Not a blockbuster headline, but I just noticed that Workplace, Inc. bought Cape Clear. I had never heard of Workplace before, they sell various Enterprise applications using a SaaS model. I had heard of Cape Clear, they are (were?) a pretty welll known Irish startup in the Enterprise Integration\SOA space - providing Enterprise Services Bus middleware.

Most the articles I have seen about the acquisition focus on the aspect of how integration into existing systems is a key capability for SaaS players, and that the Enterprise middleware space is rapidly consolidating. Makes sense, but for me what is more interesting is what this says about enterprise software startups and their valuation. The details of the deal are confidential - but I am guessing that the deal isn’t a blockbuster (given the size of the acquirer), and I’d be surprised if the deal was for more than $50M (maybe much, much less), all stock. Now according to Joe Drumgoole’s blog about $48M has been invested in Cape Clear over the years - so a $50M exit doesn’t leave much for anyone. Here is his list of Cape Clear investments:

• 2 Million in seed funding from ACT in 2000
• 16 million in Series A funding from Accel and Greylock in 2001
• 10 million in Series B funding from Accel and Greylock 2003
• 5-10 million: A phantom series C round raised as a set of warrants amongst existing investors. It was never press released and their is no mention of it on the net.
• 15 million in a series D round in the last few weeks (April 2006 - Jacob) with InterWest

Cape Clear seems to have been a “technology” acquisition for Workday - which brings me to my point about Enterprise Software startup valuations. It is very difficult to become a stand alone player in Enterprise software (especially with all of the consolidation going on), and if you aren’t a viable stand alone enterprise software company - well that means you need to plan for the fact you will be acquired - probably for technology. To make sure that a technology acquisition is a viable exit path you need to make sure your valuation isn’t too high in the early stages. Enterprise technology companies seem to sell for $15M-$100M, depending how strategic they are to the acquirer - but require a lot of money in the later sales and marketing phases.

So make sure you don’t over value your company early on, it will come back and bite you later.

Well, it is in the news everywhere, the possibility of a $44B Microsoft/Yahoo merger.  Given that I have spent a lot of ink discussing how to manage mergers after they happen - I find it hard to believe that this merger will actually end-up as a net positive for either company over time. The companies are just too different. Yahoo has been spending the last few years making itself into a media company (though lately they have been talking about getting back to their technical roots), and Microsoft is, in the end, a software and engineering company. My guess is that it will be hard for the merged “Microhoo” to be both a media and software company at the same time, which will cause enormous tension w.r.t to management attention and resource allocation. I wouldn’t want to be the one who has to make that merger work…

Another point that has been discussed ad-naseum is whether this will help or hurt the start-up eco-system. I attached a table taken from the Israeli government website about recent acquisitions of Israeli comapnies. Taken in a purely Israeli context it will probably be a net plus. First of all Yahoo has been a complete non-player in Israel, while Microsoft has both a large presence and made three acquisitions lately (see the table below). People are right that Microsoft will be busy for a while digesting the acquisition, which will slow its pace. The good news is that it will probably cause other players to pick up the pace of their acquisitions - AOL (which bought Quigo and Yedda which even aren’t on the list), Ebay which has bought Shopping.com and FraudScience (also not on the list). Maybe even some of the other advertising\internet players - e.g. Google, Amazon, IAC, News Corp. will start acquiring differentiating technology in Israel which would more than make up for any slowdown by Microsoft.

Recent Israeli m&a activity chart

I am at heart a technologist. I still get excited hearing about new, cool software technology and solutions. All of my past experience, and now at eXeed, my time goes into figuring how to mold new technology so that it solves a real problem for a large set of potential customers. At IBM Research our group used to use the term “Research in the Marketplace”. Continuing that tradition at eXeed, we work pretty much only with startups that have unique technology, so my comments are very much focused on technology based startups.

In my previous post I tried to show why the numbers make it hard for corporations to create “startups” internally. Beyond the numbers, there are two basic truths about technology based startups that make it very difficult to cultivate them in a large corporate environment:
1. Over a short period of time technology-based startup products need to morph (sometimes repeatedly) to meet customer\market needs –experimenting in the marketplace  while leveraging the same basic core technology. Very few technology startups start with the same set of product (ideas) and business model as they exit with – but in most cases the new direction still leverages the same core technology. 

2. Startups start out small, with very little (if any) revenue. One thing to remember is that even an exponential curve starts out slow – and only speeds up as time goes on.

These two “facts” make it hard for a startup to be incubated in a large company – there are just too many barriers to being nimble enough to make point 1 work, and point 2 usually means that the corporation looses interest before success can be shown (especially given the ambiguity associated with point 1, and since there is usually an existing set of products that can generate more short term revenue with the same investment).

I guess the basic point is that the impedance between running an existing business and starting a new one is so great that unless the corporation is willing to experiment with new, unorthodox models, and can commit long-term high-level executive support, it just won’t work. Even then there is still the issue of getting the right people (and giving them a loose enough rein)  – but I will discuss that in another post.

I read an Forbes article this weekend on incubating innovation which is something I have had the opportunity to do as part of an extra large organization, a medium size company, a small startup, and now as an investor.

The thought process of setting up an incubator in a large company is pretty simple – management sees the outsize returns that VCs produce, know they have wealth of worthwhile internal projects that will never make it to market – put one and one together – and come up with some sort of incubation process. They also hope that it will help them break into new markets. According to the Forbes article  “Arthur D. Little found that only 47% of companies believe their new ventures satisfy strategic objectives. Worse, only 24% meet financial objectives.” I am guessing that these numbers were mentioned since they show that incubation doesn’t work well – on the other hand, IMHO, a 24% across the board success ratio for new ventures isn’t too bad (not great, but not bad).

So I thought I try to do a back of the envelope comparison of the success requirements of internal incubation versus VCs. This is of course comparing apples to oranges since VCs look at the market value of the new venture upon exit, while existing companies look at the revenue and profit generated by a new venture. In any case, I thought it would be fun to try and somehow generate a comparison.

Let’s start by looking at early stage VC returns. Fred Wilson’s success ratio is that 35% of his companies do really well – over 5x investment , 45% do OK – 1x to 5x investment, and 20% tank.

A simple way to try and compare the two is to look at much revenue $1 investment would achieve if invested in existing products at the company– that of course depends on lots of things (including the industry), but I think a ROI of 2 would be considered a success. So to beat out a comparable investment in an existing product – a new venture needs to return at least $2 in recurring revenue for every dollar invested. Using another simplified (and conservative) measure, that $1 in revenue generates $5 in company value in the new venture which is equal to a VC obtaining (1×2x5) 10x on their investment. Now I know this is over simplifying things but a 24% success rate under these assumptions would be really, really good.

Another possible model is to assume that a company needs to return its investment in the new venture (via new revenue) within 3 years (so the new venture needs to return 1/3 of its investment each year). So let’s say the new venture generates $5M of revenue a year on average and with a really high growth rate (what the market and companies reward). The market value of a new venture like that would around $50M-$80M – which means that to get a good return – a VC can invest $10M-$14M and get a pretty good return (3x-8x). In this case the company and VCs are equivalent – the company can invest up to $15M in the new venture and also get a pretty good return by their standards (a 3 year ROI through revenue). Even here a 24% success rate isn’t bad…

Now these are just playing with numbers, there are a lot of qualitative differences between incubating new ventures in a company versus starting new ventures using VCs, but I’ll get to those in another post. These are also the kinds of considerations that companies ake into account when trying to decide between organic, and non-organic growth.

I was looking at company that wanted to build a generalized market trading mechanism for anything (which seemed to me to be another name for gambling) and decided to look at intrade wondering whether a market mechanism could actually be used to acurately predict future events. I looked at some of the most highly traded intrade political markets (over 100K trades, which I guess doesn’t really mean over 100K different people) to see who will be the future president in 2008. According to intrade (on Dec 17th)  it will come down to Hillary (with VP candidate Bayh or Obama) vs. Giuliani (with VP Huckabee), and it looks like Hillary is a shoe-in.

One interesting thing I noticed is that there seems to be an internal consistency to these markets, even though the participants are (probably) different.

There is a close correlation between the nominee front runner charts and the presidential winners charts (even though they are unlinked as markets). It will be interesting to see how these predictions change as we get closer to the election, and whether they will actually predict the future…

 BTW - according to intrade there is about a 50% chance of a US recession next year (below the sentiment in September, but above the low in October), but only small chance that Israel/US will bomb Iran (way down from September)…

I have been playing with Amazon S3 as a remote backup mechanism for my machines. It is well thought out, works well, and is cheap. For many applications it is a “good enough” solution for managed storage.

Now the friendly folks at Amazon have announced their SimpleDB which provides the core functionality of a DB - real-time lookup and simple querying of structured data. Looks like yet another “good enough solution” for many web based businesses.

It seems like Amazon is rolling along, trying to become the “data center for everyone else”. Big enterprise are not going to be able to divest themselves of their data centers anytime soon, but small business can have the support provided by a data center – with only a fraction of the expense.

Now match this up with a tailored IDE and programming framework to make it even easier to use these services – and you’ll have a killer web application platform (better than Force.com since it doesn’t require the use of a proprietary language – just a specific API).

I have been seeing a lot of presentations from budding entrepreneurs trying to at least get in the door to present their ideas to some source of funding. Of course, there is great variation in the quality of the presentations (both style and content) – but it isn’t the quality of the graphics that matters (though you can spend hours with Powerpoint wasting time on the presentation), but rather the content and your presentation style.

There are quite a few primers on the web on how to create a good presentation for VCs and other potential investors (e.g. 102030 rule, enetrepreneur pitch guidelines) so I don’t feel the need to write yet another one. In general two simple rules that I use are probably good enough:
1. When creating a presentation a good rule of thumb for the order of a presentation is: Tell them what you’re gonna tell them, Tell them, Tell them what you told them (I heard this first from Stephen Boies while I was at IBM Research).
2. Get to the point – quickly. Since we are a technology oriented fund, tell me about the technology, what it does and why it is unique. So you may actually need to tweak the presentation based on the audience. Or maybe just do it without slides (some of the best pitches were from someone just telling me their story – not a fancy Powerpoint presentation).

One pet peeve of mine is the use too many superlatives – you want me to get excited, but don’t tell me this is the best thing since sliced bread – every entrepreneur thinks that about their idea. You need to convince me. Tell me something I didn’t know. Convince me you know your technical domain and business environment (including competitors).

Another pet peeve is “patent pending technology” – important to mention since it shows that you have respect for your IP and protecting it. Beyond that – it doesn’t really say much. Anybody with a “dollar and a dream” can submit a patent, and in many cases even when it is issued – it doesn’t actually mean much about the value of the idea or technology.

An interesting study was published yesterday by the Kaufman Foundation on “Returns to Angel Investors in Groups” which did a large scale study on the returns of angel investment groups in seed and early stage investments.  The main conclusions are:
1. Due diligence time: More hours of due diligence positively relates to greater returns.
2. Experience: An angel investor’s expertise in the industry of the venture in which they invest also is related to greater returns.
3. Participation: Angel investors that interacted with their portfolio companies at least a couple of times per month by entoring, coaching, providing leads, and/or monitoring performance.

 Points 2 and 3 are the most relevant to enttrepreneurs (as long as they decide to invest, who cares how long the DD takes - as long as it is reasonable). The charts below summarize the two main points on the value of angel expertise and experience in providing value to both the entrepreneur and their investors:

These numbers back up the my previous claims in “Increasing Your Chances as an Entrepreneur” - anything you can do to get experienced professionals willing to take an active role as part of your team - do it, it will greatly enhance your chances at success.

Adding semantic information to the web has been on the agenda for a number of years (at least since 2001), and is high on the hype cycle. It is clear the value of web semantics once they exist – real automated digital assistants, search engines that can find what we meant – not just what we asked for. Practically magic.

So why aren’t web semantics evolving as fast as the web itself (though it seems like a new search engine claiming semantic capability if born almost day)? One key reason is that it is still in the domain of techies - all but meaningless to 95% of regular web users. To really start taking off requires harnessing that 95% of the web, making it useful and profitable for regular web users to generate useful web semantics – for their own benefit (or as Adam Smith put it – “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest..”).

OK, how do we spark this self interest and get the broader web community providing the semantics? The key is to take advantage of the currency of the web - advertising. Everybody is trying to make money off their sites by advertising. What if you could double, or triple advertising revenue by describing what your site is about (i.e simple semantics) just by a simple procedure that is no harder than what is needed to just get regular advertisements on your site? Even better, what if someone else could do for you, and you share the additional revenue (Tom Sawyer would be proud).

So it really is simple – make it so easy to add semantics that anyone can do it, make it worthwhile ($$$) so that everyone will to do it. Then sit back and watch web semantics start taking off. It won’t be perfect, but at least it will start to flesh-out and start evolving at the same velocity as the web itself.

I was on a IsraelNetSphere panel last week about Web startups and Angels. The moderator (Yaron Orenstein) asked an interesting question – if we could give a piece of advice to new entrepreneurs what would it be.

Not surprisingly the first was to come prepared to meetings, don’t just assume that you can win over an investor off-the-cuff. Now of course this is hard for someone who has never done it before (since you really have no idea how to prepare), but if you want to succeed - prepare. Present your ideas to friends, family, classmates – refine and hone your pitch as much as possible. Sort of like the old joke about “how do you get to Carnegie Hall?” – practice, practice, practice. I think that young entrepreneurs see people doing these types of pitches and assume that it is simple – it isn’t. In my experience the people who make something seem really simple are the ones who spent to most time preparing.

That doesn’t mean be long winded – be short and to the point. Some investors like presentations, other like discussions. You probably won’t know until get into the meeting, so prepare for both.

The second piece of advice was to listen – and that two of you should go to every meeting. Whenever one speaks, the other should listen. Intently. Think of every meeting as a way to prepare for the next one (and 99% of your meetings will be a prelude to another meeting).

Finally – persevere. You will hear a lot of “No’s” before you hear a Yes. You are going to meetings where people aren’t giving you the benefit of the doubt, and are essentially testing you, and your ideas.

Now if you think the preparation is hard – wait until you actually have the money and need to deliver…..