Thursday, December 28, 2006

Best Venture and Technology Podcasts for 2007

Being a San Francisco-Menlo Park commuter, I spend an average of 90mn per day on the road... I make the most of this time by listening to my favorite tech and venture podcasts.

Here is the short list for your 2007 travel time:

Wall Street Journal Tech News Briefing: My daily starter - a five minutes overview of the latest technology news and trends plus a rundown on technology stocks on the move

MarketWatch Morning Stock Talk : A 5mn snapshot of how the stock market is doing

CNET Daily Tech News: The daily news from CNET. More consumer oriented than WSJ - a nice complement.

Foo Casts: Podcasts from O'Reilly & Friends: A 30mn peak into the Web 2.0 world. Recent interviews include Jack Ma, Eric Schmidt and Jeff Bezos. New post every 3-7 days.

I innovate: a 20mn podcast on innovation and entrepreneurship. The bi-weekly podcasts feature interviews of entrepreneurs and silicon Valley leaders. Recent guests: Heidi Roizen (Mobius), Philip Rosedale (Linden Labs) and the founders of Meebo.

VentureCast : Bi-weekly anecdotes on the Silicon Valley venture world. Podcast: 40mn podcasts on Enterprise software. Unfortunately, Sandhill publishes new posts only around their conferences, but they have an interesting history of 4-5 podcasts. This is the only podcast I found on Enterprise software.


Saturday, December 16, 2006

Why I disagree with Tony Zingale on the future of SaaS

A couple weeks ago, I attended the 13th Silicon Valley Annual VC/Entrepreneur luncheon organized by NVCA. The guest speaker was a well known and highly successful Silicon Valley veteran: Tony Zingale, President and CEO of Mercury Interactive. Great choice for the last event of the year. The theme was "the future of software".

Tony Zingale started his speech with an overview of his career and - leaving aside the comments on how to handle option backdating - his key advice could be summarized as: do sooner, assemble a great team, select board members wisely. He is a great speaker and I enjoyed the speech, but after 40mn, I was still waiting to hear about the future of software. At last, he addressed the subject and presented his perspective:
1) Growing need for application management and mapping software
2) Future is in Service Oriented Architecture (SOA) - more and more applications will be built from building blocks
3) Security will continue to remain a key element of the stack
4) Software as a Service (SaaS) business model will not pay off in the long run as the cost of sales and services will increase (main argument was that SaaS companies have to "resell" their service every year - even sometimes every month)

I was in line with his first three points, but the last one on SaaS really surprised me. It is true that the SaaS model faces some challenges like service reliability, data privacy, lower level of customization, integration with existing applications, vendor viability concerns... however, public SaaS companies like Concur, Saba, Taleo, LivePerson and Ultimate are growing 50-100% per year and trading at an average 5x trailing revenue multiples (I excluded salesforce leading the pack with 9x!) whereas traditional software companies of this size have a growth rate of less than 10% and revenue multiples of 2-2.5x.

Why? There are several reasons driving the success of SaaS:

From the customer standpoint:
- SaaS provides superior economics to the customer: lower TCO (20-30% less than the traditional software model), no/small upfront payment (pay as you go) and low ratio of upfront integration services
- SaaS takes out a lot of IT pain: it is easy to try and buy (and lots of services have free trials, so you can see what you will get before buying it), it is a predicable cost model for companies, it can scale up or down easily, customers do not feel "locked-in" by their vendor and it requires less infrastructure
- SaaS accelerate the pace of innovation: as traditional software company provides new versions every 3-4 years, SaaS companies have new releases every six months, and the upgrade is transparent for customers. In addition, SaaS companies can monitor the usage patterns of their customers and therefore better align innovation with customer needs

From the SaaS company standpoint:
- The service model provides more predictable revenues and cash flows
- Capital requirements are much lower than for traditional software development: a start-up can launch a product and acquire several customers with less than $1m
- The time to market - and therefore break even - is also shorter: 6-12 months for SaaS vs. 18-24 months for a traditional software company
- All the customers are on the same version of the application: this makes the maintenance and support a lot easier

To get back to Tony Zingale's concerns about the cost of sales, I am not sure it is relevant - the payment method is independent from the delivery model. Companies like Microsoft have developed subscription-based licensing contracts without a SaaS delivery model and SaaS companies are selling multi-year contracts for their services.

So, to conclude this post, I think that all the benefits provided by the SaaS model will overcome the challenges, in particular for small and medium businesses (SMBs), which are the most price sensitive customers. SaaS will give them access to technologies that were accessible only to larger companies in the past, giving them a new edge to compete. With time, SaaS will also penetrate larger enterprises (main challenges being integration with legacy systems, reliability and privacy), starting with applications that are not touching their core competencies. Salesforce has started to move up this path with large customers like Symantec.

Betting on the right guy

Venture Capital is about investing in the small, fast and agile company hoping that it will beat the large and slow incumbent. In this game, sometimes you win and sometimes you loose...

Saturday, December 09, 2006

McKinsey highlight #1: the art of cost cutting or how to save 70m with a measuring spoon

Paris, November 1998. First week on the job.
The phone rings - it was the staffing manager: "Philippe, come in my office, your life is gonna change!". I come to her office to learn that I would be on the next plane for Rome, where a team was waiting for me to start a TOP project in an electronic components factory. I was super excited!

TOP or Total Operational Performance, is a cost cutting approach, where your objective is to cut 40% of all the "not-strictly-necessary costs" by doing things differently. The methodology is simple: run brainstorming sessions and generate ideas to save costs. Any investment has to breakeven in less than 18 months.

I was in charge of the SG&A budget. As you probably guessed, 100% of SG&A costs are "not-strictly -necessary", so we had a good share of the objectives. After looking at all the major ideas to redesign the QA process, outsourced payroll, cut the office supplies ect... we started to tackle the plant food service where the 2,000 employees had their daily lunch. The options were simple: either we could find creative ways to reduce the spend, or we would have to outsource the whole operations and reduce the quality of the meals (it was one of the best restaurant I ever found in a company - the social pressure was high). The overall budget was around $2.5m, so we had to find a way to save $1m. After a week of brainstorming, we were still short of 4% of the savings or $40k. This close to the objective, we had to find something...

As I was queuing up for lunch, I realized that the employee in charge of adding the parmesan on each pasta plate was using a normal spoon and was VERY generous - a bit TOO generous for the acute eye of a cost cutting project leader. Back to the team room, I looked at the yearly cost of parmesan and discovered that the spend was above $75k per year, or equivalent to 15g or parmesan per person per lunch! Simply by replacing the traditional spoon with a 7g measuring spoon we could save more than 50% of the parmesan or close to $40k. Done deal: after a quick syndication with the kitchen team (their job was at stake, so they were easy to convince...), we bought a $4 measuring spoon with an expected return of 1,000 times in the coming year. This spoon saved the in-house restaurant and Lira 70m (I never said it was USD!)

Happy ending? Yes, for a couple of years, after which the new plant manager decided to outsourced the whole thing. I guessed the measuring spoon was not used diligently...

Thursday, December 07, 2006

Zune vs. Ipod

Is the Zune going to dent Apple's disproportionate share of the online music market?

Saturday, December 02, 2006

Cracking the SMB code

Small and Medium businesses have been the holy grail of High tech and software companies for quite some time now, but the quest is far from ending.

"If you would ask me what part of the market is most underserved by technology companies today, I'd tell you it's small and medium sized business. . . and so I think it's a very, very big bet“ - Steve Ballmer, CEO, Microsoft

Indeed, the opportunity is large: with 11m+ SMBs in the US only spending more than $300B in IT...but so far nobody managed to "crack the code" and current sales model are facing diminishing returns:
(1) HT companies have little insights in their SMB customers (e.g., potential, share of wallet) and therefore have difficulty to segment them and serve them effectively
(2) The existing direct (tele)sales model coverage is failing to provide adequate returns as companies face increased pressure to lower cost of sales. There are several reasons supporting this trend:
- Sales rep. do not have the time (up to 100 companies per rep.) and the skills to sell high value solutions. The time they spend with customers is usually limited to transactional core products sales, generating lower margins
– The resource allocation is not always matching the opportunity (geography, customer segment, vertical...)
– The rules of engagement for technical resources (solution or product specialists) are not clear. These resources tend to be involved on ad hoc projects rather than on the highest opportunities
–Sales reps tend to operate independently from the channel, leading to inefficient leverage of resources
(3) On the channel side, the traditional transactional sales model does not provide enough margins to partners

This last point is the premise of a radical change. Today, VARs are the key to the SMB segment and their business model is collapsing, opening new opportunities for them and for technology providers.

To survive, VARs need to change their business model and move from product sales to services. This can be done in two ways: selling solutions or providing managed services.

This is a fundamental change for the VARs, requiring them to evolve their skills and organization. In particular, partners will need to:
- develop integration capabilities to be able to deliver solutions with good economics
- adapt their sales process to be able to articulate a clear business value to line of business managers (instead of IT managers)
- Adapt the marketing materials (webminars, events...) to focus on specific business issues, not technical issues)

In addition, success will require the VARs to develop privileged relationships with a limited number of high tech vendors (to gain visibility and support) and to create dedicated practices to build specific areas of expertise

The transformation has started - and any vendor providing technology helping VARs to develop their services offering (i.e., software packages for SMBs requiring 15-20 of integration services, platform to provide managed services) will reap a significant portion of the profit pool.