TinyURL vs. Bitly: Web Remains Not For Those Flat of Foot

In a MapQuest-like display of flat-footedness, the original URL-shortener TinyURL seems on the cusp of being crushed by the new kid in town, Bit.ly.



To me, it happened overnight. One day everyone was using TinyURL on Twitter, the next Bitly. As it turns out, that wasn't an accident as I learned in this TechCrunch story, URL Shortening Wars: Twitter Ditches TinyURL for Bitly. It seems that Summize (subsequently acquired by Twitter and now Twitter Search) and Bitly are backed by the same entity, Betaworks, which also has common investors with Twitter.

So my gut says the story goes something like:

• Hey, we're driving a lot of traffic for TinyURL
• Maybe we should get that traffic ourselves
• I bet we could get Twitter to make us the default URL shortener
• And -- this part's also key -- I bet we could do it better

Hence I wasn't surprised to start reading stories in the past two days about Bitly's big vision. See, for example, this TechCrunch story, Bitly's Grand Plans, and Their Inevitable Clash with Digg: Bitly Now.

Excerpt:

The magic behind Bit.ly are the stats that the service makes available on the underlying domains being clicked. Investor John Borthwick explained it all to investors in an email we obtained earlier this month:

bit.ly has been on a tear since we launched it last summer ...bit.ly is on its surface a link or URL shortener, helping people take long and unwieldy links and make them short and easy to share via email, Twitter, Facebook etc. But once you shorten a link with bit.ly the fun begins. You can put a simple “+” on the end of any bit.ly link and see, real time, the pace at which that link is getting shared and clicked on as it moves around these social distribution networks.

Bit.ly Now will take all of this deep (and wide) data on popular real time URLs and turn it into a service. That’s where the inevitable clash with Digg comes in.

Bitly, as it turns out, think it has some key advantages against Digg, reminding me that the web is also not for those bad at math.

Bit.ly says that the data flow they are seeing is so massive that they are getting very good at predicting the number of clicks a link will get in the future. They look at acceleration of clicks as well as the source (Facebook, Twitter, IM, whatever) and whether people are clicking that are outside of the social graphs of other people clicking.

In other words, you could say that Bit.ly knows what will be on the Digg home page tomorrow.

The amazing thing, from a strategic marketing perspective, is that TinyURL has been written out of the story. By looking ahead towards Digg as the new competition, by painting a vision of where it wants to go, by discussing how it wants to get there, Bitly just blows by TinyURL and writes them out of the story line. This isn't about URL shortening; it's about information sharing and communications.

Well done! I sometimes call this Lot's Wife's Law of Marketing Communications: don't look back; only look ahead.

The lesson for TinyURL is that you can't remain static, or someone will come along, reinvent you with a broader vision, and paint you out of the picture -- turning you, if you will, into the pillar of salt.

Kedrosky: VC Will Be Cut in Half

I just finished reading Right-Sizing the US Venture Capital Industry by Paul Kedrosky, author of the Infectious Greed blog and wanted to share some thoughts on it here.

He starts with an interesting swipe at two of the more popular claims of venture industry marketing: (1) the citation of great successes such as Google, Microsoft, Starbucks, and Cisco, and (2) the NVCA claim that venture-backed companies represent about 17% of US GDP:

... noting that venture capital played a role in the early days of these storied companies is not the same as saying the venture industry deserves full credit for these companies any more than does, say, Pacific Gas & Electric ...

Merely being the provider of a service to a company is separate from having demonstrated that the company could not have obtained that service elsewhere. There are many providers of risk capital ... and a smaller venture industry (or a larger one) might well have had as much success, or more, at funding the same companies.

He moves on to analyze venture capital performance, noting that historical annual returns were about 20% and arguing that the ten-year numbers are about to go negative because the bubble exits of 1999 will soon be excluded:

Having argued convincingly that venture capital has a performance problem, he then offers up three possible explanations. Perhaps, Kedrosky says:

• Too much capital is allocated to VC, driving higher valuations and lower exit multiples
• Shrinking exit markets (e.g., the decline in IPOs) are damping returns
  
• VC itself is suffering from structural flaws, for example, a habitual over-reliance on the relatively mature IT and telecommunications markets

Excerpt related to the last point:

The computer and enterprise software and networking markets are long past the peak of innovation in terms of being places for profitably investing significant early-stage money. At the same time, most IT entrepreneurs say today that it costs a fraction of what it did a decade ago to start a company [due to open source software, Internet distribution, and cheap hardware and bandwidth].

On reduced start-up cost, I largely agree. On being long past the peak of innovation, I disagree. I believe that technology innovation is largely stalled in IT with business model disruption (e.g., open source, SaaS, cloud) in vogue and dominating new investments. I doubt that a new, technology-disruptive enterprise software company that is not SaaS or open source could even get first-round funding today. I think this means real opportunity in mid-term for technology disruptors and (happily) fewer competitors for Mark Logic while so doing. Yeah!

Kedrosky continues, making some interesting statements on IPO window closure:

There is no question that the number of venture-backed IPOs has declined [to a little more than half] the pre-bubble number ... but it did not decline to levels completely out of line with [the pre-bubble] period ... what has changed is that the market has become less accepting of young, money-losing companies than it briefly was in the late 1990s ...

It is a mistake to say that the problem is the exit market -- it would be more correct to say there is a problem with what VCs once were able to bring to market, but no longer can.

At this point, I'm thinking this guy is one heck of a conventional wisdom challenger and a fine analyst, but again I have to disagree:

• If the IPO window were open, there were no SOX tax, early-stage public company valuations were weak, and thus VCs would not take companies public that they heretofore would, then I'd agree

• But there is a SOX tax that makes marginally profitable companies unprofitable and the IPO window is basically closed so we don't know if the market valuations are good or bad because there is no public market for the stock of these companies.
  

As I've often mentioned, $30M high-growth, break-even companies could go public and get reasonable valuations in the pre-bubble era (e.g., Business Objects in 1994). Today, I know of $100M+, growth companies that can't go public due to some combination of IPO window closure and SOX compliance and process / timing costs.

Kedrosky then proceeds to some interesting ROI arguments on VC as a category. This chart, for example, shows how the flood of capital into VC in the 2000 era has resulted in depressed returns thereafter.

Kedrosky then does a little "right-sizing" math, showing two different ways why he believes that VC should be about half the size it is today.

I should note that the Kedrosky's conclusions are very similar those reached by Fred Wilson, author of the A VC blog, in his post The Venture Capital Math Problem which looks at the same issue but in a more bottom-up, back-of-the-envelope way. Wilson, with some quick math of his own, calculates that the exit rate can't generate enough returns on the current investment rate of about $25B/year.

Excerpt:

So here's the venture capital math problem. We need $150bn per year in exits and we are getting about $100bn. That $100bn produces roughly $50bn in proceeds for venture firms per year. After fees and carry, that $50bn is around $40bn. Which is only 1.6x on the investor's capital if $25bn per year is going into venture funds. If you assume the investors capital is tied up for an average of 5 years (venture funds call capital over a five year period and distribute it back over a five year period, on average), then the annual return is around 10%.

If you're really interested in this topic go read the 250+ comments on Wilson's post (and his follow-up).

One of my favorite comments was this one:

Put all of this together and the conclusion is crystal clear. The VC class does not scale for one simple reason: dearth of good VCs.

To be successful in this class you need to have capabilities that far exceed the "random selection" approach, and very few have them. The source of pitches is practically unlimited, even if you are good at sieving out 90%, you are still drowned out in low-quality pitches. You need to be able to dismiss 99.9% or better of the low-quality pitches. Only few can do that, and they have limited bandwidth, that's why the class does not scale.

Entrepreneurship: Not Just for 20 Somethings

Here's another report that crushes the myth that entrepreneurship is only for the young: The Coming Entrepreneurship Boom by Dane Stanler and published by the Kauffman Foundation.

Excerpt:

Contrary to popularly held assumptions, it turns out that over the past decade or so, the highest rate of entrepreneurial activity belongs to the 55-64 age group. The 20-34 age bracket, meanwhile, which is usually identified with swashbuckling and risk-taking youth (think Facebook and Google), has the lowest. Perhaps most surprising, this disparity occurred in the 11 years around the dot-com boom—when the young entrepreneurial upstart became a cultural icon.

Chart:

Harvesting Deep Web Content for Open Source Intelligence (OSINT)

Frequent "KellBlog" (just trying it on for size, see previous post) readers should know that I have a keen interest in open source intelligence (OSINT) both because we do a fair bit of business within the intelligence community at Mark Logic and because I'm inherently fascinated by the notion of things hiding in plain sight. It must be the math puzzle guy in me, but there is something really cool about linking together a series of public information and transforming it into actionable intelligence.

I think Malcom Gladwell's New Yorker article, Open Secrets, about which I blogged here, is a fascinating piece of work and a must-read for anyone with an interest in OSINT. More recently, I did a post on an OSINT article in, of all places, USA Today.

The purpose of this post is to highlight an upcoming webinar entitled Harvesting Deep Web Content for OSINT where we are participating along with BrightPlanet. The webinar features Mark Logic Federal CTO Chris Biow and William Bushee, VP of development at BrightPlanet.

While I've never seen William present, I can say that Chris Biow is both an excellent presenter and a highly knowledgeable individual in search, database, text mining, and semantic web-ish technologies.

It's on June 30, 2009 at 1:00 PM Eastern Time. For (a little bit) more information, go here.

Oracle Operating Margin Tops 50%, Maintenance Bigger than License

Oracle reported its fourth quarter yesterday with several interesting highlights:

• Non-GAAP operating margin was 51%, the highest in Oracle history
• Fees for updates and support (aka, maintenance) were $3.1B, growing at 8%
• Fees for license were $2.7B, decreasing at 13%
• Oracle "beat expectations" despite both revenue and profit falling
• Oracle headcount remains flat at about 85,500 people (roughly the size of Nashua, NH)
  

I would dare say that all this continues to validate my Oracle has become Computer Associates (without anybody noticing) hypothesis.

See this Mercury News story for more.

Au Revoir LucidEra

Apparently, SaaS BI player LucidEra is shutting down as of the end of this month.

Excerpt:

He [marketing VP, friend, and former Business Objects colleague Darren Cunningham] would not go into details regarding LucidEra's financial problems other than to say, "It was a matter of funding or being acquired. And neither of those things happened."

I've always thought BI was a particularly difficult category "to SaaS" for a number of reasons:

• The dependency on external data. Operational apps (e.g., NetSuite, Salesforce) inherently have data associated with them, data that gets loaded initially when you configure the app, and data that gets supplemented every day when you use it. BI is a blank slate that requires data to be useful.

• The variability of user requirements. There are only so many ways to call a lead, pay an invoice, or promote an employee (i.e., implement use-cases in transactional apps). In BI, just about any question you can imagine is fair game and different people think about things in different ways. This is one reason why BI has seemed to defy "applicationization," despite repeated attempts from multiple vendors. While you certainly can package some common reports and dashboards, my guess is you're grabbing only 20% of the requirements, not the 80% you grab when package up transactions.

• The variability of data. While software industry consolidation is slowly reducing the number of different sources from which BI needs to pull data, BI still needs to pull data from a wide variety of sources. This is a complex problem, made more complex by the need to pull from both SaaS and traditional sources, and serves to undermine both applicationization and multi-tenancy. My hunch is you either (1) need to be highly vertically focused and "force" (e.g.,) all retailers into your retail data warehouse or (2) end up doing custom implementations for each of your customers at both a data integration and data warehousing level, and you become a hosting vendor of custom applications instead of a true SaaS vendor.
  

Simply put, I think BI's hard to bottle and you probably need to be very big, very focused (in either a vertical market or application-centricity sense), or both, if you want to succeed.

Interestingly, LucidEra doesn't blame the category for its own demise:

LucidEra's decision to shut down was brought about by a lack of funding, not a lack of interest in its products or in SaaS BI as a whole, Cunningham said.

Another friend and former Business Objects coworker, Timo Elliott (who stayed on with SAP post-acquisition), covers the winding-down in his BI Questions blog in this thoughtful post, The End of a LucidEra.

Excerpt:

My position has always been that on-demand business intelligence is an essential part of the market, but that some of the claimed benefits have been over-hyped.

In particular, I don’t think the debate should be about choosing between on-demand and on-premise: customers should be able to seamlessly and easily move between one and the other according to their needs, using the same technology platform.

Help Rename The Mark Logic CEO Blog

I've often been told that my blog name is both bland and not really representative of the content, so I'm considering renaming and asking for your help in the process. To help stimulate your thinking, here are some ideas.

Please vote via blog comments or emails to me at my regular or CEO address (ceo at marklogic dot com)

Which route should I go?

• Long descriptive such as Valley Musings
  
• Topical a la Structuring the Unstructured
  
• Creative, for example, Software-ista
• Name-derivative (a la Scobleizer) with something like Kellblog
• Techie as in XMLathon or DBdude or InfraGuy
  
• Terse: A CEO
• Mix: pensiveCEO
  
• Status quo: Mark Logic CEO Blog
  

None other than Mike Moritz once called me "Kellblog" so I'm leaning in Scobleizer direction.

What do you think?

Roadkill Alert: Weebiz

I once took a class from a marketing professor who had literally had a garage full of failed products, kind of an island of misfit toys for consumer packaged goods. The guy was hilarious because his urgency to buy a new product was inversely proportional to his estimated chance of its success. You'd get the sense he'd want to cancel class just to rush down to the store quickly to buy a particularly dubious new offering, like Crystal Pepsi or the Arch Deluxe burger (which unfortunately doesn't keep as well in the garage), while it was still on the market.

I think archiving this stuff is an excellent idea because the brain, my brain at least, has a natural tendency to forget the failures and remember the successes. Quick, name ten new recent successful products or services! Quick, name ten failures!

I do a much better job on the successes -- I suspect like everyone -- so it's great when someone can stand in front a class with literally scores of rejects like Ben-Gay Aspirin, Harley Davidson perfume, Bic underwear, the Premier smokeless cigarette, or Corfam fake leather. (See this list for more.)

I must say he was wrong sometimes; he gave Zima low odds and while it eventually succumbed to a long, slow, painful death, it did have a 15-year run. There's always a hazard in estimating the success of a consumer product when you're not in the target market: I never had Zima and if I go to Japan again (the last place where it's still sold), I won't have one there either. So I'm the wrong guy to predict its success, from self-extrapolation at least. It really wasn't aimed at me.

Being naturally cynical, I sometimes have a desire to make my own roadkill list and, unlike consumer products, websites don't take space in the gargage. So this morning, when I read about Weebiz, "a social network for companies," I had to suppress my desire to start my own garage full of websites with Weebiz as the first entrant.

Either I totally don't get it, or you should run down and check it out quickly. In addition to my gut reaction that "companies aren't people and don't have friends" they're getting a few next-positioning comments on their sponsored ReadWriteWeb story, which I also view as a bit of a curse. If you want other bad omens, the Weebiz logo looks a lot like the new Google Wave logo, which probably won't go over too well with Google's lawyers.

I don't get it. If you do, please explain it to me.

Weebiz presentation from Weebiz.com on Vimeo.

A Venn Diagram for Business Success

I found this great post and Venn diagram on the What Consumes Me blog via O'Reilly Radar.

It's very simple, very pragmatic, and coincidentally is quite similar to my career planning for individuals: intersect what you're good at with what you like doing with what provides the level of pay you desire. Here's the same idea, applied to business.

Going "Prublic": Draper's XChange

A reader sent me a link to this LA Times article about Tim Draper's upcoming exchange for institutional investors to trade shares of private companies. This strikes me as a good idea, but perhaps a few years late given that the long-shut IPO window appears to be opening.

That said, both the current IPO bar and the costs associated with being public remain high. Friends of mine continue to say that SOX compliance costs run $2-3M/year minimum, which eats half the profits of a $50M company with 10% pre-SOX operating margins and, perhaps more importantly, easily drives the difference between profit and loss for a company hovering on the edge of profitability.

So will this work? I don't know. Will it even happen? I don't know. Am I glad someone's trying? Yes. I like technological and business-model disruption and I think there's plenty of room for both in financial services.

Is there a need for mezzanine-alternatives that enable companies to raise money and founders to get some liquidity? I think so. Back when the IPO bar was $30M, it took 4-6 years to start a software company and take it public. Today, with the bar around $50M and the practical bar closer to $100M (thanks to SOX costs), it might take 6-10 years. That creates room for a new class of financing and/or a new market for the shares of these mid-stage companies.

For a while I thought private equity might fill that niche, but it really doesn't. They seem to care more about buying whole companies than fractions of them.

I've recently been wondering if foreign stock markets might be the answer. The listing requirements and associated costs are often much lower overseas. And when you look at the valuations that home-turf players sometimes get, there's even an argument for re-headquartering overseas. For example, it seemed that every French person wanted to own a share of Business Objects and that every Norwegian wanted to own a share of Fast, just as it currently seems that every Brit wants to own a share of Autonomy.

But have no fear, much as I'd enjoy it personally, we're not about to become Marc Logic, selling a système de gestion de base de données XML, relocate to Paris, and list on the Euronext.

Draper's site, called XChange, is here. Ultimately, whether companies want to sell shares on it will be determined, I'd guess, by one thing: the valuations they can get relative to alternatives.

Vive le marché!

How I Want My News: TimesReader vs. Bloglines vs. ... vs. Outlook?

I finally got tired of Bloglines this weekend and bit the bullet, figured out how to export my feed list in OPML and import it into other readers. That, plus some playing around with TimesReader, got me thinking about how I want my news, in the end with a pretty unanticipated result.

First, let's talk about Bloglines. Relative to Pluck, the first RSS reader I tried, Bloglines was a dream. It was easy to use. It was performant enough. It was thin-client, meaning first that I didn't have to download and install an application and second that it was accessible anywhere -- I could read feeds on my machine at work or my wife's machine at home and it was the same experience.

Over the years, however, I had some problems with Bloglines:

• Bloglines didn't seem to know what it wanted to be. Bloglines has this lame blogging tool included, which I can't imagine anyone using to publish a real blog. It has a playlists tab which struck me as odd and confusing. The company seemed lost.
  

• Bloglines didn't evolve. This reminds me of MapQuest. Back in 2005, when Google Maps was launched and they blew by MapQuest overnight, I was -- despite being a Google contrarian -- actually happy. Why? Because in the preceding years, I felt like MapQuest was complacent, didn't evolve, and basically deserved what it got.
  

• Bloglines was slow and cumbersome. One example: I like to mark important items "keep new" for future blog fodder, but there is no easy way to un-mark lots of them.

• You have to be online to use Bloglines. I do my best reading on planes so this was a big negative. (I'd often print posts so I could read them later. Ich.)
  

• Bloglines didn't provide a way to share newsworthy items. One of my favorite media/publishing feeds is Jill O'Neil's shared items in Google Reader. As Jill churns through loads of information, every once in a while she flags an item for her feed, and the result is an expert-aggregated stream of very interesting stories.

• The prior point is just one instance of a broader problem: Bloglines is its own, fairly cut-off world. The question then becomes how many worlds do I want to visit every day and in which world do I want to get my news?
  

I'd always struggled with the question of which feeds should I put in MyYahoo vs. Bloglines. In the end, I put the fun stuff on MyYahoo (e.g., Sharks scores, French news, E! gossip) and the serious stuff in Bloglines. That division reflected two facts: (1) I didn't want to be buried in technology and business feeds every time I launched my browser, and (2) that MyYahoo is a bad place for serious feed-reading (e.g., you need to open a new window to see more than the last 3-5 stories, there's no way to mark stories unread or share interesting ones).

Since Twitter's in vogue as a news delivery platform, let's ponder Twitter for moment. While Twitter is fun, I participate in that fun, and I do get the odd news story from a Tweet every now and then, there is no way that I want to use Twitter to get my news. That's not to say, by the way, that Twitter isn't wonderful for truly-breaking news. But my problem is specific: keeping up with about 100 RSS feeds related to technology and business. Twitter's not the solution. In many ways, it's part of the problem: if you have a finite number of "worlds" (or sites) you want to periodically visit, then Twitter is definitely one of them, and this reduces your capacity for the rest.

(And yes, I know I can get Tweetstreams as RSS feeds and thus eliminate the need to visit the Twitter world, but I've only done that once: for the H1N1 feed from CDC. Somehow, I have a desire to keep my Twitter world and my RSS worlds separate.)

Some might suggest that Facebook is the right place to get news, and I'd say yes if "news" means updates about my friends, their whereabouts, and their lives. I've sometimes heard Facebook referred to as the good news newspaper with highly personalized information, and I think that's a pretty good description. But, as a place to read and aggregate 100 RSS feeds? No. In fact, I find it vaguely irritating when people status-update serious news stories (I can get them elsewhere, thanks) and quite irritating when people do business marketing with their status-updates. In terms of my "world theory," the Facebook world has a clear position in my mind ("friends"). It's definitely a world I want to visit and a world I want to keep pure.

This leads to the notion of "work friend" and LinkedIn. While I'd never consider making LinkedIn my primary news source, I do think that they have done a wonderful job with their news section. I'm not sure how they're doing it, but I assume their using their knowledge of who my friends are and what they're reading to suggest stories for me: and the suggestions are always quite good. So, news-wise, I view LinkedIn as a good place to find stories that I might otherwise miss, but it does not solve my problem of keeping up with 100 RSS feeds that I know I want to follow.

So now we come back to the RSS reader category. I tried Google Reader over the weekend, and while I preferred it to Bloglines, it still suffered from the must-be-online problem and the own-world problem. But I liked the UI better than Bloglines and it enabled sharing a feed of interesting items, so I was about to convert when I stopped and thought for a second about that RSS Feeds folder in Outlook 2007.

I imported my OPML file into Outlook and the rest was history. I hate to say it, and the last thing I thought I'd ever say was that I want "more stuff in email" but this seems to be the best solution for me. Why?

• I can read offline
• It's one less "world" to deal with and a world where I already get plenty of news (from mailing lists and Google Alerts)
• I can forward blog posts without having to cut and paste -- yippee!
• I can easily mark things read or unread
  
• Because I can read offline, I eliminate the frustrating problem of scanning alerts offline. (Many alerts happen in the blogs I follow thus I now typically have the relevant posts already in my RSS feeds folder.)
  
• The performance hit, once it's initially setup and cleaned up, isn't bad

In fact, the only thing I dislike is that Outlook treats RSS folders a bit too much like regular folders. For example when filing email, recently accessed RSS feeds appear in the recently used folders list. (In my opinion, you shouldn't be able to file anything in an RSS feed folder, but maybe I'm too much of a purist.)

Finally, as long as I was in a self-reflection on news mode, I decided to check out TimesReader, which is built in Adobe AIR. Impressions:

• Boy, is it pretty.

• I wonder if it's a paved cow path. Are they making the online experience look largely like the newspaper to show they can, or because that's the appropriate way to experience the newspaper online?

• It's "another world" to have to visit, and seemingly a closed one. I was surprised to see no embedded hyperlinks in news stories though not terribly surprised to see no way to bring other feeds in. As previously discussed, I'm trying to minimize my number of worlds.
  

• I'm a big fan of the New York Times, a subscriber, and a frequent reader, but I doubt that I'll use the current TimesReader very often. While I definitely prefer reading the TimesReader version over the regular website version, I'm not sure I really have time for either. Perhaps if and when there's a TimesReader on the Kindle and I upgrade mine to the bigger screen size, then maybe I'll be a frequent user. But for now, firing it up to read the paper in its own world is as luxurious as reading the Sunday Times cover to cover, which I love, but rarely have time to do.
  

When I began my RSS reading journey I'd never have guessed that it would end up in Outlook, but that's where I am now and suspect where I'll stay for a while.

LogMeIn Files (Again) for IPO

Another tech company, LogMeIn, lit up the blogosphere (e.g., this story) today by pricing its IPO at $14 to $16 for 6.67M shares. It's been a long row to hoe for LogMeIn; they filed their original S1 in January, 2008.

The revised S1 was filed 6/16/09. Here are some quick highlights:

• 2008 revenues of $51.7M
• 2008 revenue growth of 91%
• 2008 operating "income" of -$5.4M, down from -$9.2M in 2007
• 1Q09 revenue of $17.2M
• 1Q09 year-over-year revenue growth of 72%
• 1Q09 operating "income" of -$3.7M
  
• 2008 sales and marketing costs of 61% of revenue
• $27M in cash, pre-financing

At first blush, you might wonder how this sales-and-marketing-intensive, money-losing operation can be generating cash and the answer is, alas, a high-growth subscription business. You sell annual subscriptions (94% have a one-year term), take the cash up-front, and amortize the revenue over the year. This explains part of it.

But the rest comes in the renewal rate, which they say is currently 80% (page 61). Let's do some quick, very rough math. If 80% of the 2007 revenue renews, then of the $51.7M in 2008 revenue, $30.1M is new and $21.6M is recurring.

Since the sales and marketing (S&M) cost of renewals should be negligible, you should more properly analyze S&M expense as a percent of new revenues, not total revenues. When you do so, you see that S&M as a percent of new-revenues is 105%. So they're spending $1.05 to get each $1.00 in new revenue. Does that make sense? Sure, if the renewal rate stays high.

At some credibility risk, I'm going to argue that their financials still roughly validate my currently asserted 50/50/0 IPO bar, which means $50M in TTM revenues, 50%+ growth, and 0% EBITDA (or operating income).

LogMeIn has:

• $59M in TTM revenues
• 72% year-over-year quarterly growth rate (decelerating from the 91% annual growth rate)
• -37% operating income in 1Q09 and -10% operating income in 2008

So how does this gibe with the 50/50/0 model?

• They're on-target with respect to size (good)
  
• They're high on growth rate (good), but it's decelerating (bad), but then again it's subscription (very good)
  
• They're low on operating income (bad)

Good + good + bad + very good + bad = very good. QED.

Hence, with one eye closed and some body English, I can argue that this indeed is another validation of my 50/50/0 IPO bar hypothesis.

The First Rule of Data Centers: Don't Talk About Data Centers

Who'd have guessed that data centers were like Fight Club?

Trying to chart the cloud’s geography can be daunting, a task that is further complicated by security concerns. “It’s like ‘Fight Club,’ ” says Rich Miller, whose Web site, Data Center Knowledge, tracks the industry. “The first rule of data centers is: don’t talk about data centers.”

The excerpt is from a great article, entitled Data Center Overload, in this past Sunday's New York Times Magazine. The article provides a layperson's introduction to the cloud and to the hidden, massive data centers -- which collectively now consume more power than Sweden -- that underlie it. Excerpt:

Yet as data centers increasingly become the nerve centers of business and society — even the storehouses of our fleeting cultural memory (that dancing cockatoo on YouTube!) — the demand for bigger and better ones increases: there is a growing need to produce the most computing power per square foot at the lowest possible cost in energy and resources. All of which is bringing a new level of attention, and challenges, to a once rather hidden phenomenon. Call it the architecture of search: the tens of thousands of square feet of machinery, humming away 24/7, 365 days a year — often built on, say, a former bean field — that lie behind your Internet queries.

The full story is here.

Things Not To Do: Declare Your Category Dead

I was reading this interesting post, Emerging Enterprise Content Management Trends, on the Gilbane Group blog this morning when I stumbled into this rather amazing soundbite.

Jeff Fried, VP Product Management for Microsoft's FAST search engine actually proclaimed that "keyword search is dead!"

Now, last I checked, Fast was doing around $50M -- oh sorry, I mean post-correction of accounting irregularities, $35M a quarter in enterprise search revenue and that Microsoft paid $1B for the company in order to do a "best defense is a good offense" strategy vs. Google.

So regardless of what Brother Fried or his PR mavens think, I can assure you that Microsoft doesn't think keyword search is dead. Oh, and did I forget to mention, as they say in Brooklyn, Bada-Bing!

One of my pet peeves is people or companies who think it's cool or controversial to declare themselves dead. Why?

The first time I heard something was "dead" was in 1987 at the original Ingres. The thing in question was the relational database. At one company meeting, our executives patiently explained to us unwashed employees that because of the ANSI SQL standard relational databases were "commoditizing" and ergo that we would be de-investing in the core RDBMS engine and instead investing in application development tools.

I'm not sure there's a font big enough to write this, but OOPS.

In 1987, the RDBMS market in total was maybe $200M. Today it's a approximately $10B oligopoly shared by Oracle, IBM, and Microsoft. Application development tools are somewhere between 1/10th and 1/100th the size and a high fragmented market by comparison.

What went wrong?

• Lack of understanding of product differentiation. Yes, the products were arguably becoming more similar due to the SQL standard (e.g., Ingres still primarily spoke Quel at the time), but more similar != identical != commoditized. The possibilities of high-speed, low-cost, parallel-optimized, query-optimized, platform-optimized, non-stop or a dozen other possible bases of differentiation seemed to elude Ingres management. My take: if people can differentiate white rice (e.g., regular, parboiled, in a bag, basmati, jasmine, texmati) then you can sure as hell differentiate technology.

• Non-observance of industry structure in RDBMS. Product differences is just one piece of "degree of rivalry" in Michael Porter's five forces analysis. Substitute threats were low (i.e., switching costs were high), buyer power was low, barriers to entry were high, and supplier power was low. By seeing only product and not seeing industry structure, Ingres missed that a huge, oligopolistic market was in formation. (Only Oracle seemed to really get that a landgrab was in progress, that switching costs were high, and that the goal should be to get as much market share as possible in the short term -- even at the cost of making a mess -- which you could then sort out later.)

• Missing industry structure in application development tools. The flip-side of the attractive industry structure in RDBMS was a rather appalling industry structure in application development tools. Barriers to entry were low, competitors were numerous, the large number of competitors was putting downward pressure on prices, and the dawn of free runtimes was already under way. Simply put, it's very hard to make money in tools and that's one reason why "tool" really is a four-letter word on Sand Hill Road.
  

• Confusing being "up the stack" with "value". One argument is that RDBMS is just plumbing and that tools are higher in the stack and ergo deliver more value and more potential for profit. This is wrong. Why? Because while tools are indeed higher up the stack, profit potential comes from industry structure, not stack altitude. Microsoft makes plenty of profit and they are at the bottom of the stack. The Oracle DBMS business in one level up and is a key driver of Oracle's 40%ish operating margins. There are many misconceptions about the applications business in this regard, but I won't go there now. See the Profit Zone for more on this general topic.
  

• Too much emphasis on vision. If your vision for the future goes out so far that we're all dead, then perhaps you should dial it back a bit to make it useful. Yes, we're all dead in 100 years and one day RDBMS services may be as commoditized as electricity. But, some 20 years later, RDBMSs are nowhere near a commodity and a lot of people have made a lot of money in the meantime. It's not predicting the eventual end that's the hard part. It's figuring out what happens along the way and how to make money during that evolution.
  

So before you go ahead and declare your business dead, ask yourself some questions:

• Am I doing this for PR soundbite? If so, is it really the kind of message you want to communicate? Is this the best you can do to sound visionary?
  

• If you really believe it, have you critically thought your view or are you being mentally lazy with the "in the long run we're all dead and everything's a commodity" argument.

• If you really believe it, then should you turn in your badge and let someone run the business who doesn't?
  

Things a VC Will Never Say

I picked up this pretty funny and, shall I say, quite cynical deck on the A VC blog by NYC-based venture capitalist Fred Wilson.

Enjoy!

VC Non Admissions

View more Microsoft Word documents from vcobserver.

Critical Thinkers vs. Critics

One of the most important skills underlying a successful business career is, in my estimation, the ability to think critically. While I think it's fairly obvious why critical thinking is important (i.e., better decision making), I'm often surprised by how poorly many many executives do it.

I make a distinction between critical thinkers and critics. I don't subscribe to the management maxim "never raise a problem unless you have a proposed solution" for several reasons:

• Some big, hairy problems don't have obvious solutions and thus may never get discussed
• The maxim encourages the submission of contrived solutions in order to avoid getting blasted for not proposing one
  
• Some people may be in a perfect position to spot problems but have no idea how to fix them (e.g., the valet at a restaurant may overhear numerous complaints about the vichyssoise, but isn't about to tell the chef how to fix it).
  

But the intent of the maxim isn't all wrong. Nobody wants to work with a whiner who complains all day about the organization's problems.

I make a distinction between (1) critic, a person who criticizes everything, generally without proposed solutions, and (2) critical thinker, a person who attacks ideas in the spirit of making them better, and who can hold both sides of an argument in their head at once,

I think I'm a pretty good critical thinker. But on the other hand maybe not. (Hint: joke.)

At one point, I had a boss who loved to stop me in meetings and say: "Dave, you're arguing with yourself." I think he viewed that tendency as a weakness that wasted time in the meeting. I viewed it as a strength. I sometimes think I should have replied: well, I need to argue with someone who can hold their own against me, boss." (Yes, that's another joke.)

Here's a quick, one-question test to help you determine if you're a critical thinker or a critic: do you attack your own ideas as well as those of others?

Critics attack other people's ideas but not their own. Critical thinkers attach everyone's ideas, especially their own. For certain disciplines (e.g., marketing positioning) one of my primary tests is not to examine the substance of a proposal, but instead to examine the critical thinking in the process that led to it:

• How many other taglines did you think of?
• Why didn't you pick tagline number three?
• Did you consider taglines based on the higher-level notion of satisfaction?
  
• What's the argument against the tagline you're proposing?
• What are the direct and indirect competitors taglines and their relative strengths and weaknesses?

As David Ogilvy once said: "good writing is slavery" (see page 33 of Ogilvy on Advertising). So is good positioning. And it comes from critical thinking and plenty of it.

Here's another test to see if you're a critical thinker: can you articulate the other side of your argument so well that folks who support it would hire you to do so? If not, then you've not really understood it. You've not really thought critically. You've looked at the flip-side superficially and dismissed it.

Here's a third test, which may sound a bit obsessive: do you constantly worry that you're not critical thinking? That you're somehow trapped so in the box that you can't see there is a box? If so, I think that's a very good sign.

The other thing that sometimes impedes critical thinking is experience. Many times I've seen executives just hit rewind/play on business ideas. "Well this worked at (Oracle, SAP, Cadence, IBM) so it's going to work here."

But will it? Are we actually in the same situation as Oracle, SAP, Cadence, or IBM was when the idea worked?

It's amazing how many people fall into that trap. The other big experience trap is false knowledge. Example: " I know that great salespeople always have something to prove."

"How do you know that?" I often ask. Answers I receive include:

• "Well, [indignantly] I've been at this 20 years and it's true of every great salesperson I've ever seen." Response: did every great salesperson you've worked with also have a belly button? This reminds me of Jim Collins's observation in Good to Great that all great companies have buildings. So do all bad ones. You should be looking for what differentiates good salespeople/companies from bad ones, not just for commonalities among the good ones.

• "Well, Mr. Bob, the greatest sales VP I've ever seen, said it was true."

As the old saw goes: it ain't what you don't know that will hurt you, it's what you know that ain't so. The fact is most successful people have no idea why they have been successful. They may have risen early. They may have shook 100 hands a day. They may carried a rabbit's foot. And they may have been quite successful. But for each billionaire early riser I can find scores of early-risers / 100-hand-shakers / rabbit's-foot-carriers, who aren't.

What's the solution to avoid these experience traps? Critical thinking.

By the way, how do I know that all of above is true? I don't. I think it is. There is some science behind a few of the views (e.g., Russo's books and similar ones). But in the end it's just my opinion.

Creative Commons Introductory Video

I stumbled into this video today which I think provides an excellent introduction to Creative Commons, the non-profit organization that provides standardized licenses to grant various types of copyright permissions on someone's work.

While I'm not an expert at this -- at all -- a few years ago, it took me less than thirty minutes to go to their site, find an appropriate license, and start publishing this blog under a Creative Commons Attribution Non-Commercial-Share Alike License.

If you're interested in learning more about this topic and the legal foundations for important web 2.0 concepts like re-mixing and mash-ups, then watch the six-minute video, below.

Re-Inventing Business Intelligence

Here's a thought-provoking piece from Curt Monash, writing for Intelligent Enterprise, entitled Re-Inventing Business Intelligence.

The basic argument is that BI is due for a revolution. I agree. In the nearly 5 years since I left Business Objects, the innovations that I see from "the other side" are few and far between. In fact, I'd argue the whole software industry is so tied up managing the aftermath of consolidation that it's basically forgotten about innovation.

Consolidation might be good for market share, profitability, and maybe -- if I'm in a good mood -- integration, but innovation has suffered. This, by the way, helps explain why I'm at an early-stage private company. Not only do I personally prefer innovation, but I think there's a large innovation gap in the top mega-vendor offerings, which leaves plenty of room for technology disruptors like us.

I particularly liked the linkage Curt made to Google Wave. Now, by the way, I think if Google could have shortened the one-hour twenty-minute "overview" video to say, 15 minutes, we'd have seen a bigger uptick in GDP this quarter because almost everyone I know has somehow found 80 minutes to watch the thing. And, while cool, I think it's easily explained in 15 minutes. (Think of the productivity losses! And that's not including all the time wasted telling "if you feel like applauding at any time, just go ahead" jokes.)

By the way, if you feel like applauding at any time while reading this blog, just go ahead.

In any case, I think Curt makes an excellent point: if you want to see something innovative, go look at Google Wave. Then ask yourself when was the last time that any BI vendor proposed something as disruptive/innovative as that?

The answer, in my maximum curmudgeonly opinion, is around 1990, when Business Objects introduced the semantic layer. Everything after that, including the decade it took to get reasonable web re-implementations, has been incremental. Most everything else has been acquisition (e.g., EPM, text mining, ETL) and integration.

Mike Moritz Interview in the Mercury News

Mike Moritz, a leading venture capitalist, and one of the top honchos at (Mark Logic investor) Sequoia Capital, was recently featured in an interview in the San Jose Mercury News.

I've met Mike several times over the years and can say that when he starts talking, smart people start listening, kind of an EF Hutton of modern times (see this thirty-second 1980s advertisement to get the reference).

The article begins:

One of the world's pre-eminent venture capitalists, Michael Moritz of Sequoia Capital, has picked winners like Flextronics, Cisco Systems, Yahoo, PayPal and Google by focusing on small teams or individuals that on first glance might appear to be unfundable. In a rare interview, Moritz spoke with the Mercury News about one of his latest long-shots, a call-center company founded in India, how he picks companies to back, and the silver lining in the financial meltdown. Following is an edited transcript.

Q: How has the financial crisis reshaped the economy and affected the way you pick winners?

Hopefully that tempts you enough to go read the whole article. If not, here's my favorite excerpt on one of my favorite topics, revisionism:

When we help organize one of these companies at the beginning, it never looks like the world's greatest idea. I think it's the marketing and PR department that rewrites history and tells you that it was always the world's greatest idea. What they don't say is that at the very beginning there was great uncertainty and a great lack of clarity. It was murky and confused and messy circumstances. I can't think of any investment that we made in a startup company or with just a few people where things didn't get worse before they got better.