SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for September, 2012

Microsoft Wants to Bribe the US Government to Let Them Hire 6000 Immigrants

Posted by Bob Warfield on September 30, 2012

This just in via Techmeme:  Microsoft wants to bribe the US Government to let them hire 6,000 immigrants.

I think it’s a fine idea to negotiate with the government in this manner.  And if I were running the government, my counter-proposal would be simple:

We’ll take the $10,000 per Visa plus another $15,000 for the Green Card, but you will have to pay for all of that with after-tax repatriated dollars.  In other words, use all those dollars you’ve squirreled away via offshore tax schemes to pay for it.  Of course I’d start out asking them to repatriate 2x the amount needed and negotiate from there.  In fact, I think maybe I’d be pretty firm on that 2X repatriation number.  Microsoft wouldn’t have publicized this offer if it wasn’t a screaming deal for them.

In the grand scheme of Microsoft profits and Government deficits, this deal is still mouse nuts.


Posted in business | 1 Comment »

There’s a Revolution in Desktop Manufacturing Underway

Posted by Bob Warfield on September 27, 2012

My day job involves running a company that makes Manufacturing Software called CNCCookbook.  It’s a bootstrapped company that I built from scratch–software, marketing, content–the whole ball of wax.  It’s been great fun and is starting to pay the bills as well.  I’ll be telling the full story of what I’ve learned over time, but right now I want to talk about the revolution in Desktop Manufacturing.  I’m not sure I’ve heard it called that, there are many other names such as the Maker Movement, but I’m an old Enterprise Software guy and Desktop Manufacturing just sounds right to me.  If not Desktop Manufacturing, then Personal Manufacturing.

This market is going to follow a curve that is the same shape as curves we’ve seen before when we put technologies into people’s hands that were previously only available to large corporations.  We did it with Personal Computers.  We did it with the Printing Press.  Video, Music, Book Publishing now via eBooks: there is a long list.  The difference is that until now it has mostly been about giving people the ability to create and publish information.  Information meaning streams of 1’s and 0’s that when properly interpreted, become eBooks, music, photographs, and so forth.  What’s different this time around is we’re giving people the ability to produce concrete substance, material goods, things that can be touched and held.

That’s a big step up from information in terms of how it may affect the world.  It’s a revolution that’s been a long time in coming because it has been much harder to accomplish.  We’re still not done yet, either.  This is unfolding as we speak, and we won’t see the full ramifications for probably 10 years.  Because we’re dealing with matter and not information, I suspect there will be more friction and therefore the evolutionary impact of it all will simply take longer.  But, along the way, it will make for a marvelous ride.

If you’re interested in this sort of thing, the Altair 8800’s (we’re not even up to the Apple II point yet, let alone IBM PC stage) are visible all around us.  I’ve been watching a 3D Printer called the Form 1 over on Kickstarter go from $366,000 to $764,000 in pledges just overnight.  Breathtaking momentum there for what is a fairly technical and geeky gadget.  A group of folks who met at MIT’s famed Media Lab came together to make this cool thing:

The printer uses a technology involving laser activated plastic resin to make parts like these:

The parts are all plastic with this technology, and they have a maximum size that fits in about a 5″ square cube.  In another parallel to the original PC days, it costs about the same:  $2699 will get you one.

There are other 3D printing technologies available that can be cheaper, print larger objects, use less expensive resins (or other raw material), and have various other trade offs.  But the bottom line is you can get an idea, draw it up in a CAD program, run that through the 3D printing software, push a button, and not nearly as quickly as Piccard can get his, “Tea, Earl Grey, hot”, you’ll be holding an object that is your idea.

There are parallels to nearly every aspect of the PC infrastructure.  For example, the SaaS/Cloud movement will happen via Service Bureaus where you can design a part online, push a button to send the specification to a Service Bureau, and the part will be mailed to you.  Or, perhaps you’ll just roll down to the local Kinko’s where they have a 3D printer.  Maybe they have an expensive industrial-quality printer that does larger objects out of tougher materials more quickly than your home model.

As the Altair 8800 genre gets underway, who will do the IBM PC?  Autodesk is making a few noises along these lines, at least where software is concerned.  Who will play Apple’s role?  Who will be the Microsoft that owns the software?  We already have Open Source playing a vibrant part in the ecosystem, and controversy over one company that is backing away from Open Source.  And there are many more technologies too.  3D printing is great for plastic, but you can shape wood with a CNC Router, and metal with CNC Mills and Lathes.  It’s all cheap enough for the desktop these days.

It’s facinating to see this movement unfolding.  I don’t know how big it will turn out to be, but I know it will be big and I’m really glad to be working in the space with CNCCookbook.  If you’d like to learn more about 3D printers, check out my Hi Res 3D Printer page over on the ‘Cookbook.  If you’d like to survey what’s possible, go through some of the CNCCookbook blog.  Try some of the categories like “Cool” or “Beginner” on the blog.

If you wonder what the power of it all could be, consider that Form 1’s Kickstarter project went up almost $100,000 just in the time I spent writing this article.  Ask yourself what would happen if anyone with an idea and an inexpensive Desktop Manufacturing machine could make any of these things any time they wanted to.

Posted in business, venture | Leave a Comment »

Google Still Doesn’t Get How to Beat Microsoft Office

Posted by Bob Warfield on September 26, 2012

I just saw the announcement that Google is backing away from support older Microsoft Office file formats.  In many ways, this is a non-event.  It only affects people that use both pre-2003 Microsoft Office and Google Apps.  On the other hand, it is symptomatic of why Google doesn’t take a lot more share away from Microsoft Office–they don’t understand compatibility and the user behavior patterns associated with switching core products that have persistent data formats.

Compatibility is an all-or-nothing prospect.  If you’re trying to take a powerful incumbent out, you have to make the transition frictionless.  Not being able to load a file is about as much friction as you can ever hope to see.  Having it load imperfectly so you have to manually deal with the differences is almost as bad.

I’ve written about this problem before.  It isn’t that hard to build a product that’s 100% compatible with Microsoft Office.  It’s been done before by companies a lot less successful than Google and Microsoft moves so slowly it’s not like it is a moving target they’re shooting at.  The mystery to me is why Google doesn’t just buckle down and get it done.

Probably a typical Big Company Fail:  Google Apps doesn’t have the priority to ramp up but they don’t want to cancel it or they’re just too arrogant to see their problem and think this will force a big wave of adoption of Google Apps.  More likely it’ll just force more people to buy later versions of Office, or sign up for the relatively inexpensive new Microsoft subscription service.

Posted in business, strategy | 3 Comments »

Dinosaur Bones Just Flew Over My House

Posted by Bob Warfield on September 21, 2012

A space shuttle on the back of the special 747 just flew over my house on its way to its final resting place in LA.  It was a proud but bittersweet sight because it was a taste of what had been in an era that’s come to a close for our manned space exploration program.  We got a call from a friend that it was coming, walked out onto our deck, and there it was within a couple of minutes. The trio of aircraft (there was a fighter escort) were moving along at a stately pace and at a fairly low altitude to give anyone who cared a chance to see the craft fly, one last time, albeit with a lot of help.

For more, see the original article over on my other blog, CNCCookbook.

Posted in cloud | Leave a Comment »

What is the Entrepreneur’s Social Contract with their VC’s

Posted by Bob Warfield on September 20, 2012

Another great post from Jason Lemkin has me responding again.

Jason seems to be going over all the dark thoughts entrepreneurs and founders have about VC’s and blogging about it instead of what most entrepreneurs do which is to keep quiet so as not to offend potential future investors.  Good for him, it’s about time the rest of the world got some perspectives on some of these goings on.  In this one, Jason is haunted by a remark a partner at one of his VC’s made over dinner:

I remember at a closing dinner after one of my start-ups was sold, a partner of the VC who invested in me (not the one who served on my board, but his partner) made a sort of haunting comment.  His firm had made 6x on the investment, and his comment after some wine was “We [the partners] debated whether to let you sell or not.  In the end [because you’re a good kid], we decided to let you.”

Hmmm.  Ok, this guy makes 6x and didn’t even lift a finger (he wasn’t on the board) — and he gets to decide if the company should sell or not?

I know the feeling well, having been told by one VC I’d never work in the Valley again after delivering his firm a 13x return on one sale.  They were completely uninterested.  In fact, the Board told us (the two co-founders) to quit talking to the company that wanted to acquire us.  When we pointed out that our share of the offer price was real life changing money, one VC bluntly informed us that if we tried to sell we would never work in the Valley again.  At that point, my partner and I resolved that we didn’t want to be in business with this guy no matter what.  Life’s too short and he clearly thought of us as sharecroppers on his land rather than as entrepreneurs and founders who he had a social contract to help succeed.

Why would he behave this way?  Why would a 6x return in Jason’s case let alone a 13x return for my company be treated in what amounts to a lot of disrespect for what should be the relationship between investors and entrepreneurs?  Why, in the end of the day, would VC’s want their founders to suddenly feel like nothing more than employees?

Before I delve into that, I will say that I worked at quite a few places afterward and the VC who made the threat is still a busy and active VC who is quoted on his bio page as saying his firm is devoted to the entrepreneur.  In other words, it basically blew over, though I doubt we’d care to ever do business again.  It required the considerable and helpful efforts of our other VC (who I would do business with again in a heartbeat) together with a great deal of integrity from the acquirer to get the deal closed so we could all get on with our lives.  I will also say that the VC who spoke to Jason was foolish for having made the remark after the deal was a fait accompli just as much as the VC who threatened me was foolish for having pushed the deal to be a fait accompli without even trying to sell us on a different route.  While it asserted their egos over our’s, there was really only downside in it to have revealed they ever even considered blocking the deal.

Founders shouldn’t think that their VC’s won’t think this way and behave this way.  Clearly Jason’s guy was tempted to do something similar to what mine did.  It’s a lot more common than it ought to be.

F. Scott Fitzgerald is supposed to have said to Earnest Hemingway, “The rich are different from you and me.”  The same could be said of the VC’s.  Their principal differences in cases like these are twofold.

First, they have a radically different utility curve and perspective on risk versus rewards.  Rewards seem smaller to them because for the most part, they are already wealthy.  A few million here or there matters not.  Even ten million may not.  Their investors expect huge returns.  Risks seem smaller too because they have protected themselves from risk via portfolio effect and diversification.  From a Founder’s perspective, the VC’s mission is to make the Founders endure almost any amount of risk in order to generate those few incredibly huge deals that will make each fund’s returns.  Those equations require them not to settle for a 3x, 6x, or 13x return if they think there is any chance at all for a much larger return.  They’ll want to keep going and they’ll take the offers that come early as ample evidence the deal has legs.

Second, they have a very limited number of ways in which they can add value.  Ironically, Jason remarks in another post that they’re not much good even at lining you up with other investors, something I tend to agree with.  They’ll try to add value, they’ll give you advice and try to steer you, and it can be helpful.  This is one reason why I much prefer VC’s who’ve held operating positions on my boards.  But at the same time, make no mistake about where they need to steer you.  It may not be the same destination as you want.  They’re steering to add value to their investment, not to  your business.  In fact, at a more callous level, they’re steering to add value to their own careers.  Most of the time, those interests coincide, and that’s a very good thing.  But when you’re getting ready to make a decision about selling, that’s one of many points where the interests can diverge.  That’s where you’ll start to hear advice that may or may not be in your interest, in the interest of the business, in the interest of the team, or in the interest of the customers.  It’s messy stuff to be sure, and something to be absolutely sober about, something to operate only with the highest integrity around, and something to seek good advice and counsel on.

Jason ends his post basically saying that in terms of returns, Founders owe their VC’s 3X, because that’s what good funds target for their investors and because Founders shouldn’t be responsible for the returns of other deals in the VC portfolio.  There is a lot of logic in that advice.  Just be aware the VC’s will probably violently disagree and they will likely have ensured there is appropriate legalese wherever needed to enforce their point of view.  Another way to look at Jason’s calculus of valuations would be to conclude that Founders should be on the lookout for divergent interests with their VC’s whenever there is the prospect of at least 3X return.

Incidentally, this topic may be related to another recent post of Jason’s, which dwells on why VC’s prefer to invest in the young.  One answer is the young are far more altruistic, far more willing to bet on their luck, and far more likely to swing for the fences in the way the VC’s require.  VC’s aren’t dumb or evil.  They’re pretty good at what they do.  But, as is always true in business, it behooves the players to understand each other’s motivations.

Posted in business, strategy, venture | Tagged: | 2 Comments »

Welcome to the Age of Mobile Devices, Mr Romney

Posted by Bob Warfield on September 18, 2012

Mitt Romney was dealt a tough blow today by a video that looks like it was taken with a smartphone:

The video was published by Mother Jones magazine.  In it, Romney says, “There are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it.”  He goes on to say that his job “is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.”

That’s not going to sit well with a large number of Americans, at least the 47%.

It marks the first time I remember a candidate running afoul of ubiquitous smartphones, but you can bet it won’t be the last time.  There are no closed door guarded moments with a friendly audience in the Age of Mobile Devices.  Everyone is potentially always on and always public.

Posted in gadgets | Leave a Comment »

You Can’t Do Cr*p with a $750K Seed Round in Enterprise SaaS, So Don’t Even Try.

Posted by Bob Warfield on September 13, 2012

Hat tip to Jason Lemkin for sharing an article with a similar sub-title with me this morning.

This has been going on a long time. I wrote about it 2 years ago and it wasn’t a new development back then:

VC’s are addicted to finding more Googles and Facebooks. They’re addicted to placing their bets at the last possible minute, after a product was built, after happy customers were had, and after as much momentum has been built as they can possibly get to without a big capital infusion.  Ten million users is the new one million users.  If VC’s have to bribe their way in at an incredibly late stage (can you say, “Github”), they don’t care. It’s better than actually having to do what the original VC’s did which was to try to understand the markets, technologies, and teams.

I don’t think it’s at all healthy for Silicon Valley that we’ve gone down this path. Apparently the VC’s don’t either, or they wouldn’t be grumbling constantly. Investors can’t be happy given VC returns.  Some entrepreneurs may be happy, but I have always hated the idea of technology companies that have to stand on the merits of whether they’re fashionable rather than on whether they’ve built something useful.

This won’t change any time soon because aside from the addictions I mention, the awful truth is, most VC’s don’t really understand that you can’t do cr*p with a $750K Seed Round. They bought the magic bullet theory, and they’ve done enough deals since that depended on that theory that it has become gospel. Repeat after me, “Yes, you can build anything with Ruby on Rails and 3 guys eating Ramen noodles in 6 months.”  VC’s are not dummies–you probably can build any consumer Internet product that way if you’re content with hundreds of Pinterests, Twitters, and whatever else. But you can’t build much in the way of Enterprise software or SaaS software. What changed is not so much the productivity of the technology as where the VC’s had set their sights.  If we only invest in deals that can be built by three guys using Ruby on Rails in 6 months, pretty soon we will have a monoculture consisting only of such deals.

Enterprise Software can be built without VC, but what results is often not VC-able for a variety of reasons, and it may not be something universally regarded as Enterprisey.  You’re not going to create a Workday, Salesforce, or Oracle this way.  What you can create is a niche product, and probably one that’s aimed at small businesses and workgroups, a customer segment the VC’s have historically hated.  If you’re smart, work hard, and really lucky, you might build something like 37Signals has.  Is that Enterprise?  I dunno.  It is certainly business software though.

Just as the VC’s work backward from IPO and liquidity to define what the starting point needs to look like (“Son, that will never be a billion dollar revenue idea, we’re not interested.”), we can work forward from the needs of Ramen-fed bootstrappers to see some of the characteristics of a bootstrapped Enterprise offering:

1.  No sales force.  They cost too much and you can’t afford the long sales cycles.  6 months is too long when you’re eating Ramen noodles.  Find something with a 6 week cycle.

2.  No expensive advertising-based marketing.  Do some content-driven marketing augmented with a little social media.  You’ll probably use a free trial or maybe even a freemium to get folks to try your stuff.

3.  Stick to a niche.  Find an itch that nobody else is scratching.  Take great delight in the idea that your niche will never harbor a billion dollar VC-funded behemoth.  Hopefully that makes the niche a meritocracy where all you have to do is be smarter and work harder.  It better be, because that’s all you’ve got.

4.  Charge for your product.  No ad-driven pipe dreams.  Somewhere I read an article that the average ad-driven business need 100x as many customers as a business that charges for the same product.  You don’t have the time, capital, or energy to find 100x as many customers.

5.  Shoot for small businesses and workgroups.  Steer clear of anything that needs IT or CIO approval.  In fact, steer clear of anything that needs more than one person and their credit card to make it happen.  You’ve got no salespeople and no time for anything else.  You’re not going to build that giant raft of features on the checklist the CIO has been adding to her entire career.  Move on, find the deal the Droids are looking for.

6.  Target passion.  You will need word of mouth.  If people aren’t passionate about whatever it is you intend to build, they won’t spread the word.  People are not passionate about paper clips or toilet paper.  They are extremely passionate about digital cameras and photography.  If you can’t find an online community anywhere that is a perfect match for your audience, maybe it’s because people aren’t passionate enough to talk about it.  If you can find some decent online communities, plug in and see if you can connect before you ever try to build a product.

7.  Do Something Different.  You’re not there to do something just a little better or a little cheaper.  Tear up the original game plan.  Focus on the problem it solved not on how it solved it.  Reinvent and re-imagine a product for your market the way 37Signals did for project management.  This is another way to get noticed and talked about.  It’s another way to stay off the radar of the Big Boys.  They’ll dismiss you as having missed the point.  But some part of the market, some interesting niche, may decide that the mainstream missed the point and you’ve got the better mousetrap.

8.  Do Something Fun.  Why not?  You’ll be working hard at it for a long time.  If it’s fun, it’s energizing–you’ll crave doing it.  If it’s fun, others are probably passionate about it.  If it’s fun, maybe you can get some help despite the Ramen diet.

Long time no blog.  Sorry, I’ve been bootstrapping a company of my own lately.  It’s working out extremely well, and I wonder why I didn’t do it a lot sooner.  I based it on those 8 principles above, as well as a few other things.  I’ve learned a lot about Bootstrapping along the way, and I’ll try to be a little better about posting to Smoothspan so I can share some of it.

PS  The photo shows hobo nickels, an obscure artform that involves carving or engraving a new image on one side of a nickel.  I like to imagine the Ramen-eating bootstrappers as hobos hopping digital freight trains to try to get to wherever they’re dreaming of being.

Posted in business, venture | 11 Comments »

%d bloggers like this: