The Enterprise Activity Stream

Here’s a partially formed thought:  For any enterprise with an on-line product/service or for any enterprise that does business on-line (I think that’s pretty much all of them by now), a meaningful understanding of User-Product-Service Activity will very quickly (if not already) become a core value proposition.  Understanding what users & customers are doing, when & why; how is a product being used, when & why;    Two key words here are activity and enterprise.

Activity represents the component parts of behavior.

Activity tells you why, when, where and how your product or service is valuable to your customer.  It also tells you how your product or service is being used at a level of detail never before possible, enabling an understanding that allows you to improve your product and service relentlessly.  Therefore, it’s core to any iterative process as well.  Knowledge of activity and behavior provide an unfair advantage in understanding customer’s attitude and willingness to continue being a customer. It enables maximally relevant conversations between you and your customer about what matters…whatever that might be.

An “activity stream” is the essence of Twitter and a core feature of Facebook…however, these are consumer services and have a generic, spread-spectrum focus.  Twitter and Facebook mix the personal and professional, business and consumer, artistic, political, religious and everywhere in between. Furthermore, many social networking platforms are simply not viable within the enterprise today.

In any event, the concept worth exploring is an Enterprise Activity Stream and it’s implications for businesses going forward.  I believe salesforce.com is onto this concept to a certain extent with its future Chatter platform but we’re in the very early days.  The possibilities and implications here are pretty big…more on this soon….

life-style businesses versus high-growth businesses

In 1998, after having worked at a number of start-ups, I started my first company (BroadJump; with 3 co-founders).  You could fill an ocean with all the things we didn’t know about start-ups, business plans, venture capital, and so on.  One thing we did know, because our investors made sure we understood, was the difference between a life-style business and a high-growth, venture-backed business.  The difference was spelled out primarily in terms of returns:  it was typical for high-growth / venture backed companies to gun for a 10x return or better on an investor’s capital. While the goal is much the same today, the “10x return” is increasingly rare in either acquisitions or IPOs and what makes a good return is up for discussion.

Let’s define what “life-style business” means (to me, in any case):

  1. it’s short hand for a business that, in general, does not REQUIRE or USE professional investors (venture capital) money to finance operations. When a business uses OPM (other people’s money), the explicit (or in many cases implicit) agreement is to accept the investor’s expectations around outcome and business’s performance.  Not using OPM means that life-style businesses typically are not obligated to growth / performance goals beyond “making ends meet” sort of profitability. If they happen to exceed such goals, fantastic.
  2. As a consequence of #1, life-style businesses are sink-or-swim operations for founders/principles who typically have much greater control, ownership, and accountability (fewer boards, fewer executives).
  3. “business sustainability” is significantly prioritized over “growth and scale” – this is inclusive of the notion that a life-style business is not built for a certain type of exit within a certain time frame

Here’s the point: a blind “swing for the fences, get a 10x return or die trying” approach to starting and growing a business is simply not realistic in today’s environment.  I’ll be the first person jumping for joy if those days return but I don’t see a reason to believe that they’ll be back any time in the next 3 years, if ever.  Some market segments are worse off than others, but every segment has been negatively affected to some degree.

For start-ups, especially web/software/SaaS start-ups, I believe the following is a time-and-place appropriate approach to growth:

  1. a highly-efficient, life-style business approach from seed-stage through profitability (or very close)
  2. an openness to positive exits at any stage (this has implications on control and ownership)
  3. balanced analysis ahead of using OPM to enter “high-growth” mode – but not losing the highly efficient heritage

UPDATE: March 28th:

There’s an interesting post at Techcrunch on the topic of risk aversion and selling early that makes sense to comment on given #2 above.  In short, the article makes two arguments for why companies sell early instead of swinging for the fences: after-the-fact risk aversion where companies sell as soon as a viable offer comes in rather than double-down and go for a much bigger return.

Most people in the world would take the certainty of $1 million over a chance they could make $30 million. I’m not knocking that. I’ll sell SarahLacy right now for $1 million. (Takers?) But I tend to think of people who make that decision as being risk-adverse. What was surprising to me, is that people who have a huge tolerance for risk on the front end– literally creating something out of nothing—become risk-adverse when they’ve proven that it’s actually worth something.

After-the-fact risk aversion is probably related to the second reason in the article: founder’s like solving the technical, early problem but not scaling and growing the company with discipline. The author also lumps Sarbanes-Oxley requirements of public companies into this category.

In other words, “the art of the hack.” Once it’s solved, managing the company, growing revenues, taking on HR problems—all of that is the boring part. He loves starting companies and has been successful at it, but he has zero desire to build one into the next Google. There are a lot of guys like that in the Valley, too, but they’ve also got a huge pool of experienced managers to hand the company off to.

I think both of these are true and worth assessing as any company grows. There will always be points in time and company scale where founders / managers fall out of their comfort zone – that’s one definition of success, by the way. That fact of start-up-dom is entirely distinct from how a company should execute:  you can always hire in experience scaling and growing a company at any stage; you can also find smaller parts of the larger problem to scratch the problem-solving itch that commonly excites early employees. Doing both could make sense if the decision is to double down and grow the company and its value to customers and the market – but make this last decision first, in the presence of as much data as possible; what to do about risk aversion and the love of problem solving will follow.

Venture Capital Supply Chain

Based on a few recent conversations, it seems like a good idea to review, at a high level, the basic supply chain for Venture Capital and Private Equity.

Perhaps a good starting place: what’s the difference between Private Equity (PE) and Venture Capital?  In my opinion, not too much: Private Equity generically refers to non-publicly available equity investments that INCLUDE stuff like early- and later-stage venture investments.  Therefore, my definition is that venture capital typically refers to earlier stage (private equity) investments; private equity typically refers to considerably later-stage (traditionally debt-enabled) buy-out type of investments from companies such as Cerberus and Blackstone. And, to be clear, when we talk about the amount of capital raised being $30billion and declining, we’re referrring to early-stage venture capital and not the larger PE/hedge fund markets.

The following picture shows the basic supply chain for venture capital:

The flow of money from institutional investors to target companies

The flow of money from institutional investors to target companies

Starting on the left, the folks who fund the venture investors are the institutional investors. Institutional investors are folks like public pension funds (such as The California Public Employees’ Retirement System or CalPERS) and university endowments (the BIG 5 are Harvard, Yale, Stanford, Princeton, and The University of Texas) I’ll have more to say on institutional investors in a subsequent post. These institutions spread investment risk across multiple asset classes that include higher-risk (and theoretically higher-reward) investments such as venture capital and private equity (along with traditional stocks, bonds, real estate, etc.). When they put money into venture funds, they become “limited partners” of those funds.

In the middle, the venture investors raise new funds every 3-5 years (no hard rule here) from institutional investors and occasionally high net-worth individuals. Funds can range in size from small (under $50m) to quite large (over $1 billion); typically the top-tier VCs raise funds that are $300-$800 million in size these days.  Venture funds can and do over lap (this is an important how-VCs-get-paid fact for later discussion); in other words, before one fund runs out, the next fund is raised. In more established firms, many funds can be simultaneously operating at various life stages.  In particular, as funds are depleted by investments in companies, VCs will keep some percentage of that fund “in reserve” for follow-on investments in companies from that fund.

On the right are the companies that receive investment. These can be companies at any stage of life: start-up to age-old brand name like K-Mart. The terms and conditions and desired outcomes depend on the company, the stage of life, and various other factors.

Of course, customers and employees of the target companies an important part of the supply chain but not covered in this post.

WYNTK: What you need to know

quick note:  I’m going to start using WYNTK as a way to capture what I think is important to know on a particular topic.

in particular, I think there is a TON of stuff that’s not important to know on most topics. And having a short-hand way to cut out the fat and get to the meat of a particular topic is something that I wish I had when I was trying to understand a topic / start a company / raise money / etc.

An Informal CV

For nearly 20 years I’ve worked in security, networking, media, communications and software industries.  I’ve served as both CEO and board member to public and private companies leading all functional areas including strategy, operations, product, sales and marketing efforts.  I’ve raised well over $100m in capital across the companies listed below.  The goal, of course, is to create significant shareholder value within each company, build great teams, work hard, play hard, etc.  The majority of companies I’ve led have experienced a successful IPO or M&A transaction, returning nearly $800m in realized gains.  And to be clear, in every case, it was a team effort. Both the successes and the challenges are going to be the subject of this blog, including an investigation of how to align and balance the requirements between board members, shareholders, customers and employees inside high-growth companies.

Currently:

Investor, Board Member: SocialWare, Inc.

Investor, Board Member:  SpareFoot, Inc.

Investor, board member   uControl

Mentor, Capital Factory

Investor  Challenge Gaming

02/06 – 03/09       ON Networks
Founder, CEO, Board member

01/05 – 11/05          3Com Corporation (NASDAQ: COMS) and now HP
President, Security Division

01/04 – 01/05         TippingPoint, Inc. (NASDAQ: TPTI)
Chief Executive Officer

• Grew revenue from $5.7M to $33.3M (484%) in one year
• Increased sell-side research coverage to 4 analysts in 6 months – all with buy or strong-buy ratings
• Increased stock price from $19 per share to $47 ahead of the sale of the Company ($430m) to 3Com in Jan 05

08/01 – 01/05          TippingPoint, Inc. (NASDAQ: TPTI)
Board member;  Lead special committee raising $24m PIPE in Oct 03

01/03 – 11/03          Motive, Inc. (acquired by Alcatel)
President and Board Member

11/98 –01/03          BroadJump, Inc. (acquired by Motive)
Founder, CEO, Board Member

• Led as CEO from biz plan through acquisition
• Grew revenue to $50 million; $100+ million in bookings annually
• Guided company through challenging “bubble” economics in 2002

03/98 – 11/98        Cisco Systems
Director, Broadband Software Development

10/96 – 3/98           NetSpeed, Inc (Acquired by Cisco Systems)
Manager, Architect

1996                        BMC Software
Software Development Manager

1993                        Motoroloa
Software Engineer, Engineering Manager

1988                       Thomas-Conrad Corp (Acquired by Compaq)
Software Engineer

1986                      Dell Computer (PC’s Limited)
Fifth employee at company; Support, SW Development, etc.

EDUCATION
THE UNIVERSITY OF TEXAS AT AUSTIN
Bachelor Degree in Electrical and Computer Engineering, 1991