Silicon Valley Frontlines

Buying a Car Online with CarWoo! Does it Work?

Buying a new car falls directly into that category of "things you hate to do but love the result". Everyone loves to be driving a new car but nobody likes the process of negotiating with dealers to get one. Price is always the key factor, of course. And while a number of intermediaries promising best prices have existed for some time - car buying services, agents, even Costco - you never really know if they are truly working for you. Costco, for example, is one of many which charges car dealers to have access to their service, so you question whether you're really getting competitive bids from a broad-enough range of dealers. With other intermediaries you never know if you're dealing with someone who simply has a "cozy" relationship with a few dealers that benefits them more than you. Various other resources exist to help you with the process. Consumers' Checkbook, for example, has a very good guide online (Download CarBargains_Secrets) and also provides it's own car-buying service. 

Given my role working with startups in the Valley it seemed appropriate, however, to test out the service provided by CarWoo!. CarWoo! is a graduate of the Y Combinator startup program and has just raised $8m in its Series A led by Interwest Partners. Basic premise: for a small fee ($49) "3 to 5 dealers" will "aggressively compete" for my business and I can use CarWoo!'s "negotiation tools" to get the "lowest prices, guaranteed". 

I wanted a 2011 Toyota Camry 4-cylinder XLE as a second car for the family. Not a lot of fancy options - leather plus heated seats and floor mats. No sat nav etc. Had to be Barcelona Red with Bisque (Tan) interior, per The Boss. MSRP: $27,745. For a Camry? Yikes!

We went to our local dealer, Toyota of Sunnyvale, test drove the car and asked for their best offer. They quoted $25,466 after "special Costco pricing" and based on financing the deal. Not bad - and a good yardstick for CarWoo! to beat. 

So did CarWoo! work? In a word, yes! Over 48 hours we got offers from 7 dealers (including a different sales person from Toyota of Sunnyvale but quoting the same price as above). One offer was for a completely different Camry than the one we spec'd - this same dealer told me none that I wanted were available in N. California (wrong!). So really 6 offers for what we wanted. They ranged from a high of $26,685 to a low of $24,457, after a couple of rounds of counteroffers, all via the site and without having to talk to anyone. This is all after adjusting any rebates etc to get valid comparables. Winner: Toyota of Palo Alto at $24,457, just over $1,000 lower than the visit to Toyota of Sunnyvale. 

Once we accepted the offer we went to the dealer and - no hassle, no renegotiation - we got the car for the price agreed. Plus zero percent financing for 5 years through Toyota. And two years free maintenance. (In fairness all the dealers offered the same financing and maintenance packages). 

Could I have negotiated in a dealer's office to get another $1,000 off? I suspect not. And certainly I didn't have to drive around a bunch of dealerships, knowing that when you're in their office they have you captive. Would another service have delivered the additional $1,000 off? Maybe, maybe not. Probably not with this transparency. And probably with a fee greater than $49. 

Was the final price a good one anyway? Well, I went to Vehix and put in the exact specifications of the car. For an identical vehicle they showed me that factory invoice is $25,603 and the net cost to the dealer after Toyota rebates or adjustments is $25,078. The average price other buyers have paid is $26,274 and I'm getting a "Great Price" with anything less than $25,743. Again, I paid $24,457. I think that's a "Super Great Price"!

Could CarWoo! be improved? Yes! 

• Customer service needs work. I called their 800 number to ask a question about the process with a dealer when it comes to financing. The person who answered said she was the answering service (wrong answer!) and would pass on my question. To her credit she made doubly sure she understood the question and read it back to me. Peter at CarWoo! then emailed me a few minutes later and said that CarWoo! does not do financing. I knew that and didn't ask that. CarWoo! needs to use some of the $8m to put in live 24x7 customer service with knowledgeable people. 
• Dealers will try and obfuscate the real price by being unclear on whether quotes are before or after rebates. Rather than have a text box that the dealer may or may not fill in in the quote I'd suggest the offers be in a structured CarWoo! format that requires full disclosure by line item. 
• CarWoo!'s "negotiation tools" seem to consist of a few FAQ's and a some reminders to counteroffer a dealer with a standard $500 less than whatever the dealer offered (even though this may still result in a revised offer higher than the lowest you have from someone else). A bit lame - needs work here!
• The site is of no help whatsoever with financing. Not with CarWoo! itself offering financing, but like Mint, providing financing offers from independent sources would be helpful. So would the key advice - which is to negotiate the best price, THEN talk financing. 
• Background education in a similar form to Consumers' Checkbook would be helpful. 

Will it work when I eventually buy that Aston Martin V12 Vantage? Er, probably not! Will it work with a Mini Cooper, with fewer dealers around to compete? Maybe. But with true internet democratization of the process combined with real transparency for your run-of-the-mill volume car, yes, CarWoo! works!

Why Silicon Valley is Still the Only Silicon Valley ...

One of my LinkedIn groups, "European Entrepreneurship & Innovation @ Silicon Valley" has an active discussion thread going on about where the next Silicon Valley might be. I thought it would be interesting to share with you my own contribution to this ...

I've worked a lot with startups in Silicon Valley and have close connections with the Plug and Play incubator in Sunnyvale as well as throughout the ecosystem here. While I agree that things are steadily improving elsewhere (and Plug and Play itself is trying to expand it’s concept outside the U.S.) there is lots of evidence that creating another “Silicon Valley” elsewhere still has a long way to go.

As evidence, I’d point to the significant and rapidly growing group of European startups coming to the Valley, from Barcelona, Austria, Rome, the UK and elsewhere. Their reasons for coming here? In their home countries or generally in Europe the ecosystem of funding, expertise (particularly management expertise), talent, mindset, advisors, legal and so on is still far less well-developed than here in the Valley. The fact is that it’s still incredibly difficult to build a successful business from scratch even with all the tools and resources such as cloud-based platforms available today and a lot of it is nothing to do with the technology itself.

The SV ecosystem is still second to none in helping in the broader aspects of this. In almost every case I’ve seen the only local advantages in Europe seem to be lower cost structures (a SW developer outside Rome costs $30k a year, same as an outsourced India person and a lot less than the Valley) and government-backed loans (if you have the patience of Job). On top of which too many prospective employees in these locations just want a 9-to-5 job with benefits (not the go-for-it mentality of startups in the Valley). And labour laws prevent you getting rid of them if they don't work out.

Another example - a local VC in Spain taking the attitude of "if I invest and you leave, then the equity you already earned and vested comes back to me". So, I punish you if you leave. What kind of stupid attitude is this? Why would you join the company in the first place? I don’t know any Valley VC who will do this – or even think of doing it. Golden handcuffs inasmuch as you earn and keep more the longer you stay, and topping up the options regularly – yes, here in the Valley. But not over there, apparently.

Yet another example - you can incorporate here in the Valley overnight with the help of a top-notch Valley lawyer from Orrick (who will do this for free and a $600 filing fee). OK, his time is minimal and he wants the relationship. But try doing that in Rome or Barcelona or Prague and they look at you like you’re mad (and you would be).

If other locations are really becoming new Silicon Valley, then they would start to siphon off a decent share of the financial lubricant needed to prove an idea and scale it up as a business. Do they? I don’t think so. According to the NVCA about 276 Silicon Valley deals raised $2.92 billion in Q2 2010 versus 216 deals that raised $1.57 billion in Q1 2010. Part of a general recovery? Yes. But in bigger picture this is almost half all the VC money invested in the total U.S. ($6.52Bn) going to the few square miles of the Valley. According to Dow Jones Venture Wire “Venture investors put €1.1 billion into 289 deals for European companies during the second quarter of 2010”. Even though this is a 50% increase over last year its still saying that all of Europe raised less than half the money going into Silicon Valley. China? Raised $689m in the same 3 months. Less than a quarter of the SV amount.

So, who is winning the fundraising game? Today anyway …

Don’t get me wrong. It would actually be a wonderful thing if there were Silicon Valley's in Poland or Abu Dhabi or Kandy or Phuket (my vote). And yes it is slowly changing out there. Not just in Europe - Asia is following suit. But they’re all still a long way from being in the same league as Silicon Valley.

My prediction is actually a bit different anyway. I think the truly successful startups will become multinational early in life and stay that way. They may be headquartered and funded in one place – maybe Silicon Valley or London, develop their software in another – maybe Prague or Hanoi (with employees motivated as part of the global team, not outsourced coders who don’t give a hoot who they’re working for), partner globally and locally and be connected directly with customers all over the world. But that’s not the old 1000+ person multinational. This is 15 people in a quasi-virtual organization yet all bound together with a common identity. And of course this is how we’ll really bring the world together in the future!

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. 

Is Your Financial Model Ready to Meet Your (Prospective) Investors?

As I work with some of the startups here in the Valley looking for early-stage funding, one of the weak spots in their approach to investors is the financial model they've developed. Or - in some cases - not developed.

No matter how exciting the idea, how great the buzz or how wonderful the management team, your pitch to investors has to show how you will build a business that will be big (if it won't be big then it won't be attractive as an investment now), and will generate profits. This is not slapping together a few numbers and hoping for the best. The financial model you develop needs to show that you know how you'll monetize the idea (generate revenues) and what resources it takes to develop a robust product or service, generate customer awareness, close deals, get the customer up and running, keep them happy and scale up the business. Most importantly, it will tell an investor just how far the cash they are putting in will go - and it had better be far enough to give the company a strong shot at getting to the next fundable stage.

To explain how all this works, how to put together a compelling model and what to look out for in the process I've been presenting a workshop to CEO's of early stage companies. Here's the how I define the process for developing the model:

The last part - validating the model - is often overlooked by early stage companies. If you really think you'll be bigger and more profitable than, say, Salesforce.com or Google was after 4 years then by all means say so. But for mere mortals in business you probably want to set goals that are a little more realistic and then explain to your prospective investors how this compares to where the other companies were at similar stages in the past.

Hint: if those "comps" are now public companies you can go to their SEC filings and type in "S-1" (without the quotes) in "Filing Type" and you'll find 3 - 5 years of financial history prior to their IPO. Often this takes you back far enough to see a few years that will overlap with your model. Here's the S-1 filing for Salesforce from late 2003, with data going back to their inception in 1999 (page 23)

Here are some of my tips for success with your model:

To get a copy of my full presentation please download a .pdf of the materials. By the way, the orientation of this pitch is towards the companies I primarily work with - internet, ecommerce, software and related companies. A fabless semi company or a telecom equipment company will have, by necessity, a more complex model but the principles still apply ...

Download Startup Financial Models - Philip Smith

If you have any questions or comments, want me to come explain this to you - or just need some help - please let me know!

What's Your Monetization Strategy?

Image by ZeroOne via Flickr

In talking with venture capital firms and with the startups that pitch to them there are many key areas to emphasize in a business plan. I'll be posting about some of these over the next few weeks.

One such area, however, is your "Monetization Strategy". At various times in the recent past - coinciding with the formation of a bubble or pending market bust - investors have not cared about this. It was all about "eyeballs" or "land-grabs" or whatever the then-fashionable euphemism for forgetting about how to be a business person and real investor. Fortunately - with a few exceptions such as Twitter (where it will still come) - investors and business people have returned to basics and now want to know "how will you turn this idea into something someone will pay for, and what will be the resulting revenue stream?"

However it can be very complex if, say, you're a software company or a web-based services company. Your software licensing model may be the traditional (a.k.a. outdated) expensive perpetual licence and annual software maintenance contracts. A perpetual licence gives the buyer the right to use the software in perpetuity but you'll need to pay 20% or so of the original license fee per year to the seller to access support, get upgrades, bug fixes etc (ie: to insure it still works).

These days its highly unlikely - impossible, really - that you'll get funding (or market traction, come to that) for a startup software company with a perpetual license monetization strategy. In part that's because there are far better alternatives - for customers, investors and for you. Term licenses bundled with maintenance in essence take a software rental approach. You still take "delivery" of the software and have to install it at your site; however you use the software for a defined period of time for a set fee - or for a variable fee that might be based on number of users, transactons processed or whatever. Obviously you can renew the license when the term is up (though you will not typically guarantee what the price to the customer will be when that happens). A big advantage for an early stage seller is that its typically easier to get the customer to adopt your solution than with a big upfront fee - think of this as the leasing model for a car, vs. a cash purchase.

More common now is an "on-demand" or "software-as-a-service" ("SAAS") delivery and monetization model. The customer doesn't install the software at all. They log into a web-based service you've set up - which can be very customized for them - and they pay by usage, number of seats (individuals in the company using the service, etc). No other license fees, no ongoing "maintenance", underlying software is always up to date (because its completely run and managed by the provider as service on their platform). This is a great model because its easy to understand and sell, it scales from one user to thousands without any changes or upgrades, etc.

Many other monetization models now exist, thanks to the on-line nature of many businesses. Advertising-supported models have become a huge factor, with Google, Yahoo! and others being such major players, and hosts of other companies providing tools, services, channels and so on around this. So much so that there has been major dislocation in all of the previously off-line, ad-reliant businesses - newspapers being an obvious example. 

So what's your monetization model? In my next post I'll consider some of the factors to think about as you develop yours!

Marketing Spend. Worth it, or not?

Image via Wikipedia

Having been CFO at a number of tech startups over the years you develop a strong sense of what's worth it and what's not when it comes to the various priorities for investing money in the growth of the business. Of course it varies from company to company, but experience (and common sense) say that, for example, having integrated business systems (lead management, salesforce automation, customer relationship management, finance etc) deployed across the company makes sense, while fragmented, stand-alone or point solutions generally do not. Despite which many companies end up with the latter rather than the former because of lack of leadership and vision in these areas at the outset.

Probably the hardest area to evaluate is one of the most important - the company's marketing spend. Particularly for early-stage businesses the key challenge is to get the word out and become known, become "top-of-mind" in a prospective customer's evaluation of the choices. Without that, the best ideas or technologies don't go anywhere.

The good news these days is that the appearance of social networks, the reach of the internet, the effectiveness of new search and advertizing solutions and many other factors have all combined to provide astonishingly effective - and cheap - alternatives to traditional marketing efforts. Here are some examples of what I think is worth it and what's not on the marketing side for early stage tech companies.

Worth it:

• Viral PR. Cultivating key influencers such as bloggers and via new media such as Twitter. 
• Speaking engagements on panels and at events.
• Highly focused and optimized key-word search advertising.
• Compelling, engaging and search-engine optimized websites
• Engaging smart, hip folks in such as Matt Stewart and JoAnn Peach to devise the strategy and make it happen.
• Online case studies, customer references and success stories.
• Lead managment solutions such as Marketo or Eloqua.
• Hip, fun, cheap videos such as Flaii's, using employees and associates. 

Not Worth It:

• $12,000 a month (or more) retainer-based PR with traditional agencies. I hate that stuff. You  might as well set fire to $100 bills and enjoy the show.
• Large, fancy tradeshow booths and splurges at big events. No chocolate fountains! Still better to have a speaking slot than a booth though!
• Advertising in traditional print media. Its dead or dying, hugely expensive and no-one cares anyway. 
• Lots of traditional print collateral and materials.
• Sponsorships
• Trash and trinkets - T shirts, lanyards, tschotckes ... urgh!!!

Some Tech is Still Alive and Well - Part 1!

OK, well not all of it. But amidst the gloom of layoffs and down-sizing here in the Valley there are still some tech sectors doing well.

One such includes the companies who build and deploy on-demand software, often called "SAAS" (software-as-a-service) vendors. In this context, "on-demand" literally means that - these companies provide software-based services to their customers on a pay-as-you go, use-just-as-much-as-you-need basis.

This is a fundamentally different model to the traditional old-style software vendors such as Oracle, the former PeopleSoft, the former Siebel, SAP, Microsoft (for enterprise level applications) and the like. Those guys still rely heavily on selling you a very expensive (hundreds of thousands of dollars or more) one-time license for the right to use their software application "in perpetuity" and then charging you, directly or through partners, a significant fee to implement the application and then charging you 18 - 22% or more each year thereafter to maintain and support the software. While this last item technically is optional, woe betide you if you don't sign up because sooner or later your mission-critical app will stop working and then you're hosed (and Mr. Ellison will gladly charge you a fee equal to all the years maintenance you missed if you want to go back).

So what's your TCO (Total Cost of Ownership) over 5 years? $500,000? $1,000,000? At least twice the cost of the original humongous license fee! Yikes! No wonder about the yachts. At least they don't demand my firstborn as well ... yet.

How does the on-demand model work? Well, typically it's a per-user, per month fee. Salesforce.com, the pioneer of this model, charges you from just $69 per person per month for their entry level package. Their application enables sales people in a company to manage and track their entire customer and opportunity pipeline through to closed deals, and customer support people to track, manage, service and support them. Got 50 sales and customer support people using this - and that makes you a pretty good sized business? Then its less than $3,500 a month. What's your TCO here for 5 years? $200,000 or so. You may have some implementation costs upfront but its usually around process design and definition - far, far less than the perpetual license guys.

Appirio, which sells a plug-in to the Salesforce platform for time tracking and professional services project management, charges just $20 per user per month for that. Let's see ... the cost of maybe one latte at SBUX a week. OK, its on top of SF.com's charges - but you get even more!! How cool is that!

Oh yes, hidden costs too. For the perpetual guys you'll need at least one, maybe more, dedicated in-house IT people to support it. For on-demand, typically no-one. No-one.

Remember I said "former Peoplesoft, former Siebel". OK, they succumbed to Larry's voracious appetite. But in reality the business models were broken.

In Part 2 of this I'll talk more about how all this is changing the landscape here in the Valley and around the world and what it may mean to you. Stay tuned!