Software 2.0: How the use of internet is transforming the software industry

In the past seven years, Internet has changed the business landscape and software has not been an exception to the rule. The web has brought simplicity and transparency in a world of complexity and opacity, empowering a new generation of public software companies like Salesforce.com, NetSuite, Webex and WebSideStory who learned how to take advantage of it.
So what changed so dramatically? Several things - and I like the way Tin Tzuo, the Chief Strategy Officer of Salesforce.com illustrated them during his speech at the Stanford Technology Venture Program. These changes fall into 6 main buckets:

1) Product Awareness: From Gartner to the blogosphere
In 1994-95 - the great age of traditional Enterprise software, the only way to learn about a software application was to read the ad-hoc Gartner report or various esoteric software reviews. Today, all the information is free and available on the internet. Through sites like Gizmodo, the NY Times Online or thousands of technology and software blogs, IT managers can gather all the technical information they need, as well as in-depth customer and user feedback. To win in this new space, software companies need new marketing skills. On top - or sometime instead of developing relationships with Gartner, IDC and other market research firms, Software 2.0 companies need to be extremely good at online marketing. Both on the spend side (keywords, banners...) and on the organic side (SEO optimization, buzz among influential bloggers and journalists...). Companies need to be prominent on the web (see my previous post on online marketing for more details)

2) Product evaluation and testing: From seminar and demo to free online trial
The second element that radically changed in Enterprise software is how people evaluate and test products. In the 1990's, the only way to get an overview of a product was to attend a seminar or call a sales rep. for a demo. Today, people find software applications on the internet and they can test the product with a free trial. This radically change the purchasing process. Before, a product demo was a great opportunity for a sales team to start partnering with a potential client - they would spend several days to customize the product and populate it with real customer information and it was a great opportunity to spend time and develop a relationship with the key decision makers. With a free trial - populated with dummy data - potential customers can see and test the product very easily and it makes them comfortable - or not. To "get the foot in the door", Software 2.0 companies need to do their best to easily show the value they are providing and let user "touch and feel" the product easily by leveraging the web.


3) Product design: From complexity to usability
In the old days - may be not that old - enterprise software products were designed to be complex. Complexity was a necessity, as it allowed vendors to control their customers. SAP understood that very quickly. Now, the new generation of applications is going against this principle, designing their product with several layers of functionality. The first layer is easy to use and provides basic functionality. The second layer is more complex and the deeper the user goes, the more complex it becomes, but the key here is to have this hierarchical filtering that enables basic users to go around the product and understand its value.


4) Sales model: From seasoned sales people to a tiered sales engine
To buy, people needs to be comfortable with the product. To be comfortable with the product, people need to talk to someone. Basic sales principle. But this can be done in different ways. In the pre-internet era, software sales meant highly seasoned sales executives with a big Rolodex. The post-internet sales force evolved into a more agile tiered engine, starting with leads generated on the website, followed by a telesales team that would further qualify the lead and assigned it to the proper sales team (telesales for SMB or direct sales for Enterprise). And this human touch is necessary even if you have a free demo on available on the web. People want this human interaction before buying to get answers to the final questions they have and feel good about it. Having widgets on the website that enables customers to call directly a sales person proved to work very well.

5) Segmentation: From solutions to packaged services
Before, enterprise software companies developed very segmented offerings articulated around the magic word "solution": you had the Enterprise solution, the Corporate solution, the SMB solution... These solutions were a mix of hardware, software and services and required usually the involvement of several companies (or divisions). ISVs, SIs and Hardware vendors were combining their strengths to offer a complete package that would solve a business issue. Today, SaaS companies have changed the model: they owned all the hardware and infrastructure, run a single instance of the application for all their users and provide the limited integration services required to make the whole thing work. And to maximize economies of scale, they need to run a single instance of the application to cover all the customer segments. To differentiate their service offering and maximize the value captured, Saas vendors package their services by segment with different price point. Each package will have specific features of the application enabled and with a maximum load (# of seats). The key benefit of this approach, is that instead of being "stuck" with a specific application, vendors can easily change their packaging and adapt it to the customer demand to maximize their profits and the customer satisfaction

6) Usage: From services to monitoring
In the 1990's, once the deal was closed, the sales team would drop a CD on the customer desk and it was up to the customer to figure out how to implement it. Alternatively, they would sell services to drive the implementation "now that you are stuck with the product, you'd better find a way to use it!". Today's world is different. With a service model, customer can stop their subscription any time. So, to limit the churn, Software 2.0 companies need to monitor and ensure that their application is widely used in the customer organization. Successful companies have developed specific teams focused on developing and monitoring key usage metrics. And the good news, is that is it easy to implement, as the application is hosted by the vendor, not the customer.


This post covered the new ways "software 2.0" companies design their products and interact with their customers. The next question is "what do these companies need to change in their internal management processes to be successful"? In a subscription model, are the "bookings" number still relevant? How should the sales force be incentivized? What metrics drive the value of this new generation of software service providers? The answer will come in a follow-up post...

Global warming: a plague for humanity?

After all, global warming might not be a bad thing for everyone. As the globe heats up, some people can now:
- play tennis 100 feet above the sea
- pay $15k for a hotel night
- enjoy drinks in bars surrounded by sea and coral fishes
- live in a rotating skyscraper (powered with solar panel of course!)
- See dinosaurs in real size
... and much more!

Popular Media: the key to viral marketing

Geoffrey Arone, the founder of FLock, who is now an Entrepreneur-In-Residence in our Menlo Park office, mentioned this company to me and I thought it was worth writting a post about it.

Popular Media is a hosted, web-based technology platform that enables customers to quickly create, optimize, and scale viral marketing programs - and it seems to work pretty well.

UNICEF USA used their solution and the results have been fantastic. The following chart compare the impact of the tsunami in 2005 on the website traffic vs. the viral marketing campaign that they launched in 2007 with Popular Media.

Through the course of testing and optimization, the number of daily REGISTRATIONS swelled to beyond 30,000 people a day — people registered at a rate of more than 1,000 people per hour. To learn more about the story, you can go to their website: http://popularmedia.com/blog/index.php

Their cost is reasonable (entry point is ~$5,000/month).

Getting the most of your online marketing: the In & Out of SEM/SEO

SEM: Search Engine Marketing (aka: paid search) is set of marketing methods to increase the visibility of a website in search engine results pages

SEO: Search Engine Optimization (aka: organic or "free" search) attempts to improve rankings for relevant keywords in search results by improving a web site's structure and content

SEM and SEO are the hottest topics of online marketing at the moment if we believe the 50+ executives of our portfolio companies who gathered recently at Spago in Palot Alto for the Bessemer Online Marketing Workshop. Attendees included Blue Nile, Postini, LinkedIn, Lifelock, Wize, Sparter , Zopa, Revver, Wikia, Flock, Vimo, Delivery Agent, Gerson Lehrman Group, Pure Networks, Zensys, Summit, T3Ci, Endeca and Nominum - a wide spectrum of companies, both in terms of stage (very early to pre-IPO) and sectors (consumer internet, software, chipsets...). Bessemer was also heavily represented with David Cowan , managing partner and co-founder of VeriSign (see his post about the event), Rob Stavis, BVP’s New York-based managing partner who led our investment in Skype, Byron Deeter, partner and founder of Trigo and our COO/managing partner Ed Colloton.

It took us some time to put together the agenda, but here is how the 1/2-day event eventually looked like:

- In-depth analysis of SEM best practices - Abe Mezrich, Director of Communications from Did-It
- SEO best practices and case studies - Andreas Mueller, President and Founder of Bloofusion

- Online marketing metrics - Chini Krishnan, BVP operating partner and founder and CEO of Vimo

- What it means for customers - Phil Braden, GM Customer Interactions, Endeca
- The future of online marketing - GeoffreyArone, founder of Flock and EIR at Bessemer
- Roundtable - moderated by Rob Stavis

- Cocktail and networking

The workshop was a great learning experience for all the participants (who rated the event at 3.6 on a scale of 1-4). Here are a few interesting insights

On the SEM side:
- Know when your customers buy: the conversion rate varies tremendously within the day, between days and by geography (even within the US)

- Understand how the customer sees a Google page (top right and top left are the first areas screened by the eyes)

- Inserting the key words in your word ad can be very effective if done properly (Watch out though, as automated insertion can lead to very interesting results: e.g., I loved the "Great deals on Plutonium - shop on Ebay and save!")

... and on the SEO side:

- Go for market share: Google is ~50%, Yahoo ~30%, MSN ~10% (for the US - there are some notable exception as France where MSN is the leader)
- Eventhough the "relevance" criteria of search engines are kept secret, respecting a few rules can make a great difference:

1) Determine the best set of key words that consumers will type to look for your product or service. This requires time and market research, but is really key

2) Optimize one page for each target search term

3) Link your site with relevant/ thematic link websites (use Google page rank as a benchmark)

4) Work on your site architecture: avoid frames, dynamic URLs, text within images, flash navigation, AJAX and JavaScript navigation for example

If you are interested to learn more about SEM and SEO, Abe and Andreas presentations can be downloaded at the following links: Abe Mezrich – Did-it and Andreas Mueller - Bloofusion.
The videos can be watched at Bessemer Online Marketing Portal (the other materials are not public).

Get your own helicopter for $50!

...and you can also make it fly on AirWolf tune. Our office is full of them! The name of the bird is PiccoZ .
- hurry up, the retailers are out of stock!

iPhone, Apple TV and more from Mac World

iPhone wonder
I was one of the lucky few to have a first sight at Apple's next wonder: the iPhone. The long awaited product was at last presented to the public and it was worth waiting. It is the most innovative product I have seen for a long time. Apple came up with the first multi-contact touch screen and an amazing user interface that will completely change the way people interact with an electronic device. It is the 2.0 version of the iPOD click-wheel.
But let's start with the beginning: what can you do with an iPhone? Well, it is basically the mix of a video iPOD, a smart phone, a camera and an internet browser. So, you can listen to music, watch videos, take pictures, look at pictures and slide shows, make calls, browse e-mails and calendar, send pictures, access Google map and weather information, and browse the web. The connectivity is both wireless (Cingular EDGE network) and wifi. The iPhone will be available in two versions, a 6GB at $500 and an 8GB at $600. Pricey, but as Steve Jobs explained, it is the addition of an iPod nano ($200) and a blackberry ($300)...
Aside from the sleek design, the iPhone has an amazing user interface. The multi-touch screen enables the user to perform several operations at the same time and everything is very intuitive. A few examples:

• the SMS interface looks like chat bubbles
• you can scroll down your voice mails (like you re-mails) and select the one you want to hear
• you can zoom in an out of pictures by scrolling your fingers
• you can select the exact part of a picture that you would like to keep as screen saver by zooming in and out with one finger and moving the picture with the other
• to look at an horizontal picture in the full screen, you just have to rotate the iPhone and the picture will rotate as well

So it is a fantastic product, for sure, but there are still a few unanswered questions:
1) Will the iPhone support a VOIP client like Skype. That would make a lot of sense with the wifi connectivity, but Apple executives at Mac World remained silent on the topic
2) What is the battery life? With the current video iPOD, I can watch 3-4 hours of video, so if you are on a transatlantic flight and you enjoyed a couple of movies in the plane, it will be challenging to check your e-mails or make a call when you land...
3) The iPhone is a high-end Nokia killer, but is it a Blackberry killer? Apparently not if you trust the stock market. As Apple skyrocketed and Nokia plunged, RIM remained steady. And it is true that the current version of the iPhone is a fantastic consumer product, but the key business feature (push e-mail and calendar) are not there yet: the iPhone will support yahoo push e-mails, but not Outlook (only cache and carry). So, for now and I believe for a few more years, RIM will remain the leader. Here are a few reasons:
- I don't see businesses buying massively $500-$600 entertainment device for their employees ($300 for a Blackberry is already expensive)
- As mobile devices become pervasive, IT departments will try to minimize the number of devices to support and are unlikely to add a new mobile OS with a marginal number of users
- Push e-mail capabilities require a server product (e.g., blackberry, goodlink or exchange) and neither RIM, nor Microsoft nor Motorola has any interest in pushing the Apple mobile platform.
So it seems the iPhone is on its way to be the best high-end consumer product, but business users will still have to carry around their blackberry for some time
4) The size of the memory is limited. The size of a typical movie downloaded on iTunes is 1.2GB, that means the 6GB iPhone can carry only 5 movies...pretty limited. 6-8GB makes sense for music and photos, not video. How long will it take before Apple increases the memory?

So bottom line, it is an amazing product. It will not replace my Blackberry or my 60GB iPOD video, but I can carry a third device - not because I need it - just because it is cool!

AppleTV

My first question was why AppleTV, not iTV? Well, iTV is the biggest commercial television network in the UK and "eyeTV" is also an application from Elgato (it is a TV/DVR product for Mac) - so the name was already crowded. But by simply replacing Apple by a logo, the achronym was safe...
But let's get back to the product. I was really enthusiat about the iPhone story, but much less by the AppleTV.
The AppleTV is a small box with a 40GB hard drive that is plugged to your TV via and HDMI connection (high definition) and connect wirelessly to any iTunes library in your home. So, you just have to select the songs/photos/movies you want to stream to your box on your iTunes application and you can then see them on your TV. You can also stream in real time the same content directly from your computer to your TV (except the pictures). And of course, the design of the interface is super sleek. It is Apple first beach-head into the living room and a smart strategic move to get there without a gaming console. To be fair, the product is nice way to access all your iTunes content on your TV, but I was not completely convinced - for several reasons:
First, the storage space is relatively small for a device supposed to carry videos. My iTunes library is more than 70GB (and I have only 30 movies). Well you don't need space if you stream. That's fair, but to start watching the movie, you will have to wait 10mn to complete the buffer (similar to a movie download service such as movielink) - not a very pleasant experience. When I asked the question to the Apple representatives, the answer I got three times was "we can say, it depends on the wireless connection" - great answer...
Second, who wants to by an HD TV to watch low resolution movies and videos? Apple is trying to simplify the media experience by providing a single format for an iPOD screen and a large screen High Def TV. It just does not work. The quality of a 1.2 GB movie on the iPOD video is fantastic, but on a large screen, it sucks. And the sound is only stereo, not 5.1 or 7.1. No surprise: a DVD is 5-7GB, so 5-6 times the size of a movie downloaded on iTunes. At Mac World, the Apple staff presenting the AppleTV kept saying movies were DVD quality, but I don't know who would believe it...
Finally, Apple TV supports only iTunes content - fairly restrictive compared to the other media center solutions.

To conclude, I would say that for $300, the AppleTV is an expensive gadget to port your iTunes library into the living room. To make it successful, Apple will need to upgrade the quality of its content and start differentiating mobile and home video content. You can listen to compressed audio without noticing it a lot, but video is a different game, especially with surging sales of high def. screens and home theater systems

My favorite gadgets from the show
I found two products at Mac World that I really liked:
The first one is the $60 Shure PTH device (Push-To-Ear). The PTH is small device that connects to your iPOD (or any player) on one end and to your earphones on the other end. When you activate it, it reduces the sound level from your iPOD and enables a conversation without removing your earphones. Any person using noise cancelling phone will appreciate this gadget - especially in planes, where you won't have to take out your ear piece to talk to the flight attendants.
The second one is the BT 359 bluetooth GPS receiver from GlobalSat. It is a small GPS device that connects via bluetooth to any PC or mobile device (smart phone or blackberry) and cost less than $150. You will need to buy the mapping software though (around $80-100).

VC lifestyle

How does the lifestyle of a VC look like? This video from Blueprint Ventures will give you good insights!



Happy New Year 2007!

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.

Sandhill.com 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.

Enjoy!

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...

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...

Zune vs. Ipod

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

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.