Google launched its new social experiment called Buzz yesterday. It has been labeled a Twitter and Foursquare killer by some, and lame and boring by others. Most of the launch was media hype, but it got me thinking about how startups must feel when they see new product announcements by Google. Google is one of the few companies that’s constantly acquiring (59 companies) and launching new products. So, what do you do if you are a startup and Google releases a product that goes after your core business?

This sounds silly, but first try not to freak out. It’s doubtful that Google is targeting your business specifically and it’s not a zero sum game. Now, if you are Twitter or Foursquare that’s a different story. Twitter in particular is an interesting case to look at. There are low technology barriers to entry in its market, but Twitter has significant demand competitive advantages (one of the 3 sustainable according to Greenwald) in the form of customer captivity and network effects. I came across recent research that put Twitter at the 1B tweets per month level, 16X growth over the prior year, in January 2010. That’s a great head start against Buzz, but with Google’s distribution engine it’s going to be worth watching how this plays out.

In general, startups should play to their strengths so here are a few things to think about:

Be nimble. Google is a large corporation with thousands of employees across the globe. With that size comes processes, procedures and other “big company-isms.” Some would argue Google is even on Microsoft’s path to creative destruction. As a startup, you don’t have the resources (e.g. R&D, sales/marketing) and associated cost structure that Google has. You are lean and mean. You can innovate at the drop of a dime and release new code many times in a single day. You can get customer feedback early and often. You can also change direction or pivot if you need to. That’s a huge advantage in itself. Big companies have an incredibly hard time shifting direction after sinking considerable time and money into something — trust me I know, I started my career off at one.

Intense focus. Last time I checked I didn’t find many companies with as grand a plan as Google’s — search, email, smb, maps, video, shopping, blogging and mobile. It’s incredibly hard to be number one in all of your markets when you have such a broad focus. Be the opposite of Google. Focus on your core business and be the best at what you do. Hopefully, your market is big enough to build a sustainable business. Build credibility in your niche and then expand.

Be disruptive. Google is a strong company because it has disruptive roots. It’s business model was incredibly disruptive. It had great core search technology, but didn’t create a new market or category. There were plenty of other search engines before Google. If you create a disruptive technology and/or business model you can compete with anyone. Disruption changes the rules of the game. Easier said than done, but aim for it.

What would you do?

TechCrunch posted an article this past weekend on the startup Blippy and how Amazon is insisting that the company stop collecting user purchase data and erase all data that was previously collected. The article got me thinking about our personal data streams, the implicit web and ownership. Many investors and technorati have previously blogged and talked about the rise of platforms that capture data based on our implicit actions on the web, so no need to rehash that here.

A question worth discussing is who owns your data stream. Wait a minute, don’t I own my tweets on Twitter, status updates on Facebook, photos on Flickr, emails on Gmail, bookmarks on Delicious and reviews on Yelp? Not necessarily and define “own”. Well, does the ownership lie with the user who generated the data, the company that captured it or someone else? If it’s the company that captured it, does the user have rights to the data and can the user share the data without the company’s permission? These are all important questions that can affect future implicit web innovation and I’m not sure we have a good answer to any of them.

In the case of Blippy, if users gave permission to collect their data wouldn’t that suffice for Amazon? Well actually no, probably not. I haven’t read Amazon’s terms of service, but I could almost guarantee data generated by users is property of the company. This is particularly true of companies with advertising based revenue models. Google’s success shows how valuable data can be. Google is actually an interesting case to take a closer look at. In their terms of service, the company claims all content created by you is your property and not the company’s. Technically, Google is licensing the content from you. So, I own the videos that I upload to YouTube and emails that I send with Gmail, but Google monetizes my content, doesn’t share the revenue and restricts access to my data or some of my data?

I don’t see a good solution to this problem any time soon. Many would argue that data ownership isn’t a problem; it’s a byproduct of the implicit web. I disagree. It is a problem and with the proliferation of mobile devices, rise of the real-time web and explosion of implicit user data the problem will be exacerbated in years to come. As a user I can accept if I don’t own my data and companies are making money from it. My issue is when the playing field is not level and incumbents create walled gardens. My vote is open and free access to ALL of my data. I may not get to own my data in the long run, but I don’t have to support companies that are not open. Let innovation happen.

Most VCs have a standard protocol for evaluating investment opportunities, but entrepreneurs vary greatly in their evaluation of VCs. Experienced entrepreneurs have been through the fund raising process before and know what “potholes” to avoid. There a few questions that entrepreneurs should ask of their potential VCs and some do, but most don’t. (Note: I use the term champion below to represent the partner or other investment professional at the VC firm who is sponsoring your investment.)

Here is my list of top questions that entrepreneurs might want to consider asking when raising capital:

1. What is the firm’s decision process? Every VC has its own process for evaluating investments, getting to a term sheet and getting a transaction closed. Believe it or not, some firms close a good number of their investments from opportunities junior folks drummed up (so much for avoiding Associates). The point is that it is important to get to know your potential VC’s investment process and your champion’s role in that process so you can measure progress towards closing the transaction.
2. Who will serve on the board of directors post-investment? This seems like an obvious question, but the answer is not always straightforward. Some firms may staff the board with a different partner than the one who championed the investment. It could depend on anything from geography to operational experience to the number of boards your champion serves on. In fact, some firms may even change out their board member based on the stage of the company. There is also turnover in the VC ranks and partners do leave firms.
3. How much of the VC’s current fund is invested? This question will give you an idea of how much money your potential VC has left after the investment in your company. Most entrepreneurs are so focused on the current fund raise that they don’t think about future rounds, which arguably are more important. The reality is that this fund raise probably won’t be your last. I’m in no way implying your VC won’t be able to support you in the future. There are plenty of ways VCs can handle these situations such as raising new funds, raising annex funds or making crossover investments. Regardless, this is a good piece of information to know particularly in the current environment where further VC consolidation is expected.
4. How many investments will the VC firm make this year and how many is your VC champion evaluating? The goal of this question is two fold. One, it gives you guidance on how many investments your potential VC as a firm does in a given year. Second, and the harder one to gauge, it gives you an idea of where your company lies in your champion’s priority stack. Does he or she have three other companies with signed term sheets right now? How many investments does the champion look to do this year and out of those how many has he or she already done? Typically, most partners only make 1-2 investments per year. I truly believe the “cream rises to the top” and if you have a strong company you’ll be able to raise capital regardless, but it’s always good to gain insight on your funding competition.
5. What are the barriers to close the transaction after the term sheet is signed? This is probably more relevant to late stage companies where a significant amount of due diligence is conducted by the VC. Signing a term and closing a transaction are two different things. Due diligence is typically conducted after a term sheet is signed and basically verifies everything you’ve told the VC up until then — technology/product, financials, management team, etc. If things don’t add up there is a chance you will be re-negotiating that term sheet. Some VCs do this and feel strongly about it and some don’t. Either way, it’s good to be aware of the possibility of it happening.
6. How has your VC champion specifically added value to his or her portfolio companies? The key here is specifics. Don’t accept high level explanations. VCs almost exclusively operate at a high level and are mostly good at selling (they raised the fund after all). Just get the facts and verify with the VC’s portfolio companies.
7. What does the VC like and dislike about your company and market opportunity? This might be a difficult question to ask, but it’s important to get candid feedback as early as possible. If there are challenges and concerns for your potential VC you need to address them upfront. Also, find out what the VC likes about your company and play to your strengths.

I’d love to hear from entrepreneurs on this one. Comments, thoughts and suggestions are welcome.

Boy has the financial services landscape changed over the past year. Collapse and utter failure are the first words that come to mind. AIG, Lehman, Merrill Lynch the list goes on and on. At the same time, a few survivors like Goldman are thriving in this environment and getting ready to payout record bonuses. What does this mean to entrepreneurs in the sector? Is FinTech dead? I don’t think so and here’s why:

Inefficiencies are rampant across the entire supply chain: Voice trading is prevalent in the OTC markets. Real-time risk management is almost non-existent. Real-time settlement/clearing is non-existent. Clients don’t understand and sometimes don’t know what securities they hold and their risk exposure. Managing skyrocketing market data volumes is getting tougher and tougher. I can go on and on, but you get the point.

Talent and risk have flip flopped: This is an important one and good for all startups in the NYC area. In the past, most (not all) good programmers went to work on Wall Street to make a lot of money, working for hedge funds and large financial services firms. Startups weren’t really on the radar. Maybe it was cultural here on the East Coast, but pay wasn’t comparable and the perceived risk was high (not saying I agree). That is changing. For one, there hasn’t been this much high quality technology talent available in quite a long time. Many of the large banks significantly cut their tech teams. Great programmers and software product folks with strong domain experience are available. These folks are getting hired by fast growing tech startups. Second, what I’ll call startup risk is down. I’m in no way implying startups are less risky than in the past, but merely pointing out that perceived risk is down. Lower salaries with equity stakes and options in exciting venture-backed startups are looking better and better. The staying power of large financial services firms is very much so in question.

Diverse Sectors: Capital Markets is one slice of the FinTech pie. There are vibrant opportunities in other sectors like Banking, Insurance and Real Estate (who would have thought). Most of these sectors have under invested in technology for many years and replacement cycles are coming up. The cost of maintaining legacy technology is increasing rapidly. There are also broad financial management plays like electronic billing and payments gaining traction in sectors like Government and Healthcare.

Regulation and Reform: We all know regulation is coming at some point. The specific impact is unknown, but with that comes opportunity for nimble, disruptive startups. A few areas that I’m particularly excited about are risk management, real-time analytics, OTC derivatives automation, SaaS, settlement/clearing, anti-fraud, new marketplaces and consumer financial services.

FinTech is far from dead. I believe the crisis has strengthened the need for technology, automation and transparency and am confident entrepreneurs are the ones who can change things for the better.

Cleantech has been one of the few bright spots in terms of venture capital investment in 2008. According to The Cleantech Group, a market research and financial services firm, Q3 brought a record-level of $2.6B invested across 158 companies located in North America, Europe, China and India. That’s a 37% increase over the same period last year, and a 17% increase over Q2.

While the category is growing, cleantech investment has been dominated by capital-intensive projects like clean power generation and biofuels. With the economic downturn in full effect and funding being harder to come by, there is a significant opportunity for companies at the intersection of software and cleantech. Software is attractive due to its capital efficiency and scalability. Here are a few categories and companies that I have run across:

	Energy Management – Customers can save hard dollars by adopting solutions that help better manage and monitor energy consumption. Energy efficiency in data centers, PC power management, efficient HVAC systems, lighting management, smart homes, demand response and facilities management are all key areas primed for growth. Companies in this segment include Verdiem, 1E, BigFix, EnergyHub, Adura, Positive Energy and Faronics.
	Carbon Management – Measuring, managing and analyzing CO2 emissions are increasingly garnering customer attention and budgets. Compliance is at the forefront of spurring demand, but not far behind are reputation risk, reduced costs through automation and climate change leadership. This segment is getting crowded fast with north of 20 companies, including Clear Standards, Planet Metrics, Carbonetworks, Carbonops, Supply Chain Consulting, Enviance and Greenstone Carbon Management.
	Trading – The carbon trading opportunity is pegged as the world’s largest potential market. Early this year, New Carbon Finance, a market research firm, predicted that the *US* carbon trading market could be worth $1 trillion by 2020. The market is still in its infancy and riddled with regulatory challenges, but there is significant opportunity across the trading spectrum in everything from risk management to electronic trading to liquidity providers. Companies include CarbonFlow, which is working on a platform to help automate carbon credit creation, broker Cantor Fitzgerald (CantorCO2e ) and Australia-based Tradeslot. We also can’t forget about the US-based exchanges CCX and The Green Exchange. Definitely a segment worth keeping an eye on.
	Solar – Most solar startups are either hardware or services-centric and include installers and manufacturers. As adoption increases there is an opportunity to help consumers and businesses qualify their properties, analyze financial impact, automate permit processes and monitor usage. Companies include Sungevity and Energy Matters. I came across a blog post on this topic that has a good list of companies. See here for details.
	Water Conservation – The United Nations estimates that by 2025, two-thirds of the world’s population will face periodic and often severe water shortages. Software can help monitor and curb water consumption and better manage irrigation and sprinkler systems. An example is California-based HydroPoint Data Systems who builds smart irrigation systems for consumers and small businesses.
	Waste Management & E-waste Recycling – Even with the economic downturn consumers are still spending dollars on new computers, TVs, cameras, cell phones, DVD players and rapidly throwing out old ones. E-waste is one of the fastest-growing waste categories. Consumers in the US throw out roughly 100M cell phones per year and 130K computers per day. With e-waste piling up, there is an opportunity for software to help consumers and large enterprises be smart about recycling, waste management, health & safety, compliance and asset recovery. Companies include Kashless, Soft-Pak, AllMax, Solution Foundry and CellForCash.

This list is by no means exhaustive. The category itself is nascent and it is yet to be determined if these companies can build sustainable businesses over the long haul. It is an exciting time to be a startup tasked with the added mission of making the planet a better place. Feel free to send over additional categories, suggestions and/or companies that I have missed.

I had the pleasure of recently speaking with fellow Rutgers alum Dev Ittycheria. Dev is President of the $1.2B Enterprise Service Management business and a member of the executive management team at BMC Software. He was formerly CEO and co-founder of BladeLogic, a data center automation software company acquired by BMC Software for $800M earlier this year. Dev is a serial entrepreneur and was kind enough to share some of his background and experiences with me. Here are some key points from our discussion.

Entrepreneur vs. VC

Dev has the unique perspective of having spent time on both sides of the proverbial startup fence – VC and Entrepreneur. As an entrepreneur, he co-founded and was CEO of Applica, one of the first venture-backed application services companies (a precursor to what people call cloud computing), which was acquired by Breakaway Solutions. Dev also spent time as an Entrepreneur-In-Residence (EIR) at Bessemer Venture Partners. He joined Bessemer in 2001 after taking Breakaway public a few years earlier. As an EIR, he had three options – start another company, work on new investment opportunities for the firm, or lead an existing portfolio company. He chose starting a new venture and teamed up with a former colleague Vijay Manwani, also an EIR at Battery Ventures. They raised $6M from Bessemer and Battery in September 2001, five days before 9/11, and launched BladeLogic. The rest is history.

Key Success Factors

BladeLogic was a success on many different levels, but there were a few that stand out. First, focused execution was critical. BladeLogic was very focused on a particular segment of infrastructure software – the server change and configuration management market. Next was a rapid and iterative development process that allowed the company to obtain customer input early and often. That was critical to deeply understanding customers’ needs and problems and making sure their products solved the most pressing problems. The last and arguably most important was the sales team. BladeLogic decided to go to market via a direct sales channel and spent a great deal of time hiring and developing the best sales force they could. A strong sales force is a competitive advantage unto itself.

Software vs. Services

As a software product company it’s easy to fall into the services trap. One-off consulting engagements can improve your short-term cash flow, but can distract the company from its overall strategy. This becomes particularly challenging as you sell to large customers who typically demand “whole solutions” and pull small software companies in many directions. At BladeLogic, the key was a disciplined product management strategy that never lost sight of the company’s strategic goals.

Advice for Entrepreneurs

These economic times are extremely challenging for all companies, particularly software startups. If you are an entrepreneur or launching a new company in this environment focus on doing three things:

1. Solve a genuine pain point for the customer. There is a big difference between building products that are “pain killers” versus “vitamins”. With IT budgets tightening vitamins won’t find dollars. You’ll find out rather quickly which camp you fall into.
2. Work on building a *great* team, not just a good one. If you are an enterprise software company, focus on developing the best sales and development teams possible. These two functions are the engines for driving your business forward and will be extremely important to surviving the downturn.
3. Build a defensible technology advantage. Your competition, which will be typically larger and better capitalized, will attempt to bankrupt your company by under-pricing their equivalent products. If you have a true defensible technology advantage that customers care about that strategy simply won’t work. Furthermore, make sure your product roadmap focuses on building features that customers will pay for, not something they wish for, but will not spend any more money on.

Update : I’ve reposted some of my findings in the spreadsheet below. Let’s just say Google Finance isn’t the most reliable.

How are public SaaS companies faring in this economic environment?

Here are some stats that I put together based on Q2 ‘08 earnings data from ten SaaS companies, including SalesForce.com, DealerTrack, NetSuite, Taleo, Omniture, Vocus, Salary.com, Kenexa, Concur and Constant Contact:

• Median Quarterly Revenue Growth : 6.5%
• Median Yearly Revenue Growth : 39.4%
• Median Gross Margin : 69.0%
• Median Operating Margin : -0.9%

Year-over-year revenue growth was rather strong across these SaaS companies. Profitability is another story, but that’s a topic for a separate post. You can see some of the underlying data here.

Now, let’s take a closer look at three earnings announcements from last quarter:

We can’t start a SaaS discussion without first looking at poster child Salesforce.com. Salesforce.com had a good second quarter with revenues of $263M, which was 49% year-over-year growth, and put the company at a $1B+ run rate (a SaaS first). The earnings translated to $53M in operating cash during the quarter, an increase of 53% year-over-year. No major changes on expenses. SG&A and R&D were at 64% and 9% of total revenue, respectively.

Salesforce.com added 4,100 net new customers bringing the total to 47,700. Not only did the customer numbers increase, but so did contract sizes. Of note, Dell signed the largest deal in company history, a three-year global contract. This is a bit surprising given the macro environment today, but increasingly larger customers are requesting these types of deals. Revenue diversification across customer size, geography, industry and services mix also continues to be a top priority for the company. International business now represents 28% of revenue, up from 24% a year ago. Overall, a rather rosy picture for the company in a tough economic period.

Taleo also had a good quarter overall. The company recorded revenues of $38.8M, representing 25% year-over-year growth. Software accounted for 80% of total revenue, 21% growth from a year ago. On the expense side, R&D and sales and marketing costs were flat. Sales and marketing came in at 30% of total revenue. Both R&D and G&A were approximately 19%.

The company added 25 new enterprise customers and 10 enterprise deals with a first-year pricing greater than $250K. Taleo also continued to focus on expanding its international customer base. International revenue came in at 13% of total revenue, representing year-over-year growth of 83%. Last, the company completed a major acquisition of Florida-based Vurv, a direct competitor. The acquisition was partially funded with approximately $44M in cash relating to the proceeds and repayment of $9M in debt.

NetSuite posted solid top-line results for the second quarter. The company’s revenue grew 43% year-over-year to $36.6M. Non-GAAP net loss for the second quarter was $900K, a 34% improvement year-over-year. Cash flow from operations for Q2 was negative $1.8M as compared to positive $1.5M from the previous quarter. This was primarily due to tax liabilities as a result of the OpenAir acquisition. For expenses, product development was 10.6% of total revenue, an increase of 8% mainly due to the additional headcount from the OpenAir acquisition. Sales and marketing was 51%, an increase of also 8% over Q1 as the company is hiring salespeople aggressively along with increasing marketing spend. G&A was 12.6% of revenue for the quarter.

NetSuite has done a good job increasing the average selling price per customer. In Q2, NetSuite added more than 400 new customers with an average annual contract value for new sales at $30K, up from $20K a year ago. International business also increased to 20% of total revenue for the quarter.

Sequoia Capital recently made a presentation to its portfolio companies about how to try to survive an economic downturn. Definitely worth a read.

Research firm Datamonitor released its annual survey of IT spending this week and predicted that 50% of organizations will be freezing their 2009 IT budgets with another 13% anticipating cuts. Given the turmoil with the nation’s economy and troubled financial markets this didn’t come as a surprise to anyone.

So, how does this affect SaaS companies selling into the enterprise? Let’s take a look at a few key factors and see how SaaS companies stack up.

• Pricing – This is top of mind for most customers today. Customers don’t want, and now are unable to sign, multi-million dollar deals. If that’s your model, then expect longer sales cycles. SaaS solutions have an advantage here since typically they have lower upfront pricing with a recurring revenue stream (e.g. monthly) spread out over the life of the contract. The exception are those SaaS vendors that require multi-year multi-million dollar contracts. From a customer’s view, they fall in the category with the traditional software players and will struggle.
• Criticality – If it isn’t clear whether your solution is a “need-to-have” or “nice-to-have” you’ll quickly find out. Customers will only open their wallets to vendors that help them drive the top line, reduce the bottom line or have significant strategic importance. That’s it. While this isn’t specific to SaaS companies, I thought I’d mention since *most* SaaS solutions aren’t deemed “mission critical” (e.g. CRM). Most customers are still skittish with moving their core systems and data to SaaS. In time, hopefully this will change. Companies like NetSuite are paving the way.
• Flexibility – Customers don’t want to be locked into software. Period. There was an interview a month or so back given by Lawson Software’s CEO, Harry Debes, where he predicted the downfall of SaaS in 2 years time and mentioned this point.
  

  It isn’t about locking people in. People lock themselves in! They see the software, like it, and want it. This is true of all professional software. The cost of moving is too high. As long as it’s working, people are happy to stick with one product.

  I disagree. This is traditional software thinking and it blows my mind. Those days are long gone. Application migration costs are lowering. Vendors who provide significant value, but don’t hold their customers hostage will succeed. The SaaS pay-as-you-go approach is ideal and resonates with many customers.

• Delivery – Customers want to get up and running quickly. SaaS deployment times are typically much lower, especially with single instance multi-tenant approaches. More often than not a customer’s needs will change over time so it’s important to get the software in the hands of the customer as soon as possible.
• Costs – SaaS companies are at a disadvantage here. They have high upfront costs with lower revenues. Customer breakeven is further away. So, if you are a SaaS company keep a close eye on your bottom line and remember cash is king. One benefit is that a SaaS company will have a more transparent and predictable recurring revenue stream. Use that advantage and plan accordingly.

In a future post, I’ll cover SaaS economics and how several public SaaS companies are faring.

I’ve been thinking about Virtualization Management for a while so I thought it would be a good time for a blog post, especially since my blogging pace has steadily declined to a crawl.

Virtualization has been all the buzz these days in the enterprise. Gartner expects the number of virtual machines to grow from less than 5 million in 2007 to about 660 million by 2011. What’s the big driver behind this growth? Well, there are a bunch of reasons, but mainly virtualization lets companies stretch their hardware resources and ride the backs of increasing processor power. The days of having one machine running on one piece of hardware are over.

With the proliferation of virtualization comes significant management challenges. Virtual environments increase configuration, monitoring and deployment complexity for administrators. Traditional software for managing standalone machines comes up short in a virtualized environment. Combating “virtual sprawl” has turned into an overhead nightmare. The big platform players, namely Microsoft, VMware and XenSource (acquired by Citrix for $500M in ‘07) offer some built-in management capabilities, but can’t cut it as environment diversity increases. There are functionality gaps across patch, discovery and inventory management. I’ve included a chart from virtualization news site, virtualization.info, to give you an idea of the numerous market segments within virtualization management.

Several startups recognize the big opportunity. Companies like LeoStream, VKernel, Embotics, Enomaly , ManageIQ, Ceedo and Vizioncore are a few that come to mind.

As complexity increases, enterprises large and small will need better tools to manage virtual environments across storage, applications and the desktop. The big platform players have taken notice and the race is on.