Jeff Clavier's Software Only

Sessions of the Stanford Entrepreneurial Thought Leaders Program are available as podcasts

One of the great things in living in the Bay Area is the incredible number of events, talks, presentations,... that are happening every day. Just take a look at WorkIt.com for an overview of a typical week. Stanford University hosts a number of these events, and one I particularly appreciate is the Entrepreneurial Thought Leaders Program. Every week or so, a startup CEO, a VC or an industry luminary will come to the School of Engineering and address an amphitheater full of students, faculty and professionals. I blogged a couple of these sessions, most recently the one featuring Mark Zuckerberg from the Facebook and his board member and investor, Accel's Jim Breyer.

The good news is that ETL sessions are now available as podcasts (here on Loomia), in addition to videos which had been around for a while. The podcast of the Facebook session is here.

Blogging in the Dark

I have just gone through about 3,000 posts that had accumulated in my NewsGator over the past few days, and that exercise proved once again that 1) relevant titles are critical to grab one’s attention and 2) even if I subscribe to 250 feeds – only 20 really matter. I read between 5 and 10% of the posts, and “Mark All Read”’ed the rest.

Things have been so busy that I have barely had time to check Memeorandum during the day, and whenever I found time to post – I did it mostly “In the dark”, with limited prior research. Hopefully, there will still some things of interest for you, dear Readers.

Figure out why, but one of the posts I did read Chris Messina’s announcement of WineCamp 2006, brought to us by the organizers of BarCamp. Beyond the customary geeky topics, here is the plan:

In addition to hosting this event at a real vineyard, we're going to be doing something really cool and important for open source. The WineCamp Fundraiser aims to bring open source practices and principles to underprivileged students by matching up mentors with various after-school projects and programs. Not a lot of concrete details yet since this is a brand new effort (being undertaken by Andrew Ferriere, the owner of the vineyard), but I've got a lot of ideas and contacts for this, and am very eager to hear about ideas, projects suggestions and and people that can help make this part of the event especially successful and impactful.

This sounds like yet another must attend event… that I will try and drag the family to.

Final quote before I go crash for my 3–hour night: “When you read blogs once a week, you get things done” – Eric Rice in an IM conversation late at night.

Don't blame entrepreneurs to base their business model on advertising...

when you get headlines like this one: Advertisers' growing Net appetite shows.

Note: I have also published this piece on my Wordpress.com account since I could not access TypePad to post it on Software Only. Sounds like the technical problems and scaling issues aren’t quite solved yet… And I know that no-one is reading that blog, but hey – publish or perish :-).

We all know that ad spending is cyclical, and startups need to have revenue sources that are less prone to going up and done like a roller coaster. Just as an example, John Battelle during the November session of the Search SIG shared with the audience that the Industry Standard went from a $260M revenue run rate to $47M in one quarter when Bubble 1.0 exploded.

In that context, MarketWatch’s Frank Barnako had this catchy headline for his column this morning, referring to an article of the Wall Street Journal: Top Web Sites Build Up
Ad Backlog, Raise Rates. The most interesting, and concerning (?), bit was:

Sales of online advertising are so strong that some Web sites are sold out and taking orders 18 months in advance. "We have a supply issue," Joanne Bradford, chief media revenue officer for Microsoft's MSN, told the Wall Street Journal. Rising demand is allowing major Web portals to raise their ad rates. Several told the Journal that they've increased prices as much as 20% this year. MSN, owned by Microsoft Corp. said it charges as much as $1 million for an ad that lasts 24 hours on the site. "It's starting to get into Super Bowl territory," said Sean Finnegan, U.S. director of OMD Digital, a division of ad-agency giant Omnicom Group.

The Web's multimedia capabilities are driving demand for broadband placements. "We have ad agencies telling us, 'We'll take every impression you can give us,' " said Wayne Gattinella, president and chief executive for WebMD Health. The president of the industry's Interactive Advertising Bureau said media buyers are able to make rational judgments to justify online spending. "In 1999, there was no research and people were chasing fear and greed," Greg Stuart told the Journal. "Now, there's good data, plus marketers have their own real experience."

Obviously, not every online property is as sought as MSN (or Yahoo, or MySpace,…) and I would venture that this overcapacity of ad inventory is only limited to the top Web properties. At the same time, it is clear that web sites, services or communities able to attract and serve a specific audience will get favorable response from direct advertisers interested in reaching and engaging that audience.

Open source and the end of traditional sales and marketing

Larry Augustin (founder of VA Linux, creator of SourceForge.net, and board members of a handful of open source leaders) makes a number of good points in his piece "Time for a New Software Model". This pro-open source pitch is not new per se since Larry has been talking about the end of traditional sales and marketing in that context.

A few point of interest, even though I recommend reading the whole post:

• The problem is that the traditional enterprise software business model is broken. A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control. In fact, Rick Sherlund at Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000.
• The Open Source model turns the marketing problem on its head. Customers can look at, evaluate and review software without contacting the company that will sell it to them. [...] The customer says, "I want something like that." He locates the Open Source version of the product, downloads it and is using it before the company is involved. [...] the Open Source solution, the CIO is happy with the software. But after using it for a while, begins to wish for documentation, a live-person to ask questions, a phone number for support, and so on. At that point, the customer calls the company saying, "I've been using your product for a year and now I need your help."
• The Open Source model likely delivers at best a 50% cost advantage in R&D. Most Open Source companies gain little community leverage developing the core of their application. R&D community leverage tends to come from testing, bug fixes, and interface/integration code. On the other hand, the savings in sales & marketing could be closer to 75 percent. Without the need to pay for large up-front sales & marketing costs, the vendor doesn't have to charge a new license fee up front. No more charging the customer to sell to them - the customers have to sell themselves - but they still come to the vendor for maintenance and support. And maintenance and support is how most software vendors make their living these days anyway.
• New license growth in enterprise software companies today is stagnating. By changing the revenue mix from primarily new licenses to primarily maintenance on already proven products, a typical enterprise software vendor's top line would drop by 25 to 30 percent. But the decrease in price and increase in market size will enable growth in those previously unreachable markets, creating a vibrant and growing company that will eventual pass its former revenue numbers.

The success of a number of companies like JBoss, MySQL and the potential of SugarCRM and Asterisk show that the model has some legs, and can build sustain companies with 40 to $50M in revenues. It will be interesting to see whether they can grow by an order of magnitude on the same model.

Search SIG: Battelle on Search

Thanks to the 200 people who joined us for the November session of the Search SIG (at least 30% of them working on a new vertical search play - based on a show of hands I did before the panel).
I found it extremely interesting and engaging, and want to thank Dan Farber, Adam Beguelin, Pete Flint, Gautam Modwhani and Tony Gentile for this. A special and warm thank you goes to our host, John Battelle who despite family circumstances managed to be with us, and share his views and “tough” questions regarding the vertical search space.

There was really a lot of good thoughts covered during the two sessions. The one that made a lot of sense to me was Gautam's statement that vertical search engines will grow in footprint and differentiation through value added features that can be deemed "search applications" - where the search part becomes a utility, and what matters is the semantic and the business/community process. Nothing surprising: this happened with databases and structured data a while back. There was a time when the value was in the ability to store and retrieve data in a structured manner, albeit through very crude UIs and tools - they are now a pure utility and value is many layers above.

Here are a few posts related to our session:

• John Battelle: From Service to Application
• Dan Farber/Between the Lines: Search engines turning into applications
• Om Malik/GigaOM:  Web 2.0 Exit… what is that? (Make sure to go through the comments)
• Josh Jaffe/TechConfidential: Vertical search gets crowded
• Mike Arrington/CrunchNotes:  Battelle talk at Search SIG
• Ian Kennedy: SD Forum Search SIG, Privacy Wall
• Jean Bedford: Next Generation for Search: The  Money is Flowing

Some of my own pictures:

   
John Battelle & Dan Farber           200+ attendees!             John kicking off the panel

 
     Kevin Burton hacking        The panel: Gautam, Pete,
           TailRank                            Adam and Tony

Tag: SearchSIG

VentureWeek #2 on Search is up

Eric Olson has released the second edition of his show, focusing on the Search market. We recorded it a week ago, with my friends David Hornik, Brad Feld and Dave McClure.

We had great fun doing it, especially when we got into why Brad and David are the "Louis Vuitton" of Web 2.0 venture capital investing. Hope you enjoy the show as well, and give us some feedback.

And thanks to Eric for inviting me - I definitely look forward to listening, and participating, to future shows.

Software Only joins the Web 2.0 Workgroup

A few weeks back, TechCrunch's Mike Arrington has invited me to join the Web 2.0 Workgroup, the network of blogs, and podcasts, covering the next generation of Web applications and services. You can now access Software Only from the home page of the group, and in the aggregated OPML file that lists all these blogs.

For more information about the genesis of the Group, you can listen to this podcast recorded by PodTech.net’s John Furrier, and the founding members: Mike, Richard “Kiwi” Mc Manus and Fred Oliveira. Thanks Guys!

Also: as a founding member of the TechCrunch BBQ Party series, I am delighted to report that the next bash is planned for Fri, Nov 18th at - obviously - TechCrunch's HQ in Atherton. We'll actually celebrate the launch of Riya. Should be fun. See you there!

Ross Levinsohn interview at the Consumer Technology Ventures Conference

I spent a portion of the day at the Consumer Technology Ventures Conference today, catching the interview of Ross Levinsohn, the President of Fox Interactive Media (“FIM”) by Lee Gomes, from the Wall Street Journal.

NewsCorp's re-entry in the Internet market was kicked off by Rupert Murdoch after Christmas 2004, and a summit of 85 top executives in February 2005. During this meeting, Murdoch’s team brainstormed about the threats and opportunities of taking a prominent position. Last May was when Ross presented a plan of actions - starting with the acquisition of MySpace and also involved investing in their FMI’s properties.

NewsCorp is focusing on companies built as a mix of content and communities. Ross mentions that Murdoch is "fearless" and ready to make bold moves, especially to enter new spaces in which they are not present. He also explains that he did not initially grasp the power of communities like MySpace, but he eventually came around and ended up acquiring both. Talking about scale, MySpace added 3M unique users in October, and served 11B pages - more than eBay. The challenge for NewsCorp is to monetize these page views and eyeballs.

Lee Gownes asks whether MySpace is “just” the flavor of the month, and risks to see its users flocking to the next new thing (sort of the Friendster effect). Ross answers that MySpace’s position was built on music distribution being the main attraction, and is further leveraging this through the launch of their own music label. The sheer size and density of personal networks existing on the site creates a strong differentiation and barrier to exit. Commenting on the Skype acquisition, Ross explains that NewsCorp did look at the opportunity but could not make the maths work, even if he found the company to be a fascinating property.

NewsCorp is now looking at over 100 opportunities a month, and would look at almost any modern Web applications or services – besides porn and gambling (at least, for the US market). Ross tends to be more excited by small(er) innovative companies than established ones – because of their ability to innovate. Asked about technologies that are overhyped, Ross mentioned mobile technology, voip,… where there are opportunities for one or two players – but not 10 or 20.

On their own competition: Ross mentions  that they are overlapping with Microsoft, Apple and other large companies – but at the same time will align and collaborate with some of them on key elements of their business (like any large business conglomerate). He cites Google as getting into their turf, and Yahoo becoming a strong media company.

Q: Back to Rupert Murdoch, and how involved he is in technology and/or tools?
Not much is the honest answer, though he reportedly has a lot of instinct on that market/business.

Q: Lesssons learnt in expanding in the Internet world ?
Be nimble and fast on execution. With key decision makers.

Q: Favorite blogs ?
PaidContent.org is a blog he reads every day, because they cover the content space better than others (way to go Rafat!), and he has 100 blogs in his aggregator at home.

More on partial founder buyout

Peter Rip has published an interesting piece on investor risk profiles, alignment, expectations,… in which he touches upon the issue of partial founders buyout. Given the traffic I got on my own piece commenting on Paul Graham’s “Venture Capital Squeeze”, I know that this is an issue of great interest to first time founders. Peter comments:

I am not arguing that buying founders stock should be a universal part of an investment strategy.  There is tremendous signal value in a founder’s willingness to sell early.  Huge.  One of the best indicators of a top in a public stock is insider selling.  Yet, people sell for many reasons, not all of which are because of a loss of faith in the future.  Part of our due diligence is to understand motivations.

There is a world of a difference between an early stage Founder and insiders in a public company, and it would be great for investors to recognize that it is great to have a hungry management team, but not a starving one. As Greg Linden, the Founder and CEO of Findory, commented yesterday:

[…] a partial cash out puts the founders back in a position to take on risk. You want the interests of the VCs and the founders to be well aligned. The founders will not have the same attraction to long-term risk that VCs have if the founders just recently depleted their personal assets.

What is not clear to me is whether Peter is actually saying that his early stage fund, Leapfrog Ventures, would consider small buyout of founders as a standard element in their Series A termsheets, on a case by case basis – with the right economics in place:

As final point, I should point out risk preference and risk assessments are linked in the decision to sell founders’ shares.   The price at which you are willing to sell may not be the price at which I am willing to buy.  That spread is risk assessment.

Brightcove's "whole tail" advertising and delivery platform

Brightcove, the company founded by Jeremy Allaire, is disclosing its advertising platform offering in this Clickz piece. This goes a step further from the pre-alpha launch presentation Jeremy gave at the Web 2.0 conference.

The company has developed a platform to allow commercial video publishers of all sizes to distribute their video content over the Internet using Flash. Smaller publishers can use a self-service interface, while larger ones will have access to more advanced tools used by traditional broadcasters. Publishers upload their video, categorize it with metadata tags, choose a design template, create graphic overlays with their brand or an affiliate's brand, and publish the Flash file.

Publishers will be able to monetize their content either by selling and serving their own ads, by running ads from Brightcove's ad network, or by selling their content for purchase or subscription. The Brightcove platform allows publishers to create customized video players to distribute on their own site, or on affiliate sites. Brightcove offers the production and syndication tools, and handles the billing and collection for the publisher.

"We're really trying to find a model that operates across the whole tail," Allaire said, in reference to the "Long Tail" idea that lower distribution costs of the Internet make it economically viable for smaller producers to be successful, or for someone to offer a product catering to a small niche.

Content owners can specify the ad behavior and policies. They can define policies for where ads appear, how frequently they are shown, and limit the maximum number of ads per session. Publishers can also choose to target ads by daypart, by geography, and contextually based on the metadata they supplied.

It is interesting that Brightcove covers the “whole tail” with its tools, allowing small and large publishers them to package, distribute and manage branded video assets whilst supporting three types of business models (content sale/subscription, publisher ads, brightcove network ads). The “big guys” will most likely look at using the service based on its functionality and its integration capabilities with the rest of their back-end, and will probably leverage their own advertising for the bulk of their inventory. “Small guys” will really benefit from the advertising network. Yet to be announced is the commercial model that Brightcove will adopt – since they are both a tool/service provider and ad network.

This other Clickz piece presented a great overview of the landscape, highlighting the fact that the market is tiny (< 2% of the online ad spending) but it is growing at a very rapid pace, with the combined effect of growing content inventory (user generated, MSM, VOD,…), low cost of delivery (cheap/free bandwidth, “legal” BitTorrent usage) and the multiplication of consuming devices (computers, phones, video iPods, connected TVs).