Cloud an PaaS – Will Hosting companies get PaaSed behind

The cloud space is getting more and more exciting.  The valley is buzzing with cloud startups, iIt is almost impossible to go out for lunch without hearing someone on the table next to you talking about the next big cloud idea.

For people like me who grew up in the hosting industry this is super exciting time.  Thus must be how the Brazilians feel in expectation of the world cup coming to their country.

The most interesting part of the cloud is the whole PaaS movement. The Heroku acquisition certainly gave a boost to the industry. Whether the $250M was a fair price or not could certainly  be debated (and  is debated passionately especially if wine is involved).  However, the amazing growth of their customer base is undeniable.

The main value of PaaS is of course the fact that developers do not have to worry about the whole hosting layer.  Developers simply include few lines of code in their app and boom the app can be accessed via a browser.  The PaaS providers usually use one of the big Cloud providers (Amazon, Rackspace, MSFT) to host the app. But the user does not see (often could not care less) where and how the app is hosted.

If you know developers you know this is very compelling value prop for them .  Developers love developing and dealing with server management is a nuisance they would love to paas on ( pun intended ) .

Despite the huge Heroku exit, I think we are still in the very beginning of something very exciting. There are millions of apps still hosted on ded servers and shared hosting accounts. Large percentage of those are going the PaaS way. So what does this mean for hosting companies, does this spell doomsday? Will customer leave in droves like Brazilians fans after the loss with France?

I am optimistic! I think there is food for everyone. Some developers will go to PaaS providers like Heroku (sits on top of  AMZN cloud) and will not ever want to hear about hosting firms.  Other developers however have needs that can’t  be met by AMZN cloud hosting.  This is where hosting companies can come in with their Hybrid / Private cloud offerings with a PaaS layer on top.

I predict more and more hosting companies will be partnering up with PaaS providers and offer some kind of PaaS+ hybrid + private cloud offering.

Either way exciting times are ahead of us, go PaaS and go Brazil in 2014 , I predict PaaS will make more money than the world cup though.

Theo

Google’s castle walls, which ones are crumbling and how to knock down the rest

When Warren Buffett talks about the kind of company he invests in he often mentions “moat”.  He likes companies that have “moats” , which keep the competition away.  In business school,  instead of using “moats” they talk about “sustainable competitive advantage” , “protectable technologies”  etc. However, I like to think of the medieval castle in Lord of the Rings,  if you remember that castle had several layers of defensive walls. 

Similar to Lord of the Rings Google had many walls and is building new ones.  This post tries to examine the walls that have crumbled, ones that are still standing  and new ones being build.

• Wall 1 ( crumbling)  The Algorithm -

 

This is the secret magic program that returns relevant results to your searches. This was a big scary wall that many competitors feared.   I remember back in my young Marketing Director days I spent years and years trying to figure out how to get on first page of Google for the term “web hosting”.  We even hired a “consultant” who almost put us out of business employing questionable tactics.  After 3 whole years  we finally succeeded.  So I can attest by three years of sweat and tears the Google algorithm was by far the best.  But no longer – both Yahoo and Microsoft have developed algorithms that are for all practical reasons are just as good.  Different test show different figures but really if there is a gap in relevancy between the engines it is quite small.  Maybe Google’s algorithm is  6% better than that of Yahoo, but will a regular user really distinguish whether a search result page is 6% more relevant? Very unlikely. Thus I feel the algorithm is no longer a wall that can protect Google’s business.

• Wall 2 (standing but not so tall) The Brand 

 

Google is a strong brand no doubt about it. But also there is no cost to the user to switch brands.  Search is free the user has no skin in the game.  I am loyal to the Volvo brand. But I am loyal because I have skin in the game, I am putting money down, if my car breaks I can’t get to work etc.  I know that if I buy Volvo I don’t have to worry about it breaking down, loosing value etc.  I am also loyal to RedHook beer but I have very little skin in the game there. I am willing to try new beers anytime the risk is only 5 bucks and if I find a better one,  so long Red Hook. With Google it only costs me 3 seconds to try something new and hey if it works better so long Google.

Opponents would say “but folks have emotional connection to Google”.  Maybe very small sliver of the population does. In fact lets explore why people have emotional connection to brands.

• They have skin in the game ( explained above)
• Brand bring status symbol ( ex. Mercedes, Belvedere vodka)
• Company is following  a cause that people identify with  ( Patagonia, Organic food brands)

 

Google doesn’t seem to fit into any of these. They do have that “no evil” stuff and the ” Google.org”. But both of these are loosing steam for once they are borderline collaborating with oppressive communist regime ( having grown up under communism you can tell I am abit touchy here) and Google.org has not been very active since the depression.

• Wall 2 – How to knock it down 

 

Build a product that is as good or better ( MS and Yahoo are there or almost there) and give users abit of  incentive to use it.   Search has pretty nice margins why not give some of those back to the user to get them to use your engine over Google.   Microsoft has already started doing that with Cashback. Some more ideas:

 a) pay companies to encourage employees to your engine and not t Google ;

b) partner up with ISPs and give folks rebates if they use you and not Google; 

c) give charities gifts if their members use you over Google , many charities have 100K+ members.

• Wall 3 – ( standing ) Data ingestion

 

Data ingestions is basically crawling of the web so that  the engine has the needed information in its “memory”.  Google has been so smart about this.  They have two big guns here Google analytics (GA) and Google webmaster tools.

GA is a free analytics tool – the user gets amazing data about the site traffic and Google gets tons of current information about the site.   Whenever user puts up a new page on his site GA could tell Google and Google in turn can “crawl” the site right away.  This way Google “knows” about certain pages long before Yahoo or MS crawler can make it out those pages.  I say “could because no one ( except ) Google knows how GA is being used.  But certainly the opportunity is there for  Google to use GA to improve their crawling.

Webmaster tools lets webmasters share info about structure of their site with Google.  That info makes the crawling of the site much more efficient for Google.  Both Yahoo and MS have similar products but Google is far and away more popular with the webmaster community.

This is a scary wall for competitors but there are ways to knock it down.

• Wall 3 – How to knock it down 

 

Obvious way is to build your own Webmaster tools for your search engine. However, getting thousands of webmasters all over the world to use your tool will require serious marketing spend.  One way to get around that is to partner with hosting companies as they have direct contact with webmaster.  Again Search has nice margins why not use some of those margins to incentivize web hosting companies and webmasters to use your webmaster tools.  Perhaps hosting companies can optimize the process so user does as little as checking “yes” on  a box.  A software on the hosting server could take in customers data an automatically populate the webmasters tool for your search engine.

Third way is for competitors to go straight to the source and work with the web server software makers. The two big ones here are Apache ( open source) IIS ( part of Microsoft).  Instead of webmasters entering data manually in webmaster tools the data can be pulled directly form the web server software and send to the Search Engine.  To be honest I am not sure how one would work with Apache , not sure who would approve any partnership/ integration with a search engine.  But Apache is open source and open source is all about sharing information making the web better etc. so theoretically, whoever makes decision there should be for working with various Search Engines. 

• Wall 4 – ( terrifying wall being built now ) Community power

 

This is the wall that should make competitors wake up in cold sweat.  This is scarier than all the other mythical creatures in Lord of the Rings.  Google is very consciously trying to use its enormous user base to improve the product.  They are allowing every day users to rate results, they are working on their Google base for shopping results, there is talk now for using experts in certain verticals (medicine)  to contribute to result pages.

This in my opinion is a real tall wall that once built will be nearly impossible to knock down.  This is the type of walls that Facebook, yelp, match.com  and Craigslist  have.  In B school they call it network effects.  It is one of the few things competitors simply cannot copy.  It works like a whirlwind, here is one scenario

Google is very smart and more and more clues are leading to the fact that they are building this wall.  Competitors need to act now and make sure they tear down the wall before it is built or better yet build the wall first.

Perseverance

Few weeks ago I read the following tweet on my super sexy smart phone. The tweet was from Sim Simeonov veteran investor and entrepreneur.

perseverance is a good strategy for success also a great strategy for slow, expensive failure?

I immediately shared it to whoever was in the car with me. Then I tried to think back in my own startup experience and see if that is true. I would actually augment the statement abit

perseverance is a good strategy for success also a great strategy for always being in a barely surviving business

In my experience if one has true perseverance it is rare that they will fail completely. But often they get to a “just getting by stage” and never really make it out of there. I saw that in several projects we started. We kept going and going ignoring the bad signs and thinking if we only work hard we will get there. But without needed capital we had few people spread super thin and as such got only small clients. These clients stayed with us bitching and complaining but they couldn’t afford anything better so had no choice.

I saw same with partners when I was running our affiliate program. Some partners would work day and night and just making enough to pay the 3 people in their office. I kept paying them every month but they simply were not delivering enough traffic to our site to make more. They kept trying to sell me into new ideas but of course I needed to see results first before I signed anything.

My philosophy is – be persistent but evaluate your skills and be realistic. If you are not getting results needed find out what you are missing. Be honest with yourself and don’t think pure hard work will makeup for what you are missing. Figure out where you can get that something. Maybe it is a mentor ; Maybe investment; Maybe you need to outsource certain functions on focus on core competencies

Theo

Disappointed by the Economist

I am a big fan of the Economist, I really think they give a fair view of events in business and finance. That is why I was shocked when I was reading the last issues ( week of thanksgiving 2009). In an article about PE/VC and Hedge funds the writer was talking about the compensation of partners in those funds. I don’t remember the exact wording but basically the article made the point that partners have no conflict of interest with investors in the fund since partners only get paid if they produce returns for investors.

How about the argument that partners get rewarded if they produce results but do not get penalized if they loose investors money and as such partners are incentivized to take on risk investors normally would not take on! There has been tons of pages written regarding that same argument since the crisis hit. Even non-finance publications have spelled this out for the non-finance reader. Have the writers of the economist just not been following the press?

Believe me I am not making the argument that PE/VC partners (LPs) are dishonest or are out for their own etc. All the partners I have worked with have been nothing but honest and very careful with their investors money.

BUT that does not mean that there is not an issue of misaligned incentives with the compensation of partners. Now some funds require partners to put in their own money into deals, which would minimize the misalignment of incentives. But the Economist does not mention that at all.

Am I missing something here? Was this just a one-off mistake that the Economist will not make anymore ?

Recession, time to cut costs, hey lets off-shore! Humm not so fast !

Economy is bad, investors are pushing you to become cash-flow positive is it time to offshore in order to cut costs? Lots of talk these days about off-shoring among the entrepreneurial circles. Since I lived and breathed the off shoring world for years I figured I would jot down few thoughts here.
• It takes 1-2 years to realize the savings – No joke, to really see the cost savings to the bottom line it takes some time. The first year you are pretty much learning trying one thing, trying one person another etc.

• Management is key – Finding capable and honest manager is always important but it is vital in an off-shoring situation. It is also much tougher on top of the usual skills needed for a manager this person will have to understand two cultures, be able to deal with all the problems common in off shoring countries (i.e bad legal system, corruption, bad infrastructure, crime etc.)

• Theft is an issue and could cost you a lot more than you saved – poorer people tend to steal more just the nature of people. Outright theft (stealing of cash and property) is rare in my opinion. However, the soft theft is rife. Most common and dangerous is employees stealing customers. Instead of providing support they establish good relations with the customer and then they start working with the customer directly charging them directly and cutting your firm out of the loop altogether.

• Wages rise quickly – we saw wages rise 15-20% per year, that directly hits your bottom line. All of a sudden the cost savings do not seem so great.

• Offshore or not good people want career prospects – the off-shoring functions are usually not very sexy – picking up phones etc. People that are good and motivated want to career progression and after 1-2 years get sick of the job. If you don’t have a road ahead for these folks you end up losing your best people.

With all that said we were actually quite successful in off shoring using Bulgaria. After we sold the company I heard some of my friends telling me that US customers would ask: “Please can I speak to someone with an accent I know they can fix the problem”. I believe the catalyst to the success was the addition of 2 -3 good managers on the ground.
Finally, I do believe the Ukraine is one place that requires a closer look for entrepreneurs who are seeking off shoring opportunities. I was very impressed by the education level of engineers I met from Ukraine and shocked by the low level of wages. Of course the problems of corruption on local and national level are there and the political instability maybe an issue. But overall I would recommend folks seriously research Ukraine.

Theo

Chicago Booth (GSB) – kudos

Kudos to the Chicago GSB ( now Booth) Polsky Entrepreneurship center folks. They have really stepped up the program. I am glad to see some strong teams in the bus plan competiton . It is also great to see the addition of more courses/ seminars with a real world focus. I am especially excited about the Entrepreneurial selling course as every entrepreneur needs to be able to sell both products and ideas both internally and externally.

Theo

Who or what caused this mess ???

This blog is about entrepreneurship, VC, startup ideas and more it is not about the economy. However, in this crazy times we are living in the economy affects every part of life including entrepreneurship. So I must take a sec and write about something that has been bugging me quite a bit.

There is probably 24 hours per day coverage on TV , radio about the economic crisis.  Large part of that coverage is focused on “what caused the crisis”.  I am shocked to see how little focus there is on the real cause ( in my opinion).  Pundits blame the greed, overpaid executives, shady bankers, hedge funds, too much regulation, not enough regulation etc.

Greed may be an issue but it also  causes many positives.  Greed is the reason why your Starbucks  coffee is fresh, why gas station is clean, why you can get a pizza in the middle of the night for 10 bucks.  Try going to the DMV where there is no greed – you are lucky if your wait is under 1hr for a simple document check.

 The biggest issue was (and perhaps still is ) principle – agency problems.   This is a economic term but in plain English it means “you are playing with someone else’s money”.  In our startup we faced this often. We had great honest employees but once in a while you get a sleazy sales guy who would find ways to beat the system and sell services below cost. He still gets commission even though the firm looses money on the sale.  The problem was much bigger with the housing crisis. Lets look at the players

• The regular Joe mortgage owner – on the hook for the money – he is a principle
• The poor investor buying mortgage back securities MBS – it is his money he is on the hook – again principle
• The mortgage broker – he simply connects Joe mortgage owners with banks lending money – he is an agent
• The Lending Bank – they loan the money but then resell the mortgage to I banks – also agents
• The I bank – they buy mortgages quickly package then in MBS and resell them to the investors above – again agents

The Agents acted in their own interests

• Broker – gets commission for each loan. He doesn’t care about soundness of the loan simply chases the commission
• Bank – similar situation they know they will resell the loans so are not so concerned if they are sound
• I banker – I went to school with lots of those. There are many honest guys and gals here. But there are many who eat drink sleep their bonus. It is all about the bonus for them. That s all they care about. And guess how they get the bonus – based on how many MBS they package and sell to investors.

That is how the crisis happened. Of course there are some more complex nuances i.e there are the rating agencies and some banks did not sell all loans in MBS, but that is the gist of it.

Professor Sufi from The Chicago GSB ( booth) does great research on the principal – agency problems.

Of course solving the problem is much harder than pointing it out. VCs have done a moderately good job in solving these problems with entrepreneurs – perhaps after they found out several CEOs spending VC investments in strip bars in the dotcom boom.  The VC contracts are so complicated and have several protections against bad agents. But the problem is much harder to solve in publicly held companies as shareholders ( principles) are so many, have different goals, and are hard to unite.

My guess is this crisis will bring us back to “small is good” . Investors will invest in smaller entities where it is easier to unite shareholders and where the agents are themselves shareholders. Companies with strong leader that has significant part of his/hers wealth invested in the company will be at a premium some examples Amazon, Morningstar , and maybe Microsoft if Bill comes back J , and of course the Buffet companies.

That maybe one of the few good things that comes out of the crisis.

Free markets and ICANN

Having gone to the University of Chicago, I am naturally attracted to the ideas of free markets, libertarianism etc. Of course the free markets took a big hit during the economic crisis we are currently in. But in the case of ICANN I really do think that free markets is the way to go. Furthermore, I believe that ICANN could do more to promote innovation and let capable talented entrepreneurs succeed.

What is ICANN : Internet Corporation for Assigned Names and Numbers, basically the body that governs how domain names and IP addresses are managed. More info here http://en.wikipedia.org/wiki/ICANN

I went to several ICANN meetings back in 2001-2003. Our company had submitted application to be the registry for several TLD ( top level domains ) .cool , .xxx and few others. Basically we were asking ICANN to give our company the right to manage all domains that would end on .cool .xxx and few more.  There were at least two dozen applicants applying for different TLDs – .phone, .geo , etc. I am proud to say that Harvard Law school representatives choose us as the best applicant for the .biz TLD. But ICANN did not see eye to eye as Harvard  .

After many hours of deliberation ICANN decided to create only few new TLDs – .biz being one of them. Now ICANN is planning to allow 200-800 new TLDs. But once again the process of who gets approved is not clear.

Myself and many others keep asking “Why not let the people decide by voting with their wallets” or let the free markets do their work. There were hours of discussions at ICANN meetings about whether the consumer would use domains such as 546-767-8899.phone . Hey why not put it out there and let the consumer make a decision ! The xxx was the most fun, again hours of discussion of what would happen whether the adult sites would use the domain names whether ISPs would block them etc. Hey why not try it out , plenty of firms are ready to throw money at it if worst comes to worst those firm lose money – that’s it!

The only argument that ICANN came back with was ” if those companies go out of business consumers would be hurt and we must protect the consumer”. Well isn’t that the case with a bunch of other services/ products : mortgage banks, software manufacturers, condo builders. If my condo builder goes out of business and my pipes are busted what do I do? What if Oracle goes out of business and my mission critical database hangs? We don’t make DB providers or condo builders go in front of a panel and make their case why they should be allowed to make DB software! But ICANN does it with providers for domain services.

This in my opinion is stopping smart talented entrepreneurs who want to get into the business. Instead of letting the market decide who should succeed we have a bunch of experts sitting on a panel making the decision. Those people are smart no doubt about it! Vint Cerf was on that panel and I have nothing but respect for the guy. But still that should not let them make decision for the consumer. Vint is likely 100X smarter than me but still I would rather make my own decision of what domain names I buy. Let me give money to a company that may go out of business , maybe I like to live on the edge.

Finally, if you really are so worried about companies going out of business ICANN can simply make a “certification process” . Much like firms need a certificate to act as builders, realtors, mortage advisers etc. Let firms go show that they have a,b,c taken care of ( e.g dedicated bandwidth, data center etc.). But once they have a certification firms should be able to launch any TLD , maybe even .THEO .

Theo

The Small Time Entrepreneur vs the Creator

Having spent my whole life working with Entrepreneurs, I have noticed the word is not used properly. In my opinion there are two types of entrepreneurs. There are what I call the small time entrepreneurs (STEs) and (what I call) the creators.

STEs are not bad people. They are also sometimes moderately successful, they can build a business with 50 or so employees and few million market value. However, that is when they hit their limit. They will never make it big.

The Creators are the ones we read in the newspaper, they are the ones that take companies public and that have thousands of employees look up to them. They are the ones who created Morningstar, Google, Microsoft, Amazon.

Why does that matter? Mainly because several of my MBA friends were looking into joining a startup, I am afraid they will join with an STE.

Good VCs can spot a STE from a mile and will give the polite give me a call in 9 months after you have done X, Y, Z.

Here are few ways the STEs differ from Creators

Egos

• The STE is completely self-centered. He never gives credit to anyone; every success is his doing. However, when there is a failure it is because some else did not execute right, his idea was great but some of jerk down in operations messed up. The STE looks down upon almost everyone except other STEs who are even more arrogant and cocky then him. He is unaware of others goals and is only focused on pushing his own ideas through. He spends little time on understanding his employees goals and motivations. Naturally the STE is always dealing with people quitting on him. Just last year (while interning in VC firm) I met an STE at a trade show, I told him we are very interested in his industry and would like to talk further. He criticized me ( using a conceded tone) for not knowing about a recent merger in the industry, he left a very bad taste in my mouth. Not a year passes by and I see one of his people at a trade show, he seems in a Microsoft shirt and starts asking for partnership opportunities. Naturally the cockiness of the STE will not help for that partnership to go through.

 

• The Creator can also be extremely conceded. Rumors are flying about Steve Jobs and others and how they have put people down. But the creator is very smart and is able to hide his cockiness when needed. He gives credit when credit is due, he makes people feel like they are appreciated loved and their work is making a difference. Naturally the creator attracts the best talent around.

Management Style

• The STE has a very simple management style – do what I say or you are fired. The STE wants yes man and work horses that do not think much. The STE thinks he knows everything from IT, to marketing, to supply chain. He is in there wanting to control every little detail muddling in the jobs of professionals. I have seen STEs tell someone with 10 years of web dev experience how to change the color of a tiny image on a site. The STE does not appreciate ideas from others he wants to come up with ideas and email them downstairs and have someone else execute. What happens than is the STE gets the low level people i.e. ones that have been turned for jobs and are sacred of being fired. Good people know they will get calls the second they put their resume out so the getting fired treat simply doesn’t work.

 

• The creator realizes that every business depends on people. He also realizes that the way to succeed is to surround yourself with experts as opposed to try to be the expert for everything. The creator does not motivate people by fear. He gets people to believe in his vision and they work for him because they are excited to be part of that vision. They know that the creator will succeed and being part of the success is what drives them. I have seen young workers at Microsoft, Google , Yahoo ( not anymore) work well into the nights not for a raise or career connections but simply because they love the product they are on and they want to be part of the success of that product.

The Idea

• The STE is stuck on his idea. If the STE is an engineer ( many are) he will talk your ears off about the product , how it works , how the different pieces fit together etc. The STE forgets about sales, marketing, support etc. He thinks that all that is less important and you can just hire some people to do it for you. The STE also does not do much research. He loves his idea so much and he is convinced it will work. He does not get the data and even if he does he simply discounts it.

 

• The creator knows that people make businesses happen not ideas. He also knows that no idea is worth anything unless there is data to support it. One of the execs at MS ( leads over $1b in revenue business) said during the first meeting with his team ” in any meeting first thing we do is look at the data if I don’t see the data the meeting is over”. Amazon is another example, it is one a very data driven company and naturally one of the biggest success of our generation.

I have seen so many STEs. I met guy in his fifties who spend most of his live on a bidet idea. All he had to show for it was a beat up old truck. We had a 45 min meeting and most of it was on the idea, he did spend much time on marketing, which is why he had actually come to us. Another guy made VoIP company sold it for few million and got about .5 to .75 M for himself, not bad for a 28 year old kid. However, in his next venture his people are deserting him, because he simply wants people to carry out ideas and not to think.

So stay away from STEs, you will work your butt off and at the end you will get nothing. I have friends who are still bitter about giving 2-3 years of their life to an STE, listening to his promises and the end to even getting a “thank you “.

Theo

Jumping on the bandwagon

 I have finally jumped on the blogging bandwagon.  Seems that if you don’t have a blog these days you don’t exist .  My goal is to be very disciplined in this blog.  The first step in being disciplined is to announce it to the world.  It has been proven by psychologists that people are much more likely to stick to commitments if they have announced those commitments to others. So here are the goals of this blog.

 

• Share my entrepreneurial and VC ( short lived) experiences
• Give advice to MBA students looking to enter the entrepreneurial life
• Test how much the concepts thought in the number 1 business school hold up in the real world
• Discuss economic policies relation to entrepreneurship and VC

Of course these may and likely will be updated down the line.

Theo