Thanks and Congrats Aveksa!

Today is one of those wonderful bittersweet moments in venture.  When a team you’ve worked with for many years and is firing on all cylinders gets acquired in a fantastic exit.  This is the case with the announcement of EMC buying Aveksa this morning.

Aveksa builds enterprise identity and access governance software.  What does that mean?  Well, in lay terms, their software ensure that the right people have access to the right data and applications at the right time.  It’s a core security function and one that is quite technically complex to solve.  And in today’s world where anyone can spin up an application with an email address and password, it’s one that’s coming under increased scrutiny.

We’ve known Deepak Taneja, the founder and CTO of Aveksa for many years.  My prior firm had backed Deepak’s last company, Netegrity, where he was CTO and VP Engineering.  Netegrity pioneered the web-based SSO market and built into a $100MM+ business before being acquired by CA.  We were of course delighted to partner again with Deepak when he founded Aveksa.  As part of that, Barry Bycoff – the former CEO of Netegrity – also joined Aveksa’s board as Chairman and we partnered with CRV to co-lead Aveksa’s Series A.

Along the way, we were joined by FT Ventures (Liron Gitig in particular) and were quite fortunate to find Vick Vaishnavi, who joined as CEO of Aveksa in late 2010.  He’s an incredibly accomplished individual, having been VP of Marketing with Bladelogic from its early days through going public and eventually at BMC when it was acquired for $800 million.  He brought together a veteran team and drove the business to 100% year over year growth.

This is a great outcome for us as shareholders and for the employees of Aveksa.  I’d like to thank the entire team, most of whom are with us today from founding and some who are not, and the Board & co-investors I’ve worked with over the years.  It’s been a thrilling ride that I’ve been privileged to be a part of and building Aveksa proved that creating complex software for the enterprise can still be sexy.  I hope to work with you all again in the future!

APIs First

Lots of discussion about whether a service should be “mobile first” or “web first”.  I tweeted it actually should be “API first”, and I got a lot of reaction to that comment and asked to expand.

First let me clarify.  I believe mobile IS important and a huge emerging channel.  Source of traffic has shifted dramatically and I don’t have my head buried in the sand in that regard.  Across many of my companies, mobile origination (tablet included) comprises anywhere from 30-50%+ of traffic.  I recognize that access patterns have structurally changed.

When I say API first, I mean that an idealized service needs to start with a core infrastructure with robust APIs that is tapped into via any number of “front ends”:  web, mobile, and even 3rd party ecosystems.  If you look behind many “web first” companies today, including in our portfolio, you’ll see a very clean architectural split between the front end and the back end.  The back end exposes a range of services that allows the front end to innovate independently and be re-purposed in interesting ways depending on changing business needs.  The rate of change on the front end is usually a LOT higher than in the back; the scale and stability requirements on the back are far more demanding than on the front.

“Mobile first” companies really are just a front end selection accessing a solid API driven backend infrastructure.  The use case, the logic, and what the app is optimized for may be a subset or different than Web, and I think this is what Fred Wilson and others are focused on.

But as I look at the world, while point of entry may vary, I believe having all three elements of web, mobile and 3rd party are going to be table stakes in the future.  You CANNOT be one only.  Users want different experiences for their different point of engagement.  Mobile is about speed of access, much more transactional and timely, very much about getting something done.  The web is great for researching, deliberating, and exploring.  Both are different aspects of the same service, and I’d want both as a user depending.  Finally, enabling third parties is a realization of the web services and SOA manifests from the late 90s that allow for programmatic distribution and can launch powerful new economic models.

Facebook has already shown us the above and what a powerful, mature, winning service looks like.  They have their core site, their massively used mobile applications, and their various graphs 3rd parties access which gives them tremendous power, platform extension, and plata.  Instagram, normally cited as the poster child for “mobile first”, recently announced they intend to move consumption to their core web site.

So to wrap up, sure, there might be some apps that are best started purely in a mobile context.  But I’d bet 99% of the services out there will have to incorporate all three elements and that starts with building an incredibly solid foundation.  API first, front end second, all screens third.

What Changes the Second Time Around?

It’s been a while since I’ve blogged but I’m trying to get myself back on it again. I thought I’d kick off on the backs of our seed investment into appRenaissance announced today.

The CEO of appRenaissance is Bob Moul, whom I had backed in his last company Boomi in 2008. They were a pioneer in the cloud based integration market and Bob led the business to a great exit in 2010 to DELL. Bob left DELL a year later to jump back into the startup world. He eventually caught the mobile bug and joined appRenaissance as CEO earlier this year. When I got the call, it was a no-brainer and we were delighted to partner together again. It got me thinking, what changes the second time around?

  1. Price and terms get figured out quickly. Seasoned entrepreneurs know the game; they know the pros and cons of too high/too low; they know the danger of running out too quickly or overcapitalizing; they don’t get sucked in by the hype in the echochamber; you don’t have to unwind all the misconceptions that exist out there. There is a tremendous clarity that allows us to virtually waste no time in coming to a handshake. Whether it was Bob Moul at appRenaissance or Chet Kanojia at Aereo, the conversation took a total of 10 minutes and we were onto building something great.
  2. Don’t need proof because the trust is there. For first time entrepreneurs, generally people like to see some evidence of execution. We want to see what you’ve been able to accomplish, before and now. The relationship is so new that it’s hard to take people simply on their word. We want to see it in some numbers somewhere. The second time around, we already know what you can do and have done before. We’re glad to take early risks blindly because the trust is there.
  3. Neither side worries about protecting outside case scenarios. You know the ones I mean… Spending a few weeks defining “Cause” and how to get a ladder of severance lengths based on that. Taking great pains to ensure you approve budget because someone might set one at zero and pay themselves insanely. Having to define exit thresholds and multiples because both sides worry about blocking (or not accepting) an exit because someone didn’t think they made enough money. In general, we never get hung up on the above, but they are real and these are the outside cases that strangers might try to protect. The second time around everyone focuses on the core issues, dealing with things that set up good governance and good mutual accountability, and knock them down easily.
  4. It’s a lot more fun. If you’ve had a good outcome with someone, it’s likely the second time, an entrepreneur will be thinking bigger, focused more clearly and will want to build longer. Bob’s goal now is no less than to build a big public software company based in Philadelphia. We love BHAGs like that – it clarifies the mission and energizes all around.

Since starting FirstMark in 2008, I am getting my first wave of entrepreneurs coming back for our second time together, and it’s fantastic. We’ve made it a point to build early, deep and longstanding relationships that make us a place to go again and again. They serve as the best references for new entrepreneurs (first time or repeat) we endeavor to work with. And I look forward to doing so in the future with the many incredible first time entrepreneurs I’m so privileged to be involved with now.

A Reflection on Boomi

This was a long overdue post, but it’s been a busy year.  Fitting this comes as we head into Thanksgiving.  Our investment in Boomi came at an interesting time.  There were plenty of scars from the legacy integration 1.0 and EAI worlds.  Those companies were marked by significant services implementation relative to license sales to deal with unique customer environments.  That made integrations complex, costly and brittle.  Companies like Grand Central, Bowstreet, and others had all tried to ride the Web services, SOA, and interconnected enterprise wave in the early 2000s.  Most were way ahead of their time, leaving lots of dead companies on the road of venture capital.

We believed Boomi’s timing was different.  The emergence of cloud compute services and the growing maturation of SaaS was a stark change from the past.  Both were important backdrops to answer the question “what had changed”.  We’ve had a thesis on how the cloud would require the re-writing of various middleware services.  While the team had a long history in EAI, they decided to bet the farm on the cloud in 2007 and wrote an innovative forward looking platform from the ground up.  They launched in early 2008, and we invested in the summer 2008 on the backs of healthy customer activity.  The business wound up growing very rapidly 300%+ CAGR, continued to launch new innovation upon innovation, won major awards, struck some good strategic partnerships, and eventually got purchased by Dell in an outstanding result for us as investors and for the employees.  From the outside, it was how you’d script it.  But there were definitely things we learned along the way.  Below are a few of them:

•         SOA and Web services (WS) are foundational, not competitive with integration.  Many had a view that as a result of the maturation of Web services, integration was built in and no longer needed.  In fact, turns out WS were foundational to doing integration in a flexible, repeatable manner.  It allowed us to connect more easily to systems, but you still needed a platform to orchestrate, move, transmute, and connect these WS ports.  We believe we are finally, after a decade, scratching the surface on how SOA will empower and impact applications going forward.

•         It takes time to find your sweet spot in the pyramid.  Boomi launched with incredibly disruptive pricing, which led to a lot of customers quickly adopting.  Early on, it turns out many were very small businesses only looking to connect two low end applications, where the value of the platform was less obvious and there were simple alternatives in the “point to point” world.  The value of an integration platform grows non-linearly with the number of points connected.  We pivoted to focus on companies with slightly greater needs, where our platform value would be clear and our innovation led to high stickiness. It takes time to tease out who the *right* customers are for a new category product.  Once we understood that, it helped clarify decisions around product roadmap, hiring, sales model, etc.

•         Don’t be afraid to raise prices.  Related to above, low price, high quantity led to a lot of early customers, but it didn’t scale exactly the way we wanted or attract the best fit customers for our product.  But it led to a lot of buzz.  As we realized our best customers were a little further up the pyramid, we worried that increasing pricing would also mean losing the very small business segment and perhaps impact buzz.  We spent a lot of time thinking about the tradeoffs, but decided it was more important to align with our target customer.  We increased prices three times and the business didn’t skip a beat (in fact inflected upwards).  If you find your spot on the pyramid, align all parts of the business to it.

•         SaaS delivery model changed everything.  Unlike the legacy world, which was plagued by high services and one off implementations, true SaaS allowed us new functionality and velocity the market hadn’t seen before.  We could do exciting things like using multi-tenancy to figure out what most people do when connecting applications, and auto recommend process maps.  This eliminated 90% of the manual work in integration.  Our platform could be opened up, allowing people to build connections and make them available to the entire community.  We could get reasonably complex integrations done quickly and reliably.

•         SIs say they love SaaS but it’s hard to break economic incentives.  We worked with a number of larger SIs who individually loved what Boomi was doing, but collectively found it difficult to leverage the product.  It broke the model of “billable hours”.  “Easier to configure” made for efficiency, but not more revenue.  Some newer more progressive SIs, like WDCi out of Austrailia were great, but bigger shops found it hard to change.

•         Indirect channels are hard to predictably scale early on.  In addition to SIs, we also worked with dozens of ISVs who were go to market partners for the Company.  We began to see success but that came after years of effort.  Mark Suster has a great perspective that fits our case pretty well.  No one could care about our success as much as us, nor did it matter that much for others versus us.

•         Conviction is important.  When we first invested in Boomi, we planned to split the round with a co-investor and introduced the Company to a few shops.  Most folks could not get there, so we decided to write the entire check.  After the market collapse in 2008, we told the guys to just focus on the business and be smart with cash, which they did a great job of.  There was constant inbound poking given the profile, but mostly off and on distracting conversations.  We decided to write an additional check so the team could focus entirely on the business.  And it was ever so rewarded!

Looking forward, we’re always sad to see a market defining company go.  The team did an outstanding job and I’d work with them in a heartbeat.  We are glad to have been a part of it.  We think there continues to be a huge opportunity in cloud infrastructure software.  The strategic interest in Boomi underscored that.  Dell has a fantastic opportunity to own one of the cornerstone building blocks for public or private cloud offerings, and exploit that as a real differentiator versus others out there.  Meanwhile, we’ll go back and look for the next great company to back!

Buy Me Or I’ll File

The 3Par saga is finally over, and the Company with the larger resources and most similar channel won.  HP is buying 3Par for $33/share or $2.4B in value.  This is over 3x where the Company’s stock was trading before the battle begun.

3Par is a classic example of why many private companies go “on file” (meaning, file their S-1) to drive an M&A process.  If you are a unique company with technology and sufficient scale to go public, that should be a pretty desirable asset.  But many times you need to create a compelling event to get buyers to take a process seriously.  By filing an S-1, you are telling a broad audience that you intend to go public.  Once public, there are a whole new set of fiduciaries the Company becomes obligated to and new set of disclosure obligations.  For example, in 3Par, all bidding happened formally and publicly.  Dell had no ability to lock the deal up and drive it to a close.  Their foresight and brilliance tipped others into action.  We saw the same with EMC, when they swooped in on DataDomain and took them away from NetApp. 

If either of these companies chose to buy 3Par when it went public in November 2007, they would have saved over $1.8B!  There are many companies on file today that don’t really want to be public.  It’ll be interesting to see if these recent public battles spark others into action sooner.

Purpose!

I was introduced to a great video around motivation by Brad Feld’s blog.  If you haven’t watched it, it’s worth 10 minutes of your time.  Much of what Brad and the video highlights is very relevant.  The primary idea was debunking the notion that pay and performance are linearly correlated.  While true in mechanical tasks, the research demonstrates that for anything requiring cognitive engagement, if pay gets de-coupled from purpose, outcomes are markedly inferior in spite of higher reward.  The talk is riveting, and I thought I’d offer a few suggestions based on what I’ve seen from our best executives.

First, create a purpose!  Many companies I meet with mistakenly assume it is so self-obvious that it is never made explicit.  And yet deciding those few words can make all the difference in the world.  Once articulated, the great thing that happens is those words can then be printed and shared over and over across a Company.  It allows purpose to be infectious and align an organization.  “Is everything I am doing consistent with our purpose?”  When everyone thinks with a higher goal in mind, it helps create a consistency of outcome.  Companies like Zappos are a great example of this.

Second, make sure you define a purpose in an aspirational way, not functional.  Purpose to me is not something that gets achieved, it’s a direction.  For example, it’s not “we want to build the best online marketing software” but “we want change the way people discover and interact online”.   Instead of “we will be the leader in online multi-player games” but “we want to revolutionize the experience, distribution and delivery of games to online audiences”.  Admittedly I spent 15 seconds thinking of these examples, but the idea is stay away from purpose that does not appeal to a fundamental emotion or create a cause of action.  The term BHAG comes to mind.

Third, find ways to reinforce the purpose and make accomplishment tangible.  Our best companies create exposure and reinforcing loops to show how individuals and the company support the mission.  Developers get introduced to customers who rave about how a new feature has shaved an hour off of their day.  Metrics are aggregated that frame how their engagement and excitement compares to other things out there.  Spontaneous community activities are highlighted and ‘shout-outs’ to individuals go company wide.  Beyond incentive compensation, people need feedback on a regular basis that they are indeed contributing to and achieving purpose.

Our best companies and leaders have a sense beyond themselves.  They create ideals that people line up to get behind.  When people believe, they will go through walls to create outcomes.  And when everyone is willing to break through walls, usually you break through mountains.  This is hard to do and requires focus to make happen, but remember even life is not that interesting without PURPOSE!

Love & Flux in a Time of Seed

I was at a panel earlier this week, when a question was asked from the audience.  “Are we in a seed bubble?”

Well, between the rise of super angels, the proliferation in micro-cap funds, and a shift in some LP interest towards the seed stage or emerging managers with small funds, it does not take a lot before we see significant changes in the available capital for seed.  Combine that with how capital efficient companies are, and you get seed stage activity at a level that did not exist before.  Admittedly, the fact that these companies can achieve material traction with much less money is a driver for the phenomenon.  But divide more dollars in the asset class by fewer dollars required per company and the output is many more companies.

What happens to those seed companies?  Typically, if a company does a good job executing on their seed round, by being capital efficient, they can quickly raise a Series A round of capital.  Some don’t need it, but generally in an era of easy “me-too”, expanding to all markets in parallel or staffing up quickly to feature differentiate usually necessitates venture capital.  The problem is that the venture industry at a macro level is in a not so healthy state.  LPs are having their own macro difficulties, and investments in the asset class are coming down materially.  Many funds from the prior climate are actively reducing fund sizes, by choice or otherwise.  And we in venture believe this actually is a good trend (at least those of us performing!).   

What does this all mean?  Combine the increasing number of seed companies with decreasing venture capital dollars, and you potentially have a tough situation.  Not every seed company that does “well” will have the opportunity to be fully capitalized.  There are only so many times a seed investor can tell a VC “no, no, THIS is really a hot deal”.  And so the bar will go up dramatically.  This is a good thing in that much better companies will get funded beyond the seed.  And in many respects the bar for a Series A deal these days will start to resemble a Series B deal.   But it also means lots of failure.

For entrepreneurs, a few things to think about.  First, think about the composition of your seed round.  Take the time to build the best network around you for information flow.  Create a good mix.  Make sure you have a strong group that can be your advocate and can give you credible advice about how to navigate the market.  Second, work actively with your seed investors to define real value creating metrics and what ‘clears the bar’.  It used to be 100K uniques was interesting, then it was 500K, six months from now it might be much higher.  Having institutional money as part of that syndicate can be helpful as we are actively in the transaction flow of real companies graduating from the seed to A and beyond.  Third, make sure you have the capital to achieve those objectives.  Don’t just take $1MM because that’s what is “typical”.  Map your capital to milestones in a disciplined manner.  This is not for investors, it’s to make sure you can grow your company seamlessly, keeping fundraising tasks to a minimum, and emerge owning a huge chunk of your business!