Software, Interrupted

I was reading an interesting post from Union Square Ventures Brad Burnham about entrepreneurship and the idea that they (along with many other VCs) are more likely to fund companies that are open with their ideas.

Many of the better entrepreneurs we know engage anyone they come across about their ideas. On the surface, this seems kind of dumb. Every time you describe your plans, you are providing a blueprint for a competitor. So, why do they do it? My hypothesis is they do it because their experience has taught them that, on average, every time they describe their ideas, they learn more than they reveal, no matter how much they reveal. And, as a result, they are able to concentrate insight in a way that creates a defensible advantage for them.

I know many people have a fear that VCs are going to steal their ideas and go start companies. While I am sure this has happened to some extent, the odds are the person who is starting the company will be much farther along than anyone who has heard the idea. Information only has value if there is substance behind it.

Union Square Ventures Via AllThingsD

Over on GigaOm, Lookery co-founder Scott Rafer outlines simple rules to survive a recession if you are a startup.

Click over to the full article for the details.

Rule #1: Raise a reasonable amount of money now, and use talent to do it.
Rule #2: Just get through another "Summer of Angst."
Rule #3: Do one thing only. Think "un-sexy."
Rule #4: Don't spend to gain 5 percent of your market.
Rule #5: Set business goals you know you can achieve.
Rule #6 Resemble your customer.

(This article was from a week ago, but I just saw it)

Before I was a big-shot executive, the end of a year meant rest and relaxation. Now it's crunching fourth-quarter numbers and budgeting for 2008.

A friend in Japan read my fortune and told me that 2007 was my year of "turbulence," that 2008 is my year of "reunion," and that 2009 is my year of "wealth." Supposedly, 2010 will be "peace and stabilized," but at the rate I am going I can only hope to make it that far.

One full calendar year later, I am still happy that my company (MuleSource) gives software consumers a choice about the technology they use and ultimately, we, like the rest of the open-source vendors, bet on the fact that adoption eventually equals dollars. Having been a software consumer that felt burdened by proprietary products for most of my career, I retain a strong desire to flip the software industry on its head.

There is an inevitable flow of events in which software companies will either get on the path or be left behind. If you start a software company today that is not SaaS or open source you are betting that the market will somehow revert to 1999. And I think we all remember what happened in 2001 here in the valley.

Two years after founding this company I believe more than ever that open source is a question of when, not if.

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Today's WSJ (login required) has a great article about Voltage Security and the less glorious side of founding and running a startup--the fact that you have to keep slogging away regardless of what's going on around you.

Every industry has its superstars and its sloggers, of course. But the tech industry of the late 1990s and earlier this decade has seen an unusual number of two-year cycles end with a lucrative sale or initial public offering. When that doesn't happen, the process can get so grueling and protracted that some VCs say they have to get creative to convince burned-out entrepreneurs not to bail.

The profile on Voltage's Sathvik Krishnamurthy is interesting as a parallel for many open source projects that have become companies. This hits home for my company, as Ross started Mule back in 2003 and we started MuleSource in 2006. Here we are some five years into and we are only now starting to really figure things out. The ability to weather the storm and make smart decisions is key to success, but *very* hard to execute on.

Disclosure: MuleSource shares two investors with Voltage, and Sathvik and I have been in the same place at the same time though I am not convinced that we have met.

Reading about the demise of Edgeio over on Techcrunch made me think a bit about being an entrepreneur and wonder what's happened to the valley. Having been through the tech downturn here in SF and watching two companies I worked for go public only to flame out I should be last person who felt the desire to start a company. But, what's the point of living in the bay area if you can't seize the opportunity for technology greatness?

There seem to be less startups lately and I'm starting to wonder if would-be founders are taking the weak route and going to work for Google and Facebook rather than going for the gusto themselves. I fail to see the appeal of spending $100k for an MBA to get a product manager job at a big company when there is a wealth of venture dollars available.

Back in 1998, I dare say that 50% or more of Stanford B-school grads founded companies (I am sure someone will prove me statistically wrong but it certainly felt that way.) Yes, it was a bubble, and yes, a great many companies were founded on pure ego and stupidity (whither theman.com?) but that's not the point.

My point is that there are more opportunities and more cash available than ever. Even if your company flames out isn't that better than not trying yourself? To quote Queens of the Stone Age "You ain't a has-been, if you never was."

The guy who created Hotmail is back with a new set of applications that are a direct clone of MS Office delivered through a browser. My initial reaction: Who cares? We already have at least 10 companies doing the same thing, including Google who have the biggest footprint...but read on:

Live Documents is similar to Google Apps, launched in February and used by companies including Proctor & Gamble, General Electric and Capgemini as a cheaper alternative to Microsoft. However, Mr Bhatia claims that his product is superior to Google?s in its range and quality, most crucially because it mimics Office 2007. Most of Office's estimated 500 million customers have yet to upgrade from the 2003 version, while it is not available for Apple computers.

He said. "This will do for documents what Hotmail did for e-mail. Why spend $400 on an upgrade when you can get it for free?"

InstaColl (Bhatia's company) said that it was not infringing copyright because of a legal ruling that concluded that it was not possible to patent the "look and feel" of a computer interface.

The thing that Mr Bhatia is missing is that companies aren't upgrading to Office 2007 because it's hard to use, has a bizarro interface and offers few if any compelling reasons to shell out $$$ for an upgrade.

Office 2007, the biggest advance in the system in ten years, took more than 2,000 Microsoft programmers three years to develop. Thirty-two software engineers in Bangalore, India?s IT hub, took four years to break Microsoft?s code so that they could replicate it online.

They should have used the four years to create a good product. What a waste of time and effort.

Nothing like a little dose of harsh reality in the morning.

InsideCRM has a list of what it thinks are the twenty worst VC investments of all time. I'm not really sure why InsideCRM would be the expert on this, it's still pretty interesting.

1. Amp'd Mobile: $360 million raised, ended in bankruptcy.
2. Procket: $272 million, sold for $89 million.
3. Webvan: Valued at $1.2 billion, went bankrupt in 2001. Ate through $800 million in venture capital, ended with $830 million in losses.

For even more depressing fun, check out the massive list of 4300 companies that Private Equity Hub put together. They even made an XLS you can download and sort! Sadly, none of the 3 companies I worked for during the boom/bust rank that highly as duds. If there is one thing that keeps me motivated it's to keep my company off these lists.

I am in Tokyo this week as we launch MuleSource in Japan. Pics and posts to come as I recover from the 11-hour flight. Somehow I managed to forget my watch, so I am not convinced that the flight was only 11 hours. It felt like multiple lifetimes.

At our Wii-off last week several people asked me if they should start considering expansion into global markets and specifically Japan. The answer is if your company is doing less than $10 million in revenue, probably not. The reason we're going for it is because there is a big push of SOA and open source and we found ourselves a great partner to work with and act as our reseller.

The big question you must ask yourself if you choose to set up sales in another country is whether it's worth it (meaning, will you get dollars?) There is a significant advantage for both OSS and SaaS companies for international expansion vs. BigCos that have expensive sales staff and marketing efforts to undertake. The downside is that expansion takes your focus off of where the money is at the moment. To smooth the economics you need to use a partner or other channel to get your offerings out into the world.

Here are the questions we asked ourselves at MuleSource (reminder: we are open source):

Do we have users? And, if so, what is their stage of deployment?
Generally speaking for the U.S., we've found that users need the most help while moving from development to production. In the U.K. it seems more like users wait until something breaks before they get involved with support subscriptions. In Japan we have users that are self-sufficient, but large companies do the majority of their IT work through systems integrators who are also VARs.

Do companies pay for open source in this geography?
This is a tough one. In many markets asking if people pay for Red Hat Linux vs. do they pay for JBoss ends up with very different results (RH yes, JBoss, no.) Regardless, going into a market that has no history of paying for OSS means you will have to educate during the sales process, which introduces overhead that you don't want to carry.

Do we have salespeople or a method by which to sell in this region?
To the extent that you can go international with inside sales, you should. However, certain markets like the U.K. are often channel driven, which means you need feet on the street. In Japan, it seems like you have to have SI partners.

Can we support the customer timezone?
This depends on how you set up support and applies more to OSS than SaaS.

What is the difference in relationships versus the U.S.?
This is by far the hardest thing to figure out. Do cultural differences play a role? Do you have to take the buyer to play golf? If you are in Japan do you have to go out for cocktails?

If all of these items (and the other things you figure out to ask) pass muster, here are a few tactical quick hits that can really bum you out:

• Tax implications--international tax laws and things like VAT
• Currency rates
• Material ownership
• Legal items like contracts, etc.
• Employment rules (Germany and Italy, for example)

It was just over a year ago that Facebook opened up member restrictions to move from college kids to the rest of the world. This was clearly a good strategy as Facebook now has an astronomical valuation and a huge userbase. The question is what was/is the impact on the core audience (college kids) that made the site what it is today?

There are a number of sites that have sprung up like College Tonight and ConnectU, but none of them seem to be as captivating as Facebook itself. As TechCrunch's Mark Hendrickson writes:

Let's say you did want to capitalize on students' (growing?) discontent with the "mature" Facebook; what strategy would you follow? You'd probably want to take a few pages out of Facebook's own, er, book by restricting membership to users with .edu e-mail addresses, gradually opening up to elite schools, and keeping things stupidly simple. But you'd also have to provide something particularly unique, useful, or entertaining that tempts mainstream Facebook users to jump ship.

This is a common concept that growing companies (especially Web properties and open-source companies) have to keep in mind. How do you grow market share without isolating your core supporters?

For open source it means that you have to manage the community as you move toward commercial. For Web properties I would presume you have to make the features that hooked users in the first place remain compelling.

To some extent, this shows why SaaS applications like Salesforce.com and Netsuite are able to sustain for a much longer period of time--the users are isolated from each other, unlike MySpace.com, Orkut, etc., where you are potentially stuck with a bunch of people you have no desire to have a social relationship with...like college kids and their parents.