other tools. Expect new product announcements from them later this month. Taleo is another public company focused on talent management. Xactly is a private, venture-backed company focused on sales compensation planning and management. As one who has had to deal with this area in many prior companies I can tell you that it's a complex management challenge and ususally hard to administer. Xactly has a good set of tools and recently rounded out their management team with the ex-CFO of Salesforce.com who took the latter public. Guess what he's at Xactly to do ...? Another early stage start-up in this space is IncentAlign which just recruited a good friend and former colleague, Bill Hunt, as CTO. All of these companies are SaaS-based - so its easy to get started and the solutions are scalable as you grow. Expect some of the public players to also look at acquisitions of the smaller players and a consolidation in the space.

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Valley Update - Funding, Capital Efficiency, Planning and Areas of Investor Interest

Spent the evening yesterday at SVASE's "Raising Capital for Early-Stage Technology Startups" event and I thought it would be worth sharing some of the thoughts from the three panelists who shared some great insights! They were

• Susan Mason, General Partner, ONSET Ventures
• Matthew Price, Sr. Associate, Nth Power
• Carol Sands, Founder & Managing Member, The Angels’ Forum and The Halo Fund

In no particular order, some of the key takeaways - all of which make great sense:

• "Capital efficiency" is paramount in this market. Meaning that the less cash you have to raise to get to breakeven/cash flow positive the better it is for investors, founders, management and employees. And therefore the cash you have also needs to be managed in the most effective manner possible.
• Yes, lots of portfolio companies have been through significant restructurings and downsizings to make the cash last and become more capital efficient. In many cases this has been a great thing as it has forced people to look at their businesses much more critically. This has been very timely as we've seen startups finding the external market has caused them to fall 6 - 9 months behind on their plans, though many are now getting back on plan.
• There will be a big shakeout in the VC business, in particular with those who have not raised additional funds or capital in the last 2 - 3 years (to be clear, all the above HAVE raised capital and are not in this situation!). The ripple effect on their portfolio companies will be substantial and ugly.
• We're seeing a return to real "sweat equity" with startups - which is a good thing!
• Good VC firms are still investing. Many are also looking much harder at how that equity gets leveraged or enhanced - partnerships, channels, even grant and government monies (which Silicon Valley companies have traditionally ignored but I see many European companies pursuing quite successfully)
• Silicon Valley startups have also not traditionally sold to the government - rethink that!
• Your financial plan needs to assume that not everything goes perfectly. In fact it needs to presume that many things will not go according to plan. Therefore always take as much money as you can now because you never know. Your financial plan is not just about having gas in the tank, but about "de-risking" the business. When you have cash you have options and can manage things going wrong. When you don't you have no options. None.
• If you're very early stage look at pre-seed convertible loans and other creative financing strategies - a bridge loan to a syndicated financing round etc (but as I've said before, make sure its a bridge, not a pier!). Get your suppliers and customers to help finance the business. 

Susan Mason, particularly, also did a great job of pointing out some market areas and opportunities she thinks are very interesting for investors:

• Monetizing data real-time
• "Everything" as a service - SAAS, Cloud Computing, PAAS, etc
• Enterprise 3.0 - for example, free, ad-supported network management tools
• Security as a service
• Financial payments infrastructure
• Internet gambling - when it becomes (inevitably) legalized here as it is in many other countries
• Virtual goods-based companies
• Mesh sensor networks with recurring revenue models
• Medical devices that speed up diagnostics or provide custom or personal medical solutions via your genetics

Sun Finally Throwing in the Towel?

Image by JulianBleecker via Flickr

In a post last month about cloud computing I said "For the traditional box sellers - Sun, NetApp, HP, Dell etc - its bad news. No longer will Sun make billions in revenues from companies each building out their infrastructure, as they did in the dot-com bubble."

Tonight comes news that IBM is in talks to buy Sun and that Sun has been actively shopping itself to potential acquirers. While its a shame that a company that was once one of the hottest in the business can't make it on its own any more, its not a surprise given the trends in the market andtheir failed strategies of the past. Example: Cobalt, acquired for $2bn in 2000 and the business discontinued by Sun in 2003. Now Sun's entire market capitalization is just $3.7Bn, for a company with $13Bn in annual revenues and $2.6Bn in cash on its balance sheet. Take out gun, shoot both feet off and, for good measure, do it again.

Not much better news for HP, mentioned in my quote above. In the last week Cisco announced its own range of blade servers, marking a direct frontal assault on their former close partner, HP. I know who I'm betting on and its not HP.

The hardware business in Silicon Valley will see radical changes over the next few years .... but the valley will continue to evolve and grow in other directions as it did with creating Google, Yahoo and Ebay and those new giants we have yet to see emerge. The talent, the money, the environment, the ideas - its still here!

Cloud Computing - Don't Ask Me to Buy You a Server Room!

"Cloud computing" is being touted as the (next) wave of the future in business infrastructure. At Pacific Crest's conference in San Francisco today this was emphasized time and again.

Cloud computing means using internet-based (the "cloud") computing resources to do many of the tasks, and provide many of the services you used to have to get by having large IT staffs, programmers and investments in servers, internal infrastructure and computer rooms. Now, with all of this available via the internet as a service, the need to make all of those investments is - over time - going away. Google, Amazon and Salesforce.com are all well-known providers of such services. Originally they developed all these skills, capabilities and made these investments to service their own needs and scale their businesses - and then they realized that it made sense to leverage that expertise into for-profit services. On top of which it's a great way to expand a partner network and - to some extent - lock others into your computing architecture.

For a startup, and for the finance guys at those companies, the move to cloud computing is compelling. Suddenly, one of the major cash drains in a startup goes away and the development and services infrastructure investment is replaced by a predictable monthly fee. And it scales exactly when you need it. And as I mentioned in an earlier blog, once again a startup can focus its resources on its core mission, not on all the crap around it to make it work. Music to a CFO, an investor and an employee's ears!

For the traditional box sellers - Sun, NetApp, HP, Dell etc - its bad news. No longer will Sun make billions in revenues from companies each building out their infrastructure, as they did in the dot-com bubble. Yes, they'll still sell gear to the cloud services providers - but it will all be generic, yet specialized boxes and far fewer of them. No-one buying the cloud computing services will care - they will just know its there and it works. Worse for those box guys, people like Google build their own! So now HP will actually have to make money by innovating rather than relentless, demoralizing and unimaginative cost-cutting. Or guess what they'll become - the tech industry equivalent of Chrysler.