Atomic Energy

Steve Blank has a very funny story posted on his blog, about when he was raising a round of money for E.piphany from Infinity Capital. He wanted a $10MM valuation, they insisted it was too high and everyone would laugh at them. In the end, they came back with… $9.99MM. The rest of the story – dust, walls and pictures – is quite entertaining, but the interesting lesson is about the difference between $9.99MM and $10MM.

At first blush, there isn’t any real difference. $10,000 on a $10MM deal is 0.1%, less than either side’s legal fees likely were, and nothing significant. That is true for a classic economics, “rational” perspective. However, in life, in business, in financing, in sales, in marketing, the emotional often outweighs the rational. That is especially true here on several fronts:

• Getting something off of Steve, however small, had emotional meaning for the VC. Sometimes you need to give in a bit just to make someone feel like they have “gotten some love.”
• Whole numbers are a barrier. Remember when people wondered if the Dow would ever cross 10,000? Going on either side of $10MM has psychological impact.
• Some numbers have almost magical properties. For reasons unknown, the numbers 9 and 7 get deals done faster. This has been proven in study after study. It is not for naught that that candy was $1.99 and not $2.00.

A whole field of economics, called “behavioural economics,” has arisen to study these “irrational” behaviours. A professor at my MBA school of Duke, Dan Ariely, has written a very entertaining book on the subject, “Predictably Irrational,” which I recommend.

From a business perspective, it is important to recognize and understand these emotional/irrational drivers of behaviour. S/he who recognizes them and remains rational can use them to his/her advantage.

All technology companies have engineers, team leads and managers. Some have good QA, others have good product managers or even program managers. But not everyone has architects, and those who do are not necessarily strong. The question cash-contrained (and who isn’t) company executives ask is, “why do I need to spend a *lot* of money to hire a technologist who is not actually writing code?” The answer is often either not to hire an architect, or to take a weaker person and “promote” them to architect. In many ways, the latter solution is like the old “security by obscurity”. You were better off without it, because at least you knew you were insecure. This way, you think you are secure, but really you are not.

The purpose of an architect is to create, design and enforce a coherent philosophy on the product. To do so, they need to know every part of it – infrastructure, middleware and application; front-end and back-end; database and network. No, this is not my brilliant idea, but was first broadly publicized in Fred Brooks’ legendary “Mythical Man-Month.”

Recently, I had the opportunity to see first-hand what happens when you do not have a good architect.

The company deals in software on a semi-annual release cycle. They were a few short weeks before releasing their product. For reasons unknown, one coder decided that a core network communication component needed a new API. Granted, he was trying to rebalance multiple versions of this API that had been around. On the other hand:

• The multiple versions were only because there were several poor ones with no architectural integrity between them, until a newer version came along in an attempt to unify them all.
• The latest version really had only one benefit: a different architectural view. Not better, not worse, but different. But a single engineer wanted to change them all.
• This was a scant few weeks before release.
• It had not been reviewed by anyone else.

Needless to say, the change was made, the engineer *thought* he got all the references but of course missed some, and some part of the product was broken, necessitating last minute run arounds by many other staff to find, fix and test the issues.

Sure, the engineer acted like a cowboy: came up with an idea and ran with it, without considering the effect. To be fair, I like cowboys; startups could not exist without them, and sometimes they are the only ones who can get through a frozen situation or process. But in this case, as in many, the real problem was the lack of architect. There was no one person with all of the authority, the knowledge and the respect/recognition of the rest of the team to decide if this change suited the whole of the product, or, better yet, to have passed that knowledge down to begin with and thus have the engineer himself decide not to do the change before getting started.

The architect need not be solely dedicated. In smaller firms and organizations, it is often a role s/he shares with other duties. But the key role must exist, and everyone must know it.

The NY Times reported on Thu that when Mark Zuckerberg is ready to make an offer (or seduce someone, meant in the most positive way) to join Facebook, he takes them for a walk in the woods. Some actually find it strange – although given some of Mark’s reported early antics, nothing should be strange at Facebook, again, meant in a positive way. I believe that there are only two kinds of people in the world: those that think they are crazy and those that don’t know it yet; it is the latter who attack post offices or Wal-Marts (or airports).

I find Mark’s ideas correct and appealing. An office, even one as informal as Facebook’s, is still an office, and an interview, even one in Silicon Valley or Israel dress code jeans and T-shirt, is still an artificial environment for both parties. The best way to get to really know someone is either to work with them for a few months, something impossible to do beforehand unless you have a long past, or to get into a comfortable situation. Mark’s “walk in the woods” is exactly that. Each party gets to see the other as a little bit more of the human they will be when working together.

A long number of years ago, a wealthy individual wanted me to join him as CIO of his company. After a day of interviews with just about everyone, we were done, and I left his office. As I waited at the corner for the light to change, he showed up “by chance” and we took a walk together. How do we walk down the street? How do we handle slower walking people, mother with strollers, panhandlers, street corners, etc.? You can learn a lot from walking with someone three blocks down the big city.

More recently, as a consultant, I often find myself in the position of needing information from or about someone that they are reluctant or uncomfortable to divulge. Obviously, if they really do not want to share, I will find an alternative source, but more often than not, drinks in the evening at a hotel bar or the nearest Starbucks during the day, talking with a consultant who is not part of the formal organization, in casual clothing, really gets people to open up.

I read a great post earlier this week, whose thesis can be summed up as “your startup isn’t unique, and it doesn’t matter.” Adam Ludwin, of RRE Ventures, argued that the success of a startup is not determined by its unique technology or innovation, but rather by the mix of good timing (the market must be ready for it) and good people (solid execution).

This is probably the most important post I have seen, for entrepreneurs, in a long time. Entrepreneurs come from all backgrounds. Technologists usually believe they will succeed because they have something new; salespeople think they will succeed because they can sell better; marketers are convinced success is theirs because they can better manage and penetrate the market.

In the end, all of them are true, and one alone very rarely is. Sure, a very innovative product for which the market is screaming can succeed on the product’s merits alone for some time; similarly, slow incumbents that are underserving their markets can be undercut by a startup with existing products and technology but better customer service, pricing and segmentation. But overall, it is about executing on all of the elements.

The biggest danger I have seen is the belief in a “secret sauce,” usually technological, that will “guarantee” unique advantage to this startup. Whenever I hear that from an investor, I advise an entrepreneur to stay far away. Investors like that are far more likely to drive too much effort into R&D at the expense of customer service, sales and marketing, and panic at the first sign of a competitor. You may have their cash, but they have your shares and may even be on your board of directors.

The only secret sauce to success in startups is the same as in every other business: execution, with due respect (or not) to Docteur Guillotin, who invented that rather gruesome and often ineffective form of execution, the Guillotine. Get the right product, new or otherwise, in the right market, with the right mix of features (product), market, price and customer service. Execute execute execute.

I read an interesting article today about what Peter Thiel, one of the best-known early investors, asks any startup founder. He wants to know why employee number 20 will join your company. Employee number 1,000 is easy: company is stable (relatively speaking; ask Dick Fuld), money is relatively plentiful, lots of different career paths. Employee number 5 is also easy: lots of equity at a low valuation, which means huge upside if the company does well (which is the definition of risk). But employee number 20 joins when there is still equity, but not quite as much to make an enormous payday, but not enough stability to appeal to number 1,000 (or even 100). You need to be able to articulate compelling vision to the “late-early stage” employees. The equity is not big enough for the risk, but the current stability and upside aren’t there.

What Thiel calls “employee #20″, I call “feet on the ground.” In the years when I worked in corporate IT, I always made it my habit to visit a vendor before I bought their products or services, especially small ones, no matter where they were, no matter how large or small the purchase, even if the executive management offered – and did – come visit me. Besides meeting the COO, CFO, CMO, CTO and CEO, not to mention the VP R&D and Customer Service, I always wanted to walk the ground, “shmooze” with the customer service reps, sales staff and engineers, the grunts in the trenches. Often, I would discover a company with a phenomenal product or service, but engineers who, I knew, could not possibly have built what they are selling me. To put a fine point on it, it was way out of their league. Dig deeper, and I would discover top talent had lost faith and left. I would walk away from the deal. Sometimes, the reverse was true, and a lost deal would be salvaged.

The most important part to me, though, even in a large company, was to get a feel of the spirit of the company. If there was a positive energy, people were doing work, happy, and really felt part of something that I, as a customer, actually wanted to buy at something within reasonable range of their ask price, that was a company I would invest in.

One particular incident stands out in my memory. In 2001-2002, I was looking at buying a notification management system. Everyone (and I mean everyone) was using a simple configuration file driven system called TelAlert. But TelAlert had a lot of shortcomings, and since I headed up Enterprise Management, it was my decision to continue or replace. I found a small company called AlarmPoint (different name back then), based in Pleasanton, CA, a little Southeast of Oakland, that had a still maturing but much better product. I met with them, did trials, gave feedback, and they listened. Our investment was not *that* big, but I got onto a plane first thing in the morning, spent most of the day with everyone from their great CEO Troy McAlpin down to the first-line engineers, and came away convinced they were a good investment. In my terms, I got feet on the ground and found good paths; in Thiel’s lingo, I found out why employee #20 joined.

HP, intrepid acquirer of erstwhile darling of the mobile set Palm, has taken the little bit of value left in Palm, WebOS, and is building its new platform on it. It is important to remember that HP used to be the vendor to go to to get Windows Phones (or WinCE, or Windows Mobile, or whatever branding they stuck on it in an attempt to make it palatable). Windows Phone is basically dead in the water, and HP, which sees the beginning of a death spiral for Nokia, and an advanced one for Blackberry, wants to save its mobile business.

HP really had two choices: go Android, or walk away. It chose the third, and picked up the one remaining, if non-existent market share, platform left: WebOS.

One of the more interesting things in WebOS is that its development model is totally unlike every other mobile platform, both new (iOS, Android) and old (Symbian, Blackberry). Rather than a specialized computing platform, variant on C/C++ that underlies most complex desktop applications, WebOS applications are build entirely on HTML5+JavaScript, on top of Ryan Dahl’s NodeJS platform.

WebOS has chosen to go for the same environment in which every single advanced Web application is written, essentially harnessing, or at least giving a huge leg up to, millions of Web application developers.

Of course, at the same time, WebOS is trying to fix some of the issues with iOS, like seeing multiple windows simultaneously, real switching between applications, and other challenges, but at heart, this is an effort to win the masses by winning the developers.

At first blush, I would expect it to fail. Apple has such a large installed base, and Android is growing so rapidly, that it seems impossible WebOS will catch up just by making life easier for developers. At the same time, Microsoft did severe damage to Apple in the PC Wars largely by recruiting many developers, and thus making the number of installable applications too compelling to users. In many ways, Apple recognizes this with its constant reminders that, “there’s an app for that”, and the number of applications available on the App Store.

However it turns out, HP is taking a risk, but one that makes sense. Rather than giving up on the market entirely, or ceding control to Google via Android (which might as well be the same thing), or trying to face Apple + Google head-on and lose, it is taking a different approach, attempting to win customers by sheer developer mass. It is a risk, but given HP’s situation, if HP management has the staying power (pun intended, given its turnovers and travails), it might make a real contender.

Of course, I did type most of this on my iPhone….

Mark Feldman, the CEO of Ziontours in Jerusalem, wrote an article in today’s Jerusalem Post describing the many changes in baggage policies of airlines over the last several years. Since Mark is based in Israel, unsurprisingly he focuses on the policies of major carriers to/from Tel Aviv.

Americans and Europeans who have gotten used to being squeezed on baggage charges over the last decade would probably be surprised to hear that most carriers – El Al and all the North American based ones – offer two free bags of up to 50lbs/23kg to Tel Aviv. Many who regularly fly this route tend to view it almost as a self-evident truth, to paraphrase Thomas Jefferson et al, that all travelers are entitle to two free (and often overweight) bags.

Once of the challenges of a competitive market – and the benefit of it to consumers – is that it can be hard to raise prices on just about anything. As long as El Al and a few other carriers give free bags, other carriers will find it very hard to charge for bags, unless they offer drastically discounted fares to lure customers in. The situation is different Tel Aviv to Europe, where, since El Al does not offer two free bags, most European carriers can get away with offering their usual one bag, if that.

Mark argues that squeezing out bag fares is pennywise and pound foolish (although that is not his terminology). He points to Southwest Airlines, the discount carrier that still offers two bags free, and markets it very heavily. Clearly, the market is responding, and customers are flying Southwest (although I suspect it is more due to being treated like a customer, not like a commodity).

Personally, if I were running an airline, I would charge for baggage… but on a rising scale. At reservation, $10/bag; up to 72 hours before, $20/bag; and at the airport, $30-50/bag. All of it nonrefundable. Baggage service is just that, a service, and people pay for a service. Somewhere built into the cost of your ticket is the cost of checking, scanning, loading, flying, unloading and dispensing your luggage. Let airlines charge less for tickets, and more for bags. Let other airlines (Southwest?) give two bags free. As long as it is transparent, it is good, varied competition.

I have read many many articles that suggest startup developers should be conscious not to aim for perfection early on – they will get the perfect product that will be irrelevant by the time they finish it – but to pay close attention to architectural choices. What they do today may be one day in one direction or another, but can be millions and months or years of work to change down the road. Peter Drucker once called this the difference between doing things right (engineering) and doing the right things (product). Nonetheless, even Drucker would say when you do the right thing, do it the right way. Not the perfect way, but the right way.

Just this morning, I saw a perfect example of this. The Blackberry PlayBook, RIM’s feeble attempt at doing a tablet, for some unknown reason, had no email. Email, the killer app for Blackberry, the one thing they normally did better than everyone else, was not on their one-time-only attempt to push into tablets. That is almost like Apple, who is famous for user experience, having one attempt to get into productivity apps and releasing one that made saving files nearly impossible, and much harder than vintage 1984 WordStar. Worst was, no one could explain why or how RIM could release a product without email.

Today, I finally saw a reasonable explanation. Apparently, RIM’s mail server cannot support more than one device per user account. If you already have a BlackBerry, you cannot have another one, or a PlayBook, for that matter. Obviously, someone made this architectural choice very early on, either as part of a conscious security decision or, more likely, because someone said, “no one has mobile access to email, we are giving it to them now, how could they possibly want more than one device?!?!”

The architectural decision you make early on have an enormous impact. Make them right.

According to today’s WSJ, Ron Johnson, the head of Apple retail, left to become President (slated to be CEO in a few months) of JCPenney.

This is a big loss for Apple, and a gain for Penney. However, Apple is an upscale brand with strong brand equity. Penney, on the other hand, is a low discount retail chain. Before Apple, Johnson was a VP at Target, the mire upscale big box store.

It remains to be seen what Johnson can do in a different class environment.

When looking at starting a venture, most entrepreneurs and investors tend to categorize the type of industry and the requirements for success. Commonly used differentiators are retail vs corporate, direct vs indirect sales (eg the Facebook model where the actual users are different than the paying advertisers), capital intensive vs light (eg chip design vs web services), etc. Many investor groups explicitly focus on one or more differentiators, since they know the requirements for success.

Another factor often used is regulatory sensitive vs independent. For example, bio and Pharma are regulatory required, whereas LinkedIn and Intel are independent. Of course, over time, as any industry grows, we can reasonably expect regulators to try and control it, but at it’s early stages there is no regulation, and for many years thereafter only light.

Even regulatory required industries can generally rely upon a certain set of rules. If product X meets all of the requirements, it will be approved.

In today’s Jerusalem Post, Gil Troy wrote an article on Arava Power, and its travails with government approvals. While I am mostly neutral on solar – if it works and is cost-effective, use it – Israel, with it’s almost unending intense sun, especially in the Arava desert, would seem extremely well suited to solar.

Yet, as Troy writes, the industry is being stymied by government approvals. Unlike even Pharma, solar needs many layers of approval for two reasons:
1- Land. The panels need to be placed on large tracts of land, which always requires signoff, especially for something that is not a house or factory.
2- Power. The power industry is one of the most heavily regulated in most countries.

Thus, unlike bio and Pharma, which require approvals but have a well known process, and can be called regulatory required, and unlike even defense firms, who sell into government but have many governments and independent agencies and customers, solar is “regulatory unpredictable.” Without regulator signoff, in an area where existing regulations do not address the issue and there is no predictability, a venture can be stymied from the get go.

More than anything else, such industries – green, black, purple or anything in between – require, like Pharma, a well known and designed regulatory process, so they can move from regulatory unpredictable to required.