The VC View - funding start-ups in todays market place

Article published in The Manzella Report: http://www.manzellareport.com/index.php/economy/926-reports-of-another-dot-com-bust-are-exaggerated

Every few months news report claim we’re on the verge of another dot com bust or too much money is being pumped into too many start-ups that are destined to fail. These reports often are greatly exaggerated and demonstrate a total lack of understanding of the current startup market.
Some doomsayers’ predictions of another dot com bust actually have more to do with the changes in the world of funding over the last fifteen years. And venture capitalists (VCs) have devised a Darwinian culling process which can look to outsiders like a waste of money. But in actuality, it’s exceedingly efficient.

It is difficult for even the most experienced VC to choose early stage winners. Nevertheless, within the first year of funding it usually becomes self-evident which startups will not make it to round two.
The first big change since the dot com bust is in the internet itself. Today’s entrepreneurs have an easier time vetting an idea and accessing funders. There also are many more avenues of funding for very early startups then in the past. And today’s entrepreneurs can post their ideas to crowd funding sites and apply to incubators — organizations that work with entrepreneurs in developing business plans and executing products.

The second big change relates to who gets funded. Back in the 1990’s an entrepreneur with a well presented idea likely could get funding. Today, angel financiers and VCs want to see traction. Thus, an application needs to be available and already have a following before VCs consider funding the project. More specifically, the angels and VC’s look at user growth rates as the prime metric for funding.

What started in the dot com area now has become a way of doing business. There are a few exceptions to this model which have involved a very few lucky entrepreneurs with an idea so compelling their high rate of crowd funding has received the VC’s attention. Think Oculus Rift, the virtual reality headset company bought for $2 billion by Facebook. Entrepreneurs who have proven themselves on previous projects also can get funding for just an idea. And finally, some VC’s troll top grad schools like Stanford and MIT for graduate projects that fit their portfolios.
For most startups, funding is their first daunting hurtle. What started in the dot com area now has become a way of doing business.

For example, when VCs decide on an area of technology to build out their portfolios, they may give $10 million to ten or more different promising startups which only get scant support and direction. At the end of one year, the VC’s will review each startup and fund the top one or two that show promise.
It’s not a coincidence that some of the most successful companies in Silicon Valley started in a garage and have founders that can finish each other’s sentences. When VC’s decide which companies they’ll give the next round of funding to, they do this on the following basic criteria: they look to see if the startup has met it’s deliverables, used its money wisely, hired the right type of people, and very importantly, whether or not the principles work well together.

Too often startups internally combust when the partners have disagreements, spend too much money on fancy offices, waist funds on the wrong people, or do not have the necessary discipline to cut losses by firing employees who don’t work out.

For those few startups that make it out of their first round of funding, VC’s have a strong network of experienced managers that can provide the winners with guidance. For example, VCs appointed Eric Schmidt as President and CEO of Google.

Some startups that don’t receive a second round of funding become Zombies — startups with some money and level of traction, but not enough traction or market interest to be considered of value to a VC. These Zombie companies usually continue for a time from sheer determination of the founders. Some turn into mom and pop companies, while others eventually wither up and close down.
Regardless if the startup continues as a zombie or just closes, today’s VC’s are positioned to recoup all their expenses. In fact, some even make a profit from failure. Over the last fifteen years markets have been established to sell debt from closed startups, while intellectual property such as patents are sold on patent exchanges.

By calculating expected losses and creating markets for debt and intellectual property, VC’s have mitigated their losses while providing a Darwinian process, that in the end, can produce a few blindingly bright stars.

How Steve Jobs Stunted Apple’s Growth

Article published in The Manzella Report: http://www.manzellareport.com/index.php/u-s/911-how-steve-jobs-stunted-apple-s-growth

Steve Jobs’ death was a sad and traumatic event for Apple. His ability to drive marketing and product design was truly amazing. It was unheralded the way he was able to see the market for the MP3 player, drive a better design, and use this product to move a niche computer company to unimaginable heights. Yet, Jobs also held the company back.

Strangely enough for a man who ran a company with more than 100,000 employees, Jobs didn’t understand large companies and had no idea what IT organizations required. He always enjoyed being the iconic rebel, thumbing his nose at big companies like IBM.
Jobs’ brilliance when it came to consumer products was juxtaposed to his inability to understand the need to create business focused solutions, as well as to establish the environment to sell organizations other than schools and designers. Jobs more than bristled at what was needed to create products for employees.

Understanding the needs of an IT organization truly was his Achilles heel. When Jobs was running Next, classic Silicon Valley stories included his demand to make all internal computer wires black so when computers were opened for repair, they would look cool. Every computer repair person will tell you they use wire color to trace problems. And who else would be opening up business computers?
It’s not just Jobs’ absence that has given Apple new business opportunity. Apple obviously is doing just fine without Jobs, as company devotees quickly gobble up their latest offerings. But as Smartphones become more commoditized, Apple needs to create new markets and products to drive growth.

For Apple, business customers traditionally have been an untapped market. But with Jobs gone, Apple can move their products into the corporate environment. The deal Apple now has with IBM is a perfect example of what never would have occurred if Jobs was involved.
Selling corporations takes more than just a consumer product available to business customers. There is a whole synergy around business solutions that need to be executed. Business products never would have gotten past the consumer driven Jobs and his need for total control over the design of each solution. With Jobs gone, these synergies now can be created.
It’s not just Jobs’ absence that has given Apple new business opportunity; a weak Microsoft also let it happen. Microsoft started off as an IBM partner who used that relationship to dominate the business desktop.

While Microsoft has been busy maximizing revenue with existing applications, they lost focus on the changing marketplace. Steve Ballmer never had the guts to “eat his young” and cannibalize current revenue to maintain a leadership role in browser, operating systems, and office applications. Currently, Linux is eating into the server space, Google is eating into their browser and office application space, and as the desktop space moves to fingertip space — where clients want complete synergies with computers, Smartphones, and tablets — Apple is well poised to take over this space.
While Microsoft focused on maintaining a 1990’s business model, they missed the biggest change in technology — consumer driven solutions. In the 1990’s, Microsoft dominated the computer industry. After winning the browser war, Microsoft let other companies innovate and drive technology while they focused on internal fights and created lack luster product offerings.
Has there been a word processing feature added in the last twenty years that anyone really cares about? Microsoft didn’t even pay attention to the Smartphone and tablet market until it was well established. Eventually Microsoft put forth a lackluster solution that didn’t grab anyone’s imagination.

As Google steels the low end of the office market with their free doc’s products, Apple is now poised to take over what the employee touches with their line of integrated Smartphones, tablets and computers. It will be interesting to see if Microsoft’s Satya Nadella has the nerve to do what’s necessary to create compelling solutions to keep Microsoft in the game.

Radio Interview - Project management - project concept

On the radio show "The Small Business Advocate" I discuss with Jim my new book "Project Management - Getting Mobile Apps connected to Big Data Out On Time and On Budget  

We discuss how to vet new ideas.

Apple continues to gain at the expense of Microsoft

A few years ago I blogged that I thought Apple had peaked.  I no longer feel that way.  The main reason I’ve changed my mind is that Steve Jobs is no longer at the company.  Yes, I know everyone who never worked for him thinks Steve Jobs was some kind of god (and all the sycophant know he was a god); but Job’s Achilles heel was always B2B. Strangely enough, for a man who created large businesses he didn’t get large companies and especially never got what drives IT organizations. More than that, he didn’t like doing what’s needed to sell into big business.  Now with Jobs is gone, Apple can move their products into the corporate environment.  A perfect example of what never would have happened if Jobs was alive is the deal Apple now has with IBM. 

Interestingly enough it’s just not Jobs being gone that has created this opportunity for Apple but it’s also a weak Microsoft letting this happen.  Which highlights my thinking, that is, Microsoft’s earnings do not yet show how much trouble they’re in.  Microsoft is turning into Yahoo – a past leader who lost touch with customers and technology and now is just hanging on.  Microsoft’s products are old and weak.  They’ve missed major trends, producing second rate solutions as a response e.g. search engines, smartphones, tablets, online office apps, cloud services, development environments … Their development organization is so internal focused that they forgot there are actually customers out there; resulting in the creation of subpar products that technologists hate using and are confusing for end users.  While Microsoft misses out on all the latest technology trends Google and Apple are poised to eat their lunch. 

A big indicator of what’s going to be hot in IT organizations in five years are the skills Silicon Valley companies are looking for in engineers today.  Ten to fifteen years ago sixty percent of Silicon Valley companies were looking for engineers who knew .net and other Microsoft centric skills.  Today less than 1% of engineering jobs in the valley are for Microsoft centric skills.  The top engineers are being drafted into solving big data issues – centered on technologies like Hadoop – a Google/Facebook developed open source technology.  Where the less math centric programmers are being hired to develop web apps, using Google and Apple developed open source technology.

Based on this, I see Apple and Google continuing to rise at the expense of Microsoft. The big question is, can Microsoft’s new chairman change their course and turn Microsoft around.

My story of Tiananmen Square

On June 4, 1989 I had just gotten back from traveling in China when the government killed the students in Tiananmen Square. I spent the next few days glued to CNN watching what enfolded; shocked since four days earlier I was there, in Tiananmen Square.

The question I had then that I still have today is, What happened in the other cities?  Back in 1989 I was touring China with my mother.  We started our trip at the beginning of May in Shanghai.  I was told that the building across the street from our hotel was a sports stadium.  There were a number of people in front of that building dressed in white carrying banners.  When we asked our tour guide what was going on, she told us it was a sports rally for a local team.  I remember thinking, those are the strangest sports fans I’d ever seen.  

As our trip progressed and we visited more cities, it became apparent that these people with banners were more than sports fans. About a week into our trip CNN started covering the student protest story. This was the first time we learned that the people with signs were part of a country wide uprising.  The first large protests we saw were in the city center of Suzhou. As our trip continued and we visited more cities, we found each progressively filled with citizens marching in solidarity with the students.  By the time we got to Xian there were tens of thousands of people marching in solidarity. Also, by the time we got to Xian all western broadcasts were blocked.  I remember watching Chinese TV, not understanding a word they said.  What I saw were a few young men being interviewed.  These young men were having a hard time remaining conscious during the interview.  A local Chinese person told me that the young people were protest leaders in Beijing.  They were being sleep deprived.  To this day I have no idea if that assessment was accurate.

In Xian our hotel was at the top of a large traffic circle, which was the center of the protests.  Since we no longer had access to any western news I went outside, found people who spoke English, and asked what was going on.  There were copies of hand written sheets of paper pasted up on walls.  Asking around, a man who spoke English politely told me it was underground news describing what was going on in Beijing.  Another English speaker asked me what I thought of their students.  When I replied, “They’re amazing” he smiled and said, "we all are so proud of our students."

Someone else explained that the students were demonstrating for freedom.  What I learned from the people in the street was their definition of freedom and democracy was different than how those words are used in America.  At that time in China each street had a representative who reported to an area representative, who reported to a town representative, this chain of representatives went all the way to the top.  If someone on a street needed a job, wanted to go to school, wanted to change jobs or had any other basic life choice they had to go to their street representative and ask for a favor. That the street representative had a lot of power over their lives and corruption was rampant.   I learned that people wanted an ability to make life choices, what schools to apply to, what jobs to apply to, and ability to leave a job and go to a different job without asking their street representative.  I was told the students were trying to change the system, so that the people had more control over their daily lives.  

Every evening we were in Xian I could look outside of our hotel window and see tens of thousands of people walking down the street in solidarity.  This went on for hours.  This was not a small group of people walking in a circle, it was tens of thousands of people who joined in the protest. Whole families were part of it, dads pedaling a bike, moms balancing on the back and a child balancing on the handlebars. They were joined by large groups of people carrying a company banner singing their company song.  

When we finally got to Beijing, the protests and the energy was amazing.  The streets down town were impassable by bus.  We got out of our tour bus about ten blocks away and walked to Tiananmen Square.  The atmosphere was casual, lots of people with banners, whole families out showing their solidarity.  

Also in Beijing we visited the parents of a friend of my mothers.  His father spoke English and told us how worried they were for the students; that the Chinese government does not like instability.  He kept on saying this will end in disaster.  Looking back, it was the first sign of troubles to come.

Microsoft’s real problem

Ten to fifteen years ago in Silicon Valley when a software developer was looking for a new they found that roughly sixty percent of the companies were looking for people fluent in Microsoft technologies like .Net, C#, VC++, or MFC.  Fast forward to today, the skills that companies are asking for in Silicon Valley are either app development or big data, all of which use open source programming languages like C++, PHP, Java, or Python.  I estimate only one to two percent of the available jobs are for people with Microsoft centric skills.

What Silicon Valley does now, IT departments do in five years.  This is a fact that has been true for a long time.  Microsoft’s bottom line still looks strong, but if virtually all the new development is in areas other than Microsoft, then Microsoft will be then next Yahoo -- A big company that once had a leadership role and is now fighting for relevance.