Tuesday, May 30, 2006

Microsoft High Priority Patch!?

I've been tinkering with the IE7 beta 2 preview again and I have my homepage set to update.microsoft.com as an added measure to make sure that I'm always up-to-date on patches. I also use Windows Update to automatically download and install patches. However, from time-to-time I find that I'm missing a patch that Windows Update missed.

Today Microsoft informed me of a "High Priority Update" that I'll be sure to install:
The Windows Genuine Advantage Notification tool notifies you if your copy of Windows is not genuine. If your system is found to be non-genuine, the tool will help you obtain a licensed copy of windows.
Gee, thanks Microsoft!

Actually, in all seriousness it is quite a good idea to use the a licensed copy of Windows these days because many of Microsoft's security features like Windows and Office Update and the Microsoft Security Baseline Analyzer require the validation check. I guess there isn't much difference between the validation check and installing this new "update" so I'm going to go ahead and put it on my desktop because if "virtually" licensed software some how gets installed in the future Microsoft will be able to tell how I can pay for it. :)

Big Surprise: Tim O'Reilly is not Evil

Tim O'Reilly has taken the time to respond to the "owning web 2.0" controversy... and guess what... it turns out he has a reasonable explanation... that he does want to protect his brand of conference but isn't trying to claim ownership of web 2.0 in any other context. I agree with Tim's point that a polite/informal cease-and-desist request would have been a nicer first step but otherwise, I still can't see anything that he did wrong. Hopefully we can all get back to work now.

Sunday, May 28, 2006

Sticking up for O'Reilly

The blogsphere is buzzing again... this time about O'Reilly attempting to protect a trademark they have applied for regarding the use of "Web 2.0" for conferences. It all started when Tom Ratery posted a cease-and-desist letter from a CMP Media lawyer on behalf of CMP & O'Reilly asking the IT@Cork conference not to use "Web 2.0" in the title of their upcoming conference.

Sara Winge, O'Reilly's VP of Corporate Communications responded quickly on behalf of O'Reilly because Tim is on vacation. Thats what the blogsphere wants right, a quick response with an explanation? Nope, O'Reilly Media, Inc., Sara and Tim O'Reilly are being absolutely roasted across the the blogshere and the comments on O'Reilly Radar are just plain nasty. Sara has now even written and update on the controversy that seems to just be adding fuel to the flames. This is ridiculous and O'Reilly, Tim and Sara all deserve better.

Many people see protecting the "Web 2.0" trademark as a hypocritical stance from Tim O'Reilly because he has been such a champion of the open source movement. I probably agree with this sentiment but I can't stand for the personal attacks that have taken place against Tim O'Reilly or Sara Winge. The insults flying on the O'Reilly Radar blog are absolutely childish. O'Reilly has spent so much time and energy promoting open source benefits to the community that even if they are completely wrong on this issue they do deserve wiggle room. Furthermore, Tim hasn't even had a chance to respond! Give the man a chance to explain himself! Oh and by the way, did anyone even consider that Tim may not have any idea that the letter was even sent? Surely Tim isn't involved in every legal decision that O'Reilly makes and this may not have even made it to his desk.

I like O'Reilly and they are going to have to F-up a lot more than simply attempting to protect a trademark in order for me to lose any respect for them.

Here are links to whats being said:

Wednesday, May 24, 2006

Investor Pitch: Bottoms Up Market Sizing

Continuing my mini-series on sizing the market for investors is the bottoms up approach, which is generally considered to be the most credible way for estimating existing demand for a product/solution. I like to use two types of bottoms up forecasting, which I describe as the total potential market and the total competitive sales approaches.

The total potential market approach is an easy way to get an idea of how big your product can be if you know who your target customers are and what your average selling price (ASP) is. Entrepreneurs need to be intellectually honest about what their sweet spot really is and how much their customers will actually pay, but once satisfied with these numbers the total market potential can be estimated by simply multiplying the number of customers in the target market by the ASP. For example, there are 13 million businesses in North America but only 8% of them have over $1M in annual revenue. If your product sells for $50K your total potential market is not $650 billion because you're probably not going to sell anything to 92% of companies with annual revenues below $1M. Zapdata by D&B is provides an accurate list of companies that is easily accessed, free (at least for the number of leads) and sortable based on common demographics such as location, sales, industry and number of employees. Zapdata provides lists for marketing purposes and I was skeptical at first that their numbers represented the number of contacts rather than the number of companies, but I've queried them directly about this numerous times and they assure me that the "leads" they describe do represent companies and not contacts.

The second part of measuring the market in this manner is the accuracy of the ASP. It is very hard to know what an ASP will actually be in sales situations but competitor price points do provide very strong data points. If no competition exists than estimating the savings or new revenue the product creates can help build the case for your ASP. Lastly, simply asking prospective customers what they would pay is another a great way to target an appropriate ASP.

Ultimately, the more specific the entrepreneur can be about the target customer, (nationwide, financial services with annual revenue from $50-$250M, etc.) and the more evidence provided that the price points are accurate, the more believable this type of total market potential approach will be.

The total competitive sales approach is highly credible when your goal is to build a better mouse trap, which replaces an existing product that has established sales numbers. This approach asks the question of "how much do people currently spend on the products that you intend to replace?" For example VOIP is a better way for consumers to make local and long distance phone calls. Thus, a credible way to size the market for VOIP would be to count up the revenues of landline phone competitors, discount it based on the savings that VOIP offers and then add this figure to the existing VOIP sales of Vonage, 8X8, Yahoo, Skype, etc.

If the competitive vendors are public than their revenues by product line are usually easy to come by in either SEC filings or analyst reports. Marketwatch and other financial news sources often will have the high level figures of total revenue for public companies. However, if more detail is required FreeEDGAR is a good option. Ironically, FreeEDGAR is not free but it is pretty cheap and 2 day access is only $9.95.

Sales data for private companies is much harder to come by without subscribing to D&B. D&B's website is terrible, it slows to a crawl and can never seem to access a new report when I'm pressed to meet a deadline. However, D&B does keep a massive database of private company revenue and if you prepare in advance their numerous website issues shouldn't be a significant barrier... but seriously, never count on D&B for anything last minute! Hoovers is another source of data but it is not as wide as D&B. D&B's Marketing Assistant Subscription is only $59.95 per month and it does not require an annual commitment. These numbers are self reported so their accuracy is not 100% because some companies will find in their interest to under or overstate their revenue. However, entrepreneurs who are competing against multiple competitors will find that the overall D&B data becomes incrementally more reliable as the pool of companies increases.

So many entrepreneurs rely only on Gartner's market research, which investors don't value highly, that performing a bottoms up market sizing is another small way that entrepreneurs can build personal credibility with the investors they are working with. At first performing a bottoms up market sizing can seem out of reach for bootstrapping entrepreneurs but the method I used costs less than $70.

See these earlier posts for more information on sizing the market for investors:

Also, will write in the future on forecasting future markets by "catalyzing the dream."

Tuesday, May 23, 2006

Vonage IPO Raises $531M... Bankruptcy in 2008?

Vonage's much maligned IPO was finally sold today at $17 per share. Vonage sold 31.25 million shares generating $531M in capital, which is the 2nd largest Internet related public offering over the last 5 years behind Google's $2B IPO in 2004.

I just don't understand why anyone would want a piece of Vonage. They have a technology that is rapidly being commoditized and they aren't profitable. Sure there is a landslide of demand coming for VOIP, but in todays world technology doesn't stay new very long and Vonage isn't offering a premium/high tech/value-added service any longer. 8X8, Verizon, Yahoo, Skype and many others are jumping into this market so if Vonage can't generate profit now how are they going to make any money as more competitors sprout up and undercut their prices?

At Vonage's current burn rate of $75M in Q106, this $531M should last them for 7.5 more quarters. I wonder if we'll see a Vonage bankruptcy in 2008, or maybe sooner if they have to cut prices further. I know that growth in consumer VOIP demand is high, but I don't see VOIP becoming mainstream by 2008 and I think mainstream adoption is the only way that Vonage will be able to reach the kind of scale it would require to be a successful company.

At the end of the day Vonage's customers may wind up being the biggest loser of all paying too much for VOIP and losing money on the stock. Ouch!

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Monday, May 22, 2006

Temporary Fix for MS Word Trojan

According to the latest Microsoft security research, the latest trojans compromising MS Word, which are commonly know as, BackDoor-CKB!cfaae1e6, Ginwui or W97M_MDROPPER can be mitigated by limiting the software restriction policy because the attacks seen thus far require administrator privileges. Microsoft actually has a pretty good write up on how to set the software restriction policy and to their credit they do provide a free hotline (866.PCSAFETY) customers that need help with viruses. SANS also has a list of work around ideas but the good news is that this trojan does not seem to be spreading very quickly and all of the major anti-virus software vendors have updated their databases with signatures that detect it.

For more information on this trojan see my earlier post from 5/20/06:

MS Word Trojan Targets Corporate Users

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Zefrank Vlog is Hilarious

I stumbled upon Zefrank's video blog called the "the show" about a week ago and its definitely the funniest thing on the net. If you like random slightly crude left-leaning humor you're really going to enjoy it. If you are offended by a complete jackass making a fool of himself than Zefrank probably isn't for you.

Btw, if anyone knows someone at the exact opposite point on the other side of the earth from Palo Alto who wants to make an earth sandwich with me please contact me ASAP. Earth sandwich... that is ridiculous!

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Sunday, May 21, 2006

Omid Kordestani: $289 Million Dollar Man

The San Jose Mercury News ran a roundup of Silicon Valley executive pay in this mornings Sunday edition. Google's Sr. VP of Sales, Omid Kordestani topped the list taking in $289M in 2005 from a base salary of $175K, a bonus of $838K and $287.9M in stock options. And believe it or not, Kordestani's compensation was actually much greater that $289M because the value of his options were calculated at the time he exercised them and with Google's stock trading at $375 they are actually worth closer to $500M. In fact, SEC records indicate that Kordestani sold $422M in worth of Google stock in 2005, although some or all of this stock may have been have included options exercised prior to 2005.

The Mercury also created a list of the top 100. Here is a preview of the top 10:

  1. Omid Kordestani, SVP Google, $289M
  2. Terry Semel, CEO Yahoo, $182M
  3. Larry Ellison, CEO Oracle, $75M
  4. Farzad Nazem, CTO Yahoo, $72M
  5. John Thompson, CEO Symantec, $72M
  6. John Chambers, CEO Cisco, $63M
  7. Harold Messmer, CEO Robert Half, $51M
  8. Susan Decker, CFO Yahoo, $40M
  9. Thomas Mendoza, President Network Appliance, $37M
  10. Jeffery Henley, Chairman Oracle, $37M

Saturday, May 20, 2006

Firefox 2 Alpha Released / Testing Flock

The Firefox 2 Alpha, titled Bon Echo, has been released for public testing and has gotten a postive review for its speed on Boing Boing... but this post is really just a chance to see what happens when posting from Flock a second time... I'm keeping my fingers crossed.

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Flock Screws Up Blogger HTML?

I just wrote my post on the MS Word trojan using Flock. I was kind of starting to like blogging with Flock but somehow posting with it seems to have screwed up the formatting of my blog. The sidebar with my profile, links and archives seems to have been replaced by part of my posting on SkypeOut/Vonage IPO post from earlier this week. I can do some extremely basic stuff with html, but I have no idea how to get formatting back to normal. I suppose I'll have to see it Tom can help. This is very annoying... Argh!

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MS Word Trojan Targets Corporate Users

A new vulnerability has been found in MS Word that allows attackers to "execute any external commands, download additional Trojans, capture desktop screen shots, monitor and record keystrokes or passwords," according to McAfee. The vulnerability is known as primarily as, BackDoor-CKB!cfaae1e6 or Ginwui requires user to download malicious MS Word files in order to affect a system and does not spread virally like a worm. However, the exploit is tricky because it attempts to mimic business common communication in order to entice users to download the Word file, which is usually distributed as an email attachment. According to Microsoft's 2nd Security Resonse Center Blog Posting on the trojan, the two common email subject headers carrying the malware are:

  1. Notice
  2. RE Plan for final agreement

This vulnerability affects Word XP and Word 2003. The malware does not install on Word 2000, but it does make the application crash. Microsoft reports that Word Viewer is not affected and that they are on track to release a patch fixing the problem in time for their next update release on June 13th.

SANS has released recommended defenses for mitigating this threat until the vendor patch is released. The most practical advice is really to use Open Office to open Word attachments until the application can be patched. Other recommendations like quarantining attachments for several hours or waiting to open attachments until after their validity has been confirmed by the sender may not realistic for many organizations that rely on rapid reaction to Word documents.

Most of the major anti-virus software have already updated their signature database:




Dropper component
Backdoor.Ginwui (Backdoor component)




Trend Micro:


I could not find a signature for ClamAV in searching their database earlier this morning but ClamAV, which is open source, is usually one of the fastest to write new signatures and I'm sure the update will be added shortly.

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Tuesday, May 16, 2006

Non-VC Buzz: Web 2.0 & TechCrunch Influence

After having written last week about VC's buzz surrounding Josh Kopleman's post that too many companies are building products solely for the TechCrunch / early-adopter audience, I've noticed that a number of the non-VC blogs I read have now also commented on the subject. However, I believe the whole meme still seems to under-estimate the value of this audience in two key ways:

  1. Early-adopters demonstrate market traction to friends&family and seed stage investors (but not Series A) that helps keep these startups afloat
  2. Early-adopters build out the user-generated content and community that so many web 2.0 startup rely on in order to add value to a wider audiences... think LinkedIn... mainstream corporate America is now starting to use this service but only because the network of 5M+ has existing value

Here is a summary of what continues to be an interesting conversation:

Matt Marshall suggests that the "53,651" buzz is itself newsworthy... and I agree :)

Dharmesh Shah advises that the TechCrunch landslide of user feedback is largely redundant and hard to manage. He further writes that "[startups are] much better off, where possible, trying to “stage” this adoption – to the degree [they] have control over it."

Om Malik argues that the mainstream will adopt web 2.0 technologies slowly and the tipping point is likely to be Yahoo, AOL and Microsoft incorporating them into their mainstream product launches. He also concludes that Web 2.0 may have its greatest impact on the enterprise where many of the scale issues that he claims plague web 2.0 companies with user bases greater than 300,000 users do not exist.

Dave Winer writes that size of user base only has relative importance if the startup is looking to make money and/or raise venture capital. He also suggests that VCs are not usually investors in very early technologies and therefore user base may not even be an indication of potential success for truly ground breaking companies. (I'd like to caution that I personally think this is very dangerous advice because very few companies really have ground-breaking technology that is simply too early for VCs to invest in w/o clear signs of market traction. Yet virtually every entrepreneur believes they have this type of ground-breaking technology. My three cents (ie more than anyone asked for) is that w/o market traction startups should remain hobbies rather than businesses because knowing when an entrepreneur should kill his/her own baby is always extremely difficult. People don't lose their homes because they decided to re-mortgage in support of their hobbies, yet this happens to entrepreneurs all too often. Delicious is a great example of a company that started as a hobby.)

Robert Scoble notes how far mainstream Americans are from web 2.0 commenting that he doesn't see ipods or any sign of web presence in advertising (ie urls) in his hometown. He suggests that widespread wifi, ala Google in Mountain View, and a more geek oriented culture may help diffuse web 2.0 to wider audiences.

If you missed it, don't forget to check out my summary of the last weeks VC buzz including Brad Feld, Charlie O'Donnell, Paul Kedrosky, Josh Kopelman, Jeff Nolan and David Beisel.

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Ebay Killing Vonage with Free SkypeOut?

As I wrote last week, I am very skeptical of Vonage's IPO. Now that Ebay / Skype have announced free calling to any phone within the US & Canada throughout the end of the year I think Vonage may be on the rocks... Not just the IPO, but the entire company. Vonage is burning so much capital that if they don't go public it isn't clear which institutional investors will put up the hundreds of millions of dollars ($225M to get through the rest of the year based on $75M losses through Q106 that Andy Kessler sites here) that it will require to keep Vonage going. It has been speculated that Vonage is merely posturing in an attempt to be acquired. One the one hand the acquisition strategy seems to make sense but on the other hand I can't really see how Vonage has any value at all given that its technology is rapidly being commodotized combined with the fact that is not anywhere near profitability.

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Monday, May 15, 2006

Treo 700p Annouced... but will it work?

Palm announced the new Treo 700p smart phone earlier today. The new phone runs the Palm operating system and is an alternative to the Windows Mobile 5.0 based Treo 700 that was launched with Verizon earlier this year. The Treo 700p has numerous cool benefits including:

  • Fast data connection with EvDO
  • An improved camera (now 1.3 mega pixels)
  • The ability to function as a high speed modem at broadband speeds for laptops
  • Increased built in memory capacity (now 128mb)
  • Full PDF support with DataViz
  • Better integration with MS Exchange

All of this sounds great, but my real question is does any of it actually work? I have a Treo 650 and while I love the functionality, the phone is ridiculously unreliable. First, my touch screen really sucks. In fact some times I have to press the screen 5-10 times just to pick up a call, which is both annoying and dangerous while driving... yes, I am that guy :)... and the phone reboots itself at least once per day, but worse yet, it's often its phone calls that cause the reboot! I've literally missed important phone calls because the incoming call caused the phone to reboot. How bad is that? For all of the extras, calender, email, web, the one thing I absolutely need the Treo to do is receive phone calls! Its an absolute joke and while I'd love to use the Palm OS rather than Windows when I upgrade later this year, Palm will have a long way to go in rebuilding my trust before I buy anything else with their operating system on it.

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Sunday, May 14, 2006

Silicon Valley: Cradle of Startup Cultivation

A lot has be written about Silicon Valley being the best place in the world to start a technology company. The argument usually centers around 3 key elements:
  1. Culture that encourages entrepreneurship and is accepting of failed startups
  2. Legions of skilled engineers in the work force and access to world class research labs
  3. Unparalleled access to venture capital
All of those things are great and there is no question they play a strong role, but how about the Bay Area just being the nicest place on earth to live?

The Bay Area has it all. The weather is great, never too hot in the summer and never too cold in the winter. With in 4 hours drive we've got great skiing in Lake Tahoe, Napa Valley wine country, Yosemite, beaches (okay LA's are nicer for swimming but we've got Mavericks for surfing), two world class universities and access to San Francisco, which despite being a relatively small is one of the most metropolitan cities in the world. So maybe its just that cool/smart people want to live here and interesting things happen when a bunch of cool/smart people get together. :)

Anyway, time to logout... I'm about to head out an ride my bike around the Portola Loop and enjoy another gorgeous day here in Palo Alto.

Friday, May 12, 2006

VC Buzz: Web 2.0 & TechCrunch Influence

Josh Kopelman recently wrote a post that "strongly caution[s] entrepreneurs from taking their initial consumer adoption metrics and extrapolating them too far into the future" because the early-adopters of technology don't represent main stream Americans who ultimately need to be converted in order for these startups to be successful. Much of the focus seems to be on TechCrunch and the post really seems to have gotten the VC blogsphere buzzing. Brad Feld, Paul Kedrosky, Jeff Nolan, Charlie O'Donnell and David Beisel all have written detailed responses.

I think all of the posts are interesting and intelligent but they all do seem to underestimate the earlier adopters in two key ways:
  1. early-adopters are willing to build out the user generated content that so many of these startups rely on to provide value to main stream users later on
  2. while VCs may not be ready to make series A investments in web 2.0 startups with fewer than 25K users, these early-adopters provide a key metric for friends/family and seed rounds. It is definitely less costly to build a web 2.0 company than an enterprise software company but there are server, rack space, power and bandwidth cost that are beyond the means of many entrepreneurs.
Thus, I believe that that while these early-adopters are not sufficient on their own, they are imperative in building a venture fundable business. Nonetheless anyone starting a web 2.0 company should definitely read the following posts:

Brad Feld adds that the PR like TechCrunch can lead to an initial spike in site visits but these are trial users and usually do not represent sustainable growth.

Paul Kedrosky followed Brad Feld with similar post adding that TechCrunch readers make fickle beta testers and ties in the concept of "crossing the chasm."

Jeff Nolan writes that enterprises aren't likely to purchase Web 2.0 features like tagging behind the firewall anytime soon because they don't understand what del.icio.us is and that "maintenance is the primary function of enterprise IT, not innovation."

Charlie O'Donnell advises companies to release early and not worry about waiting to launch when TechCrunch decides to a review the site because many other more niche focused media outlets may be more effective in targeting the startups core audience and also a more attainable PR target.

David Beisel adds that all sources of users acquisition are not created equal. While he does not suggest in the post which sources are best (I've already left a comment asking) he does imply that TechCrunch's audience does not produce highly monetizable users.

Vonage IPO Doesn't Add Up

Vonage is doing an interesting thing with their IPO in that they are reserving shares for their customers to buy. Vonage is the largest provider of VOIP services with 1.6M customers and any of them who signed up for service prior to December 15th, 2005 will be eligible to participate in the IPO, which could be as much as 15% of the planned sale. Others have written that this offering is a sign of desperation. I don't agree with this because tapping into an additional pool of demand is a smart way to increase the shares values regardless of how hot or cold the IPO is. However, there is too much about the IPO that doesn't add up to me.

I'm not a savvy public market investor by any means, nor am I really qualified to speak about the issue at all but this is my blog so here are my thoughts on the issue anyway. On one hand Vonage's revenue ramp is very impressive:

$19M '03
$80M '04
$270M '05
$120M '06 (through March)

However, on the other hand they also had a net loss of $261M in '05 and have already lost $73M this year. Also, their CEO Jeff Citron is stepping aside because he is banned from the securities business after misconduct at a previous company. which lead to at $22.5M fine, which at the time was one of the largest fines ever given to an individual. While Sarbanes-Oxley makes it pretty unlikely that Vonage's books have been cooked by Citron, the SEC clearly doesn't want him anywhere near retail investors and that is a strong signal to stay away from Vonage. But lastly and most importantly, competition in the VOIP business is increasing rapidly and I don't think Vonage's revenue ramp is sustainable. One of Vonage's most direct competitors, Packet8, has been on a marketing tear recently and other serious competition is starting to shape up from the likes of Skype, Verizon cutting their costs and Yahoo's voice service. Furthermore, a new entrant, VoipStunt, is offering virtually free calls for just 10 euros per quarter.

I do have a couple of friends who have expressed interest in purchasing the IPO but only because they think they might get a quick pop with in the first couple of days. While this is certainly possible, short-term behavioral investing from retail investors is nothing more than gambling unless one has insider information... and then of course its illegal.

Anyone looking for more information on the Vonage IPO may want to read these posts:

V is for Vonage... T is for Takerover
Surprise, Surprise... Vonage Plans to File for IPO
Vonage IPO Smells Like Bait
Why I don't buy IPOs

Vonage's IPO

Like Vonage Service? Buy Some Shares
Vonage pitches IPO shares to customers

Vonage dumps on themselves

Vonage online IPO offering to Vonage customers

Vonage Offering Shares To Customers

Should I do it?

Vonage panics

Vonage's Uses VOIP Spam To Push IPO On Customers

Vonage IPO: Customer Directed Share Program
Vonage Open IPO

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Thursday, May 11, 2006

Another Great Stirr Event

Last night Stirr held its second mixer at the Blue Chalk Cafe in downtown Palo Alto. The event was packed with interesting people and was lots of fun. I met a lot of cool new people, drank a couple of beers and even had a few complimentary hot wings courtesy of CommerceNet.

This months presenters included:
  1. 3Jam, Andy Jagoe, CEO
  2. Accomplice, Jason Feinsmith, CEO
  3. JumpCut, Stephen Weibel, Director
  4. LogSavvy, Mark Searle, CEO
  5. TheMintPages, Angie Chang, CEO
Lots of event photos have been posted already and even some video too. I highly reccomend that anyone involved with the Silicon Valley startup community attend the next event.

Tuesday, May 09, 2006

Angel Tax Credits Would Be GREAT!!!

Jeff Cornwall writes and interesting and informative blog on entrepreneurship that I enjoy reading. I respect Mr. Cornwall's opinions, but his most recent posting claims that recently proposed legislation to support angel investing would be a bad thing because he writes

"If government wants to help entrepreneurship all the research shows that they should get less involved, not more involved."

I am all for minimally regulated markets and I am almost always for deregulation but not simply for the sake of deregulation... its got to make economic sense also! The two proposed bills would give angel's investors tax credits and create an Angel Investment Program that gives qualified angel groups $2M. This would great for entrepreneurs and I couldn't disagree with Mr. Cornwall any more strongly on this issue. The only possible downside would be a higher incidence of failure among startups due to more fundings taking place. However, the additional startups that would get funded are those that the investors are currently sitting on the fence with, not totally unqualified companies. Given that venture capital is an inexact science, I'm not convinced that these deals would be statistically worse than any others. Much like those companies that do get funded, some of these startups at the margin would fail, many would breakeven or have modest exists, and a small number would be breakout winners.

The topic of the rapidly growing pace of venture funds has been the subject of recent debate. I'm not sure where I stand on ventures funds growing from millions to billions, but providing more capital to be dispersed to startups in smaller chunks at the seed level through angel investors would allow more entrepreneurs to test their underlying hypothesis at a relatively low cost.

I strongly hope both of these bills get written into law.

Thursday, May 04, 2006

Investor Pitch: Flaws with Top Down Market Sizing

Top down is the most common and least convincing way to size a market. The top down approach relies on analysts market research from firms like Gartner, Forrester, Frost & Sullivan, Yankee Group, Jupiter and others. Most investors will not consider a top down sizing of the market to be a sufficient if they are calling it into question.

There are two main problems with this approach. First, analyst predictions often don't windup meeting expectations and it seems that every market has been predicted to $5 billion plus within 5 years by at least one research firm. Investors just don't put much stock these research firms assessments.

The second, more problematic issue, is that even when accurate, the market research figures represent the total market, which isn't necessarily relevant to the startup. For example, Gartner estimated that the security software market was worth $5.3 billion in 2004. Yet, at Cryptine we are not creating VPN, encryption, firewall, IPS or many other sub-categories included in Gartner's $5.3 billion figure so it is a gross exaggeration of our market. The important number is not what Gartner quotes but rather the total addressable market (TAM) and the total serviceable market. TAM and total serviceable market are used somewhat interchangeable by different people, which is kind of confusing. Yet, it doesn't really matter how these terms are described, rather that the market is effectively sized, but here is what logically makes sense to me:
  • Total Addressable Market = 100% of the market for type of product you sell
  • Total Serviceable Market = 100% of the market you could actually sell to
For example the TAM for encryption software would be the global sales of comparable encryption products. However, the total serviceable market would be encryption software sales in the region, verticals and segments the product is targets. For example the total serviceable market might be North American encryption software sales to mid-sized health care and financial services companies. Per my descriptions, entrepreneurs should use the total serviceable market because this is what investors use to determine whether or not a compelling liquidity event could be achieved. Occasionally, market research firms will provide this type of detail but when they don't a bottoms up approach provides a more credible sizing of the market, which I'll describe in one of my next postings.

Wednesday, May 03, 2006

Investor Pitch: Intro to the Market Slide

One of the most important topics in an entrepreneur's investor pitch slide deck is the market size. The point of the market slide is to demonstrate that your company can grow quickly to a size which can command an compelling liquidity event for the investor. VCs vary on how big a market they like to see, but as a general rule of thumb they tend to look for billion dollar markets and $500M would be a typical minimum. Dominating any niche market might be a successful outcome for an entrepreneur but a $25M can't produce a meaningful exit for VCs. If the market doesn't yet exist, as consumer internet didn't when Netscape was funded, than it becomes the entrepreneurs responsibility to sketch out when and how the market will materialize in addition to sizing it. For most entrepreneurs demonstrating market size will simply be an issue to check off rather than something that helps or hurts their pitch. However, if the market is perceived to over-invested than it can be a negative factor. In the case of Cryptine Networks, we are developing security software and we definitely have to combat the perception that security is an over-invested market. Furthermore, if the market is seen to be hot as clean tech or software as a service are now, it the market can also be a positive influencer.

Over my next couple of posts, I'll outline the three basic techniques of sizing a market: top down, bottom up and catalyzing the dream.

Entrepreneur to Entrepreneur Etiquette

This morning I pitched at the Angels Breakfast Club organized by Silicon Valley Bank. I presented first and afterwards I sat through two other entrepreneurs pitches. I always enjoy listening to how other entrepreneurs present their business opportunities because I generally take away a couple of ideas on how I can refine my own pitch. As I was listening to one of the presentations a burning question about the presenter's business jumped into my head. My first instinct was to raise my hand during the Q&A session. However, I quickly quelled that urge having remembered previous events that I have attended where other entrepreneurs have hurt the presenters by asking hard questions.

At events where multiple entrepreneurs are pitching to investors audiences I think it is very disrespectful for non-presenting entrepreneurs to ask questions. First and foremost entrepreneurs are detracting from dialogue opportunities that the presenter has with the investors in the room. Typically these types of events have only 5-10 minutes for Q&A and these minutes are precious for making a good impression and getting to the next meeting.

Second, the questions from other entrepreneurs to the presenters tend to be hardballs. I've always thought that, at the heart of it, these hard questions are an attempt by the other entrepreneurs to impress the investors. This bothers me because the opportunity for entrepreneurs in the audience to impress the investors is when they take the podium, not during someone else's presentation. Sadly, I've witnessed presenters choke on these tough questions and loose credibility with investors in attendance. It is quite possible that these difficult issues would be raised at a later date by interested investors but its definitely not fair that a non-presenting-entrepreneur takes the opportunity away from the presenter.

Lastly, this is just poor etiquette. These events are setup to help entrepreneurs and we should be supportive of each other. Just imagine how you would feel if after giving the presentation of your life and successfully answering the guy from Sequoia's and girl from DFJ's questions only to be derailed by some entrepreneur you've never met before.

I'm not suggesting that entrepreneurs who have questions about the fellow presenters'' businesses don't share them because it is constructive criticism that helps us all refine our own businesses. However, any criticism should be conveyed confidentially after the event.

Tuesday, May 02, 2006

Stirr Founders Table was a Hit

This evening I had the pleasure of attending the inaugural Stirr Founders Table event. The event consisted of dinner and drinks with 15 other entrepreneurs at the Mandarin Gourmet in downtown Palo Alto. It was both a fun and learning experience. The mix of entrepreneurs was mostly first timers but there were also a handful of very experienced founders who had taken companies public and/or created major liquidity events through acquisition. The dinner tables were split into two groups of 8, which lead to a fairly intimate setting for the everyone to share their dirty laundry in a setting that was totally comfortable and confidential. The dialogue was free flowing and everyone participated equally. I met an interesting group of people that I intend to follow up with. There is also some talk of a Founders Table alumni network, which I hope comes together because I'd like to keep in touch with everyone whom I met this evening. Ultimately, the event was a great source of founder peer-to-peer networking and clearly met a need that isn't being served by SVASE, SDForum or eBig. Feel free to contact me if anyone is interested in attending the next event, I'd be happy to facilitate an introduction:

afife "at" cryptine "dot" com

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