Yet Another (ex-)VC Blog

Cloud computing, startups, and venture capital

Archive for January 2009

Service Level Agreements in the Cloud

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Yesterday I posted a comment on SAI regarding Oracle’s use of a single tenant SaaS delivery model for CRM on demand.

I can understand why some customers want to be hosted on their own physical hardware.  However, I think this is actually a really bad idea from a service reliability perspective.

Think about it: if has a service issue which affects a large number of customers, they are going to respond as quickly as possible and give the situation the highest sense of urgency.  Whereas in a single-tenant scenario like the one proposed by Oracle, if you have an issue that is isolated to your single-tenant infrastructure, there  will be much less urgency in resolving your issue.  After all, you are just a single customer.

I can’t take credit for this idea as I had heard it several years ago from the guys at Keynote Systems.  Those guys have a whole business around SLA monitoring so I give it a great deal of weight.  It made alot of sense then and I think it really does now in this cloudy world.

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Written by John Gannon

January 28, 2009 at 12:48 pm

Lean hiring tips from Eric Ries of IMVU

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Eric Ries is keeping a blog called Lessons Learned where he discusses the application of formal rigor and process to all parts of a startup.  Today I missed my stop on the train because I was engrossed in his post about hiring.  I thought that if the post was good enough for me to (almost) accidentally take the V train to Queens, then I should probably blog about it!

Eric spends a great deal of time in this post talking about when to hire (answer: when a bottleneck exists not when you’re annoyed that you’re doing 18 different jobs at once) as well as how to hire.

The latter is extremely important and an area in which many startups underestimate what it takes to recruit the best of the best.

For example, it’s not enough to post to a mailing list and say something to the effect of (and I see this all the time):

I’m a business person with a great idea set to turn the XYZ market on its head, looking for a tech cofounder to join for equity (read: no pay) and help us build a prototype which will then be used to help us pitch investors.

Besides the working for no pay thing, there is no attempt to convince the audience of tech people you’re hoping to recruit why you are going to lead the charge, attract investors, and help create a breakout company.  There are so many business people looking for tech people that you need to go the extra mile…

You need to get out there and recruit.

Get on LinkedIn and identify the top people in the market you’re going after, find out how to get in touch with them, and pitch them on your idea.  Get them excited about what you’re doing.  Even if they’re not willing to join you, oftentimes they’ll be willing to help you connect with other individuals who could be helpful as well.  And if they aren’t willing to come work for you and don’t seem particularly interested in helping, maybe you need to work on your pitch.  Keep in mind that hiring (especially hiring people out of positions they’re comfortable in and that they like) is sales, plain and simple.

Your ability to recruit could impress potential investors.  As an example, I recently met with a company where the founder (a 1st time entrepreneur) was able to recruit a very well-known individual to join his team.  This person arguably was a perfect hire and a perfect match for the company’s mission.  We didn’t end up investing in the business but this was one of the reason these guys got my attention.

In any case, take a peek at Eric’s blog post, it is well worth reading, especially if you’re building your core startup team.

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Written by John Gannon

January 26, 2009 at 9:47 am

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The compelling event

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Many sales, investments, and business development deals come to be because of a compelling event.

What is a compelling event?

Simply put, its something that happens that makes your product/service/investment proposal so attractive that the customer, potential partner, or potential investor move from “interested” to “buyer”.

Some examples of compelling events in a sales context:

  • Exploding product discounts: “We’ll give you 25% off list price but only if you buy before the end of the quarter.”
  • Technology upgrade cycles: (Example:) Enterprise IT departments typically replace servers every 3 years.  If you are a new server vendor trying to displace an incumbent, this would be a good time to tell your story to the customer.
  • End of fiscal year:  Many companies havea “use it or lose it” approach to budgeting, meaning any money not spent in the current fiscal year cannot be carried over to the new fiscal year and is lost to the business unit.  Also, the business unit runs the risk of receiving less budget in the following year because its often assumed that since the money was unspent, it wasn’t needed.  This is a great time to approach customers to see if any of that spend can be directed your way.

…and in an investment context:

  • Signing a big customer: Is that investor on the fence?  If you bring in a big deal, the investor may want to invest and you may be able to get better terms.
  • Getting your first term sheet: If you’ve got one term sheet, you’ve got a better chance of getting a second term sheet than if you had no term sheets.  Especially if that first term sheet is exploding.  And two term sheets is going to mean you’ll most likely get more favorable terms than if you just had one.

These are just examples but my point is that you always want to think about ways to create compelling events, or leverage events around you to make what you’re selling compelling to your potential buyer.

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Written by John Gannon

January 22, 2009 at 9:04 pm

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Cisco’s bold move to own the cloud computing infrastructure

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Image representing Cisco as depicted in CrunchBase
Image via CrunchBase

Cisco is getting into the server business, says   One could argue that the writing was on the wall when Cisco announced their Nexus virtual switch platform complete with deep VMware networking integration, but now there are few doubts that Cisco has clear designs on owning a huge portion of the cloud computing market.

It is important to note that Cisco is not going to be getting into the box business (a commodity business with low gross margins).  They are going to leverage their current architecture to build blade systems.  These blades are bound to be highly configurable, customizable, and most importantly more easily managable by enterprise IT staff than existing x86-based servers.  True, the other big server vendors have blade servers, but a Cisco/VMware combo is going to best equipped to deal with the networking nuances (and headaches) that become apparent as you virtualize a datacenter into a smaller physical footprint.

Who wins?

I think the article is correct to assume that this will spur the server vendors to start playing more aggressively in the networking space.  Blade servers have already encroached on Cisco’s territory as blade enclosures have ethernet switches built in, but I’d expect to see even deeper integrations and more robust feature sets from the server guys going forward.

My guess is that the open source routing startups (like XORP and Vyatta) are well positioned to take advantage of this shift because the server vendors could work with them to build integrated server and networking platforms (at a fraction of Cisco’s price).  I’m also hoping (selfishly, as we have an investment in a datacenter switch company) that this will encourage the server vendors to look more broadly at their layer 1-7 networking strategy and how other players (besides Cisco) will fit in.

Who loses?

Cisco will certainly take a near to medium term margin hit (just as they did when they entered the carrier business).

I also think server vendors without a strong management software offering will feel some pain (Dell comes to mind) as Cisco (and HP and IBM once they respond) will be able to put together some very slick, integrated offerings that will make servers and networks much easier to manage.

What do you think?

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Written by John Gannon

January 21, 2009 at 10:11 am

The most important skill

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I’ve been wondering lately what is the most important skill or trait that a venture capitalist must have in order to be successful.

We spend our days hearing pitches, analyzing business models, crunching numbers, helping portfolio companies, networking, and talking to people in the industries in which we’re thinking of investing.

You can slice a market 16 ways from Sunday and project 5 years of revenues for a startup company but ultimately you are trying to find the best people building businesses around the best ideas.  And then you are doing everything you can to help these people and businesses succeed once you invest.

If that’s the case, what’s the most important skill or trait for a VC?

I’m going to go out on a limb here and suggest two:

operating experience:  If you’ve been there and done that (that being started a company) before, you’re apt to have seen similar challenges to those that your portfolio companies are facing.  And consequently, you may be able to provide some relevant thoughts on how to overcome those challenges.

personal network: If you believe venture capital is all about backing the best entrepreneurs with the best ideas then you need to make sure you know those entrepreneurs and are a part of their personal network.  This is a cliche in the VC business but its a good time to mention it: “An A team with a B idea is better than a B team with an A idea.”  I think that says it all (but I’m going to keep blogging anyways…)

Second, as a VC you often have to dive into new markets and sectors and get up to speed very quickly.  Certainly you can read blogs and websites to learn about new areas but in my opinion nothing beats talking to experts working in the sectors in which you’re interested.  The problem is that you need to find those people, and in some sectors its not easy to identify them and its even harder to get some of their time once you find them.

The other way personal network comes into play is when you’re able to help line up sales or partnership prospects for your portfolio companies.  If you do not have the relevant connectivity into certain sectors, your effectiveness is going to be limited.

What do you think?

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Written by John Gannon

January 19, 2009 at 11:21 pm

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Why most venture capitalists won’t invest in consulting companies

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Although most companies that pitch VC firms are product companies, sometimes consulting companies that are raising money will approach venture capital firms.

Most venture capitalists tend to shy away from investing in pure services businesses.  Typically they exit for low revenue multiples and they only scale as quickly as you can hire billable resources (with costs increasing linearly).

On the flip side, these businesses tend to reach cash flow positive on Day 1, so they can be great businesses for founders.  They’re just not the type of businesses that early stage VCs will be able to realize the level of ownership required to hit their return goals.

Some consulting firms try to augment their services with managed, repeatable offerings than can scale without hiring additional resources.  Others use their consulting profits to finance the development of products and when those products are complete they morph from a consultancy to a product company.  Moving to a product or managed services centric model is certainly more attractive to venture investors, but of course such a move has its own set of challenges (not limited to a lack of focus as a company tries to keep consulting customers happy while doing product work on the side).

Some very sharp venture investors do invest in the services space (Sigma comes to mind with their investments in Glasshouse and Virterra) so I hesitate to write off the consulting services space completely, but it seems like a tough place to generate venture returns.

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Written by John Gannon

January 15, 2009 at 9:38 pm

How do venture capital deals get done?

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Entrepreneurs should always understand how deals get done at the venture capital firms they’re pitching.

Some firms operate on a consensus basis.  In this case, every partner in the firm needs to approve a deal before a termsheet is issued.  This is usually the case for firms with a small number (< 10) investment professionals.  If you’re working with a firm that operates in this manner, an entrepreneur will need to find a champion for their deal.

This champion is someone who believes in your company, wants to invest, and then will work to convince the rest of the partnership that the firm should move forward with an investment.  The champion could be a senior person at the firm but it could also be someone at a lower level, like an associate.  If you are working with a lower level person it will likely take longer for your deal to get through the firm’s process.

So, if you have the ability to get partner level attention for your deal, great.  However, if you’re not able to get a partner’s attention initially (and most startups are not), make sure you empower the junior VC staffer to make the case for your company within the partnership.  That includes accepting coaching from the junior VC, since they’ll be introducing you to the other members of the firm and will want you to customize your pitch to hit the key issues that appeal to the other members of the firm’s investment committee.

Other firms (typically larger ones in both fund size and personnel size) tend to grant more autonomy to partners and allow them to invest without obtaining permission from the partnership.  Partners in these firms tend to have fairly focused investment themes and sectors that they pursue (for example, a partner who only covers enterprise software, or only does wireless deals, etc)  In this case, you only need to convince a couple of people (the partner and the junior person who is likely supporting them) that your company is a worthwhile investment.

The bottom line is that the deal process varies by firm and it is helpful to understand how the VC firms you’re pitching operate.

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Written by John Gannon

January 10, 2009 at 12:26 pm

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