Startable – Healy Jones’ & Prasad Thammineni’s Blog

For the past few months I’ve been debating with other OfficeDropStars why the heck Amazon hasn’t ever lowered cloud storage costs. Well, looks like they are finally bringing them down! The first tier of storage pricing is coming down from $0.14 per GB/mo to $0.125. The lower tiers are seeing about 12% reductions in prices – but the biggest tiers have no stated decrease (i.e. they are staying constant!)

It’s a little odd the top tiers aren’t going down. I guess this is because those rates are more likely negotiated with the company using them, where as the lower rates are pretty much just plain old taken by the company using it?

Why is Amazon lowering storage costs?

What’s motivating the lower storage costs? Are other cloud storage companies starting to eat at their new business? I kind of doubt that it’s MSFT’s platform, I don’t know any startups using it. Perhaps Amazon sees Apple’s iCloud starting to take some of the newest startup storage needs, where the startup simply pushes the costs of cloud storage onto the end user by integrating their apps with iCloud and letting the user deal with it? Think about it – Amazon has basically been in the cloud storage business since 2007 and I don’t think prices have come down before! And cloud compute costs for sure haven’t!

Comparison of New and Old Storage Costs

These are the numbers I got from Amazon, and are current as of Feb 7 2012.

The lower prices are effective as of Feb 1 and are listed here.

OfficeDrop has been very aggressive in our “cloud manifesto,” promoting the concept of Frenemies in cloud services.  Earlier this year Prasad wrote about how competing in the cloud is making companies frenemies in TechCrunch.

Today he penned one on “Building a Business Around Frienemies” for FastCompany.

What’s a Frenemy (or Frienemy, depending on how you spell it)?

An important business philosophy that we have here at OfficeDrop is the concept of “Frenemies” – we will work with other services that would historically have been considered competition if it makes sense for our customers. It means that we value our customers’ workflow and actively look to integrate our cloud filing system with other online, cloud and SaaS services that our customers are using. Our customers are small businesses who want to move to a “digital office” and away from having their different work processes silo’ed into particular, proprietary applications.

This is a big deal and it represents a major shift in the way software is made and consumed. Old, desktop software that wrote special, unique and proprietary files and that trapped your data are out. Remember when a file could only be opened by the program that created it? Well, in the cloud all the smart providers have open APIs, which means your data can now be pushed (securely, of course!) from one application to another – making it easier for you to get your work done. This means that our service may have to work with other online storage companies, or companies that have overlapping features. Should we be competing with these companies and avoid integrating with them?

Nope. We can only survive if our clients WANT to use our service. They can get their data out at any time, so we need to offer the best paper-focused, searchable storage service we can – and let customers use other best in class services in conjunction with ours – like our FreshBooks document management integration. We’ve got an open API, and if someone who might be close in features wants to connect with our service they are very much able to create a tight integration with the OfficeDrop service.

As I mentioned in a previous post, my company recently did a lot of cool testing during our site redesign. Anand Rajaram, OfficeDrop’s co-founder has a series of posts on Performable’s blog that talk about tips, tricks and tools that we used during the process:

Optimizing Conversion Rates Part One – Quantitative Tests

Optimizing Conversion Rates Part Two – Qualitative Tests

Optimizing Conversion Rates Part Three – Lessons Learned

CB Insights has a report on a topic I mentioned last week, the decreasing deal sized in New England. The report shows that the “In Q2 2010, the median seed VC deal size in both NY and Massachusetts were $425k and $480k, respectively, meaning entrepreneurs were raising smaller rounds.”

Interesting stuff – visit CB Insights here to see their take.

What is happening with venture/angel deal sizes in New England? Why are things getting smaller? It may be the sudden angel/seed renaissance… while the CB data does not include later stage investments, I think that New England did not have any huge ($50 million +) investments last quarter, which would impact the data I mentioned last week by driving down the average deal size… but I think something strange is going on.

There is a really interesting read in the Times on Apple vs. Google. Of course, as I’ve touted my horn a number of times, I called this a few years ago – GOOG’s real target was Apple, not MSFT. This all leads me to think – hey, has Microsoft really left the building on mobile? I know there was the new Windows Mobile, but I don’t hear anyone talking about it…

MicroWho? Microsoft needs to buy RIM.

I can’t really think of any other way, unless they don’t want to own the OS. MSFT could become a premium app provider. I’ve just downloaded the Bing search app for the iPhone. And it’s pretty awesome. Image search is really slick. The navigation has a good UI, yielded good results to my hard-to-find friend’s house out in the burbs and I like the way the map unfuzzes into focus. I’d recommend it. So, I’m pretty confident that MSFT could become a really sweet application provider – but I’m also pretty sure the battle that the folks in Redmond want to win is for the OS, not just for cool apps. Anyway, a MSFT RIM deal is one I’d love to see.

Finally, I’ll leave you with some choice quotes from the Times article:

Mr. Schmidt hasn’t shied away from taking public swipes at Apple, either. In January… when asked what he thought of Apple’s new iPad, due to go on sale early next month, he joked to reporters: “You might want to tell me the difference between a large phone and a tablet.”

…

In filing the lawsuit over Android phones, he (Jobs) positioned his company as an aggrieved victim finally standing up to the playground bully. “We can sit by and watch competitors steal our patented inventions, or we can do something about it,” he said in a statement when the suit was filed. “We’ve decided to do something about it.”

…

When Mr. Jobs announced Mr. Schmidt’s departure from the board, he noted that with Android and plans for a computer operating system, Google was “unfortunately” entering more of Apple’s “core business.”

For lovers of the technology business world and for people addicted to their smart phones this is AWESOME. I can’t wait to see what these companies produce/invent next.

Charlie O’Donnell has a great post on getting momentum in a seed financing round. He is talking about momentum, but an understated undercurrent is how to get a higher valuation. I’d like to elaborate on one of his points, which is “understanding the social graph of the investors.” Charlie’s point is a great one – that if you can get a group of investors who talk with each other (and invest with each other) to talk about your company then you dramatically increase the chances of closing a deal with them. Thus, he recommends focusing and lighting a fire under one of these groups and using that to push toward a close. He is 100% correct.

However, I’d like to point out that this strategy does not maximize the chances of a higher valuation. I’ve found that angel investors who regularly invest with each other tend not to like to compete with each other – instead they like to co-invest with each other. While this is great if you can get things going, since you are likely able to raise enough capital to hit your fund raising target, it does not help you create an auction type environment where you get a higher valuation. As I’ve said before:

Once one group (an angel group) sets a pre-money valuation I don’t think the other angel groups are going to get into an auction type-process. These groups need each other to fill in bigger financing rounds. One group can’t outbid another aggressively, or they will not be able to find enough capital to meet most startup’s financing needs. A startup can get different syndicates of venture capitalists in a bidding war; I don’t know if this is as easily possible in the angel financing world. It may be a better idea to try to pit a VC against the angel groups if you are really valuation sensitive.

(That quote came from my post on how angel groups are professionalizing)

So, I will moderately disagree with Charlie’s last point of not pitching in too many places. If you are going to get a decent valuation, you probably need a couple of different groups interested – groups that don’t naturally invest together or information share with each other.

Sim Simeonov (a much higher profile Boston-area former VC than me) just published a good post on raising a Series A venture round. I agree with the majority of his points, although he does postulate that it may make sense to ask for/raise a bit more money upfront even if it means the founders end up with a lower ownership percentage. I agree with his thesis that more capital is better if it boosts your next rounds valuation/de-risks the business intelligently. However, I’m not 100% sure it actually has to decrease the founders’ percent ownership all that much. I continue to believe that early stage VCs main valuation tool is how much they want to own (which usually falls within a pretty narrow band). See my post on the way VCs calculate startup valuations.

Sim puts forth some important math on how to calculate the real pre-money valuation of your Series A round, taking into account option pools, amount raised and percentage ownership taken by the VCs. As a startup founder looking to raise money, you should understand this. The algebra is simple, it’s nice to have a clean little formula to help you understand the implications of your term sheets. (I have worked at funds that did a more complicated pre/post money “effective” valuation taking into account the impact of some preferred stock features like participation – basically breaking the participation out and valuing it as a stand alone bond and then valuing the equity separately, but I wouldn’t bother/recommend that for most early stage investments.)

Sim also lays out the other real truth in getting a higher Series A valuation – you need multiple funds competing for deal. This is much, much harder said than done. And you also have to remember that VCs are pretty clubby – they like to syndicate/invest alongside each other, so if two firms realize they are both interested in the same company and they like investing with each other you probably DON’T actually have any real competition. This is because they are likely to team up and offer you a joint term sheet, or one is likely to wait until the other makes an offer and then try to join that investment as a co-investor.

He also has a link to a startup valuation calculator, that I haven’t stress tested yet. But it looks pretty straight-forward and very handy. If you are raising a Series A, you should read his post.

Tomorrow evening there will be a wine tasting event attended by many of  Boston’s technology leaders and venture capitalists to benefit TUGG, a non-profit created to help fund organizations that promote youth entrepreneurship and technology learning in less-fortunate parts of the area. The event is organized by Hemant Taneja of General Catalyst and one of my former bosses, Jeff Fagnan of Atlas Venture. You can sign up for the event here – I will be there and if this is at all similar to the previous few years’ events it will be a great place to meet movers and shakers in the local tech scene (note that I’m suggesting that I’m a mover and shaker, just that real movers and shakers will be in attendance!)

BusinessWeek recently ran a piece on the contraction in the venture industry is causing some startups to lose their VCs. The article talks mostly about how the shakeout in VC is causing some venture funds to abandon certain investment sectors. While I am a happy subscriber of BusinessWeek, I think they missed the real point – that if you lose your VC you are potentially in a lot of trouble. Earlier this year I wrote a couple of posts on What happens when your VC leaves and Steps to take when you lose your VC. I think that advice still stands. Given the back and forth I’ve recently had on the state/changes in the VC industry in my last post, I thought it might make sense to relink to those previous posts and remind everyone that the changes to the early-stage financing world are not yet over!

I had never thought about it before, but it seems that B2B publishers may be managing the transition to an online business/distribution model much better than their consumer focused brethren. MediaPost is reporting results of the American Business Media’s 2009 Media Financial Survey, and business publishers are somehow replacing a lot of their offline magazine revenue with substantial online revenues. 

While tota B2B publisher revenues were off about 2% from the 2007 to 2008, but this is much better than 16% decline in the traditional B2C newspaper and magazine market. From the report’s press release:

Online media benefited from the continued shift in ad dollars from magazines to online channels. Online display and search advertising, which accounts for more than 50% of total online revenue, gained 12.4% in 2008 versus 2007 and grew at a CAGR of 30.7% from 2006 to 2008. At the same, magazine net ad revenue declined (10.2%) in 2008 versus 2007 and fell at a CAGR of (4.9%) over the three‐year period.

Good for B2B publishers! 

I guess the real questions are: 1) what are B2B publishers doing right and 2) can this be applied to B2C publishers.

I hope that this isn’t just because business content users were never trained to expect to get free content like consumers have been…