Startable - Healy Jones’ & Prasad Thammineni’s Blog

Quick link to some interesting recent stats on technology M&A as the “new” exit paradigm on gigaOM.

My friend from business school, Matt Soldo, has a well written post on MBAs in the tech startup world, “In Defense of the MBA.”

Matt has held positions with a few different internet companies, and is currently with Box.net. I also know he seriously batted around a few legit startup ideas while getting his MBA as Wharton. So I respect his opinions.

Since I was sort of famously quoted in TC on my MBA experience (and my MBAs and Startups post continues to get good traffic) this is a good opportunity for me to revisit my MBA post from last year.

As OfficeDrop has grown I’ve found my MBA more and more useful. Basic stuff like statistics, pricing strategies, etc are particularly useful. I sure that I could have learned this in a book, but there is something about the classroom learning environment that is good for the way I acquire knowledge.

The connections I made during the MBA are very useful. For example, I wanted to test out an idea for a new verticalized product offering at OfficeDrop. I glanced through LinkedIn, saw several classmates who were in the targeted field and had some quick conversations. I could have done this without the MBA, but it was nice to know that there were people who would pick up the phone. And of course the connections were helpful during our fund raise.

I’ve said it before, but my Managing People at Work class was really good. People, outside of the greedy finance world, are pretty fun to manage because it’s not just about the money. My MBA has provided a structure for me to think about this.

I still wish there had been more emphasis on leading sales teams at Wharton. How is this not the most important skill for almost anyone running a company?

The environment of business school is a real problem for people thinking about starting their own company. So many MBAs run for the safety of things like consulting, banking and big corporate positions (and have their post-graduation jobs sewn up with high salaries by the early part of their second year) that you feel strange trying to do anything different. I know for a fact that this atmosphere pulled some potentially great startup people into the boring safe jobs. My friends at Stanford and Harvard who started their own companies said they felt this pressure there too, so I think it’s safe to say this is a pretty standard MBA program problem.

And, finally, business school loans are the bane of anyone looking to start a company because they destroy so much free cash flow.*

Those are my current, unfiltered, thoughts on my MBA. Just as my position has changed over the past year I’m sure it will change again. Would love your comments, and don’t forget to read Matt’s post!

*On a somewhat unrelated note, does anyone else think that student loan situation in the US is the major cause of the educational cost inflation that we have here? In other words, because the federal government makes loans so easily available it is driving up the cost of higher education? I’m starting to think that government policies may be part of the reason that education is becoming so expensive - flood a market with cheap financing and the asset prices will go up??

I’ve been one of those quarter of US households without landline service for the past… I think five or seven years. (The last time I had a landline I was living in San Francisco and I needed one for my Tivo. I don’t even think Tivo needs a landline anymore.) Much ado has been made about the slow death of landline telephone service…

from ReadWriteWeb article

This is a very clear trend (as the ReadWriteWeb article mentions) “younger adults under 35 are more likely to have cut their landlines, but the CDC also reports that the number of wireless-only households increased among all age groups. About half of all adults aged 25 to 29 now live in households that are wireless-only…”

But all that changed last month for my house, as my wife is starting a SEO/marketing business - and she has realized that she can’t rely on her mobile phone connection. (We are on AT&T). She can simply not rely on the constant dropped calls when she is talking with clients, so she needed the reliability of a landline. (No one needs to mention Skype; I’ve never found it to be reliable enough to speak with clients.)

Pundits are now mentioning the upcoming strain on AT&T’s network that will come from the new iPhone 4.  Also, it sounds like Android is really taking off - will this stress other carriers networks too?

If cellular networks become clogged, will people who actually need/like to talk on their phone switch back to having landlines?

I have no idea, but in my own little world this has just happened. Has anyone else seen this/experienced this/thought about this?

Hiring talent is one of the most challenging things facing a startup. Hiring the best programming and technical talent is even harder. Taking data from The Entrepreneurs Census, which I wrote about yesterday, we can get a glimpse into how hard it is to hire programmers in Boston, Palo Alto and New York.

It may be easier for startups in Boston to hire programmers than startups in Palo Alto

Startups in Boston may have a better time hiring programmers, as measured by how long it takes to fill an open position and by the percent of startups that have open positions.

Hiring Programmers in Boston vs Palo Alto

The two thirds of startups in Boston were able to fill open positions in under three months - verses about half in Palo Alto and 63% in New York City. (OK, the difference between New York and Boston is probably statistically insignificant.) Three months is a lifetime for many software and web startups; being unable to add a critical developer in that period of time could derail product launches and critical feature updates. Heck, a lot of startups are out of business in 6 months to a year, so if you can’t fill your positions by then who knows if it’s even worth still looking…

The data collected by the study would fit with anecdotal evidence that I have heard from friends starting companies in Palo Alto. Many people have told me that it’s impossible to find talent in the SF Bay area… especially at a reasonable price. I know it is hard to find good people in Boston as well, but this study would suggest it is a bit easier here than in Palo Alto.

Compensation of programmers in Palo Alto is higher than Boston and New York

And of course the other important part of the equation is how much it costs to hire talent. From the study:

Compensation for Programmers Palo Alto Boston

Doing some really crude math, it looks like programming talent in Palo Alto is 13% more expensive than Boston and 36% more expensive than New York. (I very roughly calculated that the average comp in Boston was $66.85k, Palo Alto 75.65k and New York $55.75k; I assumed the comp for each salary range was in the middle of each range for my calculation. Again, the numbers are small so the difference may not be statistically significant.)

The other data point in the above compensation chart that I’m trying to get my head around is low end and high end. The high end is easy enough to understand; you have to really pay up to get good talent in some cases in Palo Alto (and NYC). This doesn’t surprise me too much, but it is interesting that the high end is zero for Boston. Maybe due to a small sample set? I just don’t know enough.

The low end is also pretty intriguing. I’d bet that most of the sub $50k programmers are working for equity. It looks like regions OTHER than Boston have more programmers working for a pittance, trying to get equity. Does this mean that Boston has less of a founders culture???

Pretty ironic and not really very important, but Gmail decided to add in this little advertisement to the top of an email conversation that I’m having with someone about this post… it looks like Google is hiring developers in Boston!

ComScore is reporting that ecommerce actually shrank in 2009 due to a major decline in travel spending (via Online Media Daily). Online retail spending decreased 2% year-over-year to $209.6 billion.

Weighing down the broader numbers, travel e-commerce spending dropped 5% in 2009 to $79.8 billion, while retail — non-travel — e-commerce spending actually remained flat at $129.8 billion.

The holiday period grew vs. the previous year, so this is a good sign.

Another interesting point is that Bing grew search volume share to 10.7% from 8.3%. I believe that a viable competitor in the search space is important, so I’m hopeful that Bing will be able to produce good enough results to bring over a real volume of people.

And this is before the Nexus One!

I’ve really had my head down at Pixily recently and am behind in keeping my New England SaaS company list up-to-date. If you know of any NE based SaaS companies not on this list, please leave a comment or ping me on Twitter or over email: healy (at) startabledotcom. As long as the company has launched their product and is HQ’d in the New England area I’d love to have them on the list. Thanks!

Great interview with Don Dodge, tech luminary who recently joined Google from Microsoft. Don was technology ambassador for Microsoft and is now in a similar position at Google. Don has a very unique view into both companies strategies, technologies and cultures. Some of the best quotes:

One of Google’s biggest challenges: “Another challenge is to earn a reputation for communicating clearly with developers and partners, providing them the support they need, and being as clear as possible about our product road map. ”

On how Google is prioritizing its efforts vs Microsoft: “All the exciting new applications are running in the browser, with application code in the cloud and the cell phone as the platform… Microsoft has product offerings in each of these areas, but they weren’t the high-priority programs… At Google, Chrome (browser), Google App Engine and Google Apps (cloud), and Android (mobile) are top priorities…”

On the state of MSFT: “I think Microsoft today is a lot like IBM was in 1985.”

On the cloud: “It all comes down to your application needs, workloads and design architecture. Amazon, Google and Microsoft are all solid choices.”

It’s a great interview; check it out.

There has been a lot of talk recently about the amount of value venture capital brings to the US economy. As usual, this includes a lot of griping by entrepreneurs who were unable to raise venture funding and who thus rip on venture capitalists. Occasionally, there is an academic report that attempts to shine a little light on the subject. Many times these professors do not really understand VC, having never helped start a company nor invested money in startups. But on those rare times when a person who really understand finance and startups publishes a robust study it is really worth paying attention.

That is why a recent TechCrunch article, “What Have VCs Really Done for Innovation,” posted by Vivek Wadhwa, has got me thinking. Vivek is a professor (at Harvard, and I think Duke) who has also helped grow software companies and worked for CSFB. Not only his is his background the right one to study entrepreneurship and venture funding, but his post was thoughtful and much more measured than the typical VC-bashing.

Vivek is responding to the NVCA’s recent PR campaign. In this campaign, the NVCA highlights venture capital’s contributions to the US economy and how a lot of innovation in the US has been done at/by venture funded companies. Here are some of Vivek’s key points, as picked by me:

1. The NVCA claims that 81% of tech jobs and 21% of GDP is produced by venture-backed companies; Vivek responds by asking: “would those jobs never have been created if the VCs had never appeared on the scene? How can the NVCA prove causality?”
2. He highlights some research he is about to publish on how, after interviewing over 500 successful entrepreneurs, only 10% raised VC in their first venture and only 25% raised VC for their second. In other words, not that high of a percentage of successful companies bother/need to raise venture funding.
3. “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.”
4. VC investments don’t really out-perform other investment asset classes (he specifically discusses research vs. the Russell 2000 index).
5. “What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks.”

These are some pretty negative opinions - from someone who has a right to be making them. I agree with some of his points, but not all. At the risk of sounding too much like a VC industry defender (remember I used to be one!) here are my responses/takes on his points:

5. Starting from the last point, I think Vivek is half right. The venture industry is fighting a real battle to avoid having their carry taxed as capital gains. However, other than a change in government policy towards cleantech I don’t think VCs are looking for bailout $. What I really think VCs are looking for from the government is to try to avoid being lumped in with “evil” private equity and hedge funds and thus become regulated as “risks to the US economy.” See my post on how private equity regulation might impact venture capital firms. In fact, this point is really a core reason why the NVCA has started making so much noise recently. Regulation could have a negative impact on venture investments, at least for smaller firms that can’t afford the time and effort to comply/prove to the government that their investments aren’t about to cause a global financial meltdown.

4. He’s probably right.

3. Again, he has a real point. But I disagree that all VC funds ignore innovation. First of all, what defines innovation? Would Google have been innovation? It’s not like they were the first search engine. In fact, the search space was already a sexy place to invest when they got funded. But, as a user of their search, analytics and ad words products I’m pretty happy this non-innovative company received money from their venture capitalists. Secondly, what makes venture capital so important for the US economy is not just the creation of innovation, but the commercialization of innovation. Universities are great at fostering innovation, but it is usually companies that take that innovation and create jobs and technologies that can be used. But, I do agree that there is a lot of me-too investing in the venture capital world. Too many of the same ideas do get funded - sometimes I actually wonder if this actually hurts innovation by creating too much undifferentiated competition in nascent markets. But that is probably something for another post.

2. I also agree with this. The ratio sounds about right. I’m willing to bet that many of those unfunded companies would have been less successful if they had raised venture capital. Venture funding is not right for most companies, even “successful” ones. Entrepreneurs too often think that their business needs venture funding to be successful - but as I like to say “don’t raise venture capital.” But I don’t think this is an indictment of the venture industry; it is more a generic point that most companies do not require VC to get where they are going.

1. I can’t really speak to the validity of the NVCA’s numbers in terms of what % of the US economy is based on venture funded businesses. However, I can say that venture funding does help companies get bigger faster. I know I just made fun of it, but would Facebook be as large as it is without venture funding?

Vivek has some very good points, and he presents them with data - which makes them even more powerful. I understand his negative reaction to the NVCA’s PR campaign - it is a little over the top. However, I think venture capital is important to this country’s technology leadership. While I don’t think the US needs MORE venture funding, I do think that a healthy early-stage financing environment is necessary to foster continued innovation here. I hope that as we come out of this downturn and seek to change the financial landscape that early-stage investors are not caught in a regulatory net designed to keep hedge funds from doing silly things with highly-leveraged derivatives or other exotic instruments.

So, Facebook announced yesterday at TechCrunch50 that they were finally cashflow positive. This is pretty big news. It means they’ve created a real business, one that is, in theory, self-sustaining. They’ve reached the holy threshold where venture capitalists stop biting their nails and thinking “man should I have sold this earlier…” Now the management team can seriously start getting wined and dined by investment bankers hungry for “the IPO of the year.”

But, after we congratulate the team for a job well done (nice job people) we probably ought to think about what this means for social media as a business. Here is a company that now has 300 million users - and has just now become cash flow positive. What is that, like 5% of the Earth’s population? What number of companies ever founded reach that high of a global penetration? That’s a pretty amazing number. And they needed that many users to become cashflow positive?

I believe that Facebook has raised over $700 million in venture capital. Impressive. I doubt that more than a handful of companies, ever, have raised that much private capital. I don’t know how much of that has been used in the quest to become cashflow positive, but I assume it is a decent amount. Although, to be fair, a meaning amount of that capital might have gone to providing liquidity to the management team.

So what does this say about social media as a business model? The requirement to get sooo large and burn sooo much capital calls into question the basic business model of a social media company. The pure online company with revenue only coming from advertising just doesn’t seem to make sense if you have to get that big to become a self-sustaining company.

Just to be clear - I am not questioning Facebook. I am pretty much amazed at what they have created and am excited to see what is next for the company, both as a venture-junkie and a FB user. But I just wonder if these stats are the death nail in the advertising-based online business model. Who else could possibly reach cashflow positive with a pure advertising model if you need that many users and that much capital?