Don Dodge on The Next Big Thing

The Next Big Thing doesn't exist...says IBM

In a CNET story today IBM exec Nicholas Donofrio says The Next Big Thing doesn't exist. "The fact is that innovation was a little different in the 20th century. It's not easy (now) to come up with greater and different things," Donofrio said. "If you're looking for the next big thing, stop looking. There's no such thing as the next big thing,".

The Next Big Thing does exist...it just doesn't look BIG to IBM. That is a common problem with large companies. When you have revenues of $40B to $100B no one thing will move the needle. Nothing looks big or interesting. Innovative or disruptive technologies are viewed as a threat to the core revenue stream, rather than promising new opportunities. This is the premise of The Innovators Dilemma by Clayton Christensen.

Here is a sampling of the hot start-ups we are working with now. Any one of them could emerge as The Next Big Thing.

Adesso Systems—Mobile apps for an occasionally connected world. A Red Herring  100. Think "WinFS today."

Akimbi—Automates and accelerates the setup and teardown of even the most complex multi-machine software configurations using virtualization technology. Winner at Under the Radar.

Akimbo—The first functional marriage of TV and the Internet. "Your wish is on demand."

AtHoc—Alerting specialists for warning systems, emergency operations centers, and critical communications.

AviCode—Can pinpoint the exact source of any bug in a .NET application in real-time—during production or development. Identifies the exact line of problem source code.

BeVocal—Provides hosted self-service voice application solutions for carriers and call centers.

Cicero Networks—Voice over Wireless IP that harnesses the power of wi-fi and Bluetooth networks to deliver wireless voice services.

Colligo—Instant collaboration for teams in the field: Lets any wireless capable laptop, Pocket PC, or Tablet PC instantly and securely network to one or more computers no matter where you are.

Coveo—Specialized enterprise search with superior relevance ranking, document summaries, and integrated security.

CXO Systems—Web services-based dashboards that enable a one-touch, comprehensive view of multiple business functions in real time.

Digipede—Its "many legs make light work" and turn any combination of servers and desktops into a grid for .NET apps.

EchoPass—Offers complete solutions for on-demand call and contact center needs.

eSecurity—Security event management and continuous compliance monitoring for IT controls; makes sense out of the deluge of security log data that all the different systems on the network spit out.

Exact Target—A SaaS e-mail marketing company with a very slick AJAX interface that has achieved massive scale.

Fortify—Kind of like a mega-powerful cereal for your code; it figures out security problems during code development so you don't become the next statistic.

Forum Systems—Hardware appliances provide secure transmission and acceleration of XML data.

Fractal Edge—Cool visualization technology that lets you maintain and know your place anywhere within the hierarchy as you drill down on data. A Red Herring  Top 100 Private Company in Europe, 2005.

Grouper—Provides a way for friends and family to share videos and photos online via .NET smart client applications. Friends-only file sharing.

IdeaBlade—.NET on Rails. A framework for building service-based applications and distributed clients.

IP Commerce—Transaction payment platform and toolsets that enable the IP Payments Framework, a partnership Software as a Service system for incumbent and emerging players involved in electronic payments. Chase Merchant Services, a division of Chase Manhattan Bank, is an initial partner.

IDV Solutions—A visualization and geographical mapping solution. Integrates with MapPoint, Visio, and SQL.

K2.net—Enterprise scale workflow solution that automates any business process spanning people, divisions, technology, and distance. It has a powerful drag-and-drop design environment.

LoyaltyLab—Software service that lets merchants easily manage an online rewards/points system and create custom marketing messages to customers.

Newsgator—RSS aggregation from consumer to enterprise, from phone to desktop.

Onfolio—Built into the browser, it's a convenient and familiar tool that will help make web research more efficient, thorough, and organized.

OutlookSoft—Web-based solution delivers real-time planning, budgeting, forecasting, consolidation, analysis, reporting, score carding, and process management.

OSIsoft—Delivers performance management software to the world's leading process manufacturing, life sciences, and utility companies—anywhere real-time operational metrics fuel performance.

Oxlo Systems—Lets automotive dealers integrate their systems with auto manufacturers, service providers, and other partners.

Rackwise—Focused on automating the manual processes associated with designing, documenting, and tracking changing networks in a datacenter through an on-line subscription service.

Skelta—Superior yet affordable workflow technology has let software vendors and enterprises implement workflows rapidly and at significantly reduced costs. 100% web based, multicultural architecture for anywhere, anytime access. Red Herring  Top 100 Private Companies in Asia.

Tableau—The Visual Spreadsheet, it provides visual reporting and analysis solutions.

Workshare—Lets you exchange high-value business documents and be certain the right information—and only the right information—is in your document. Works in-line with Microsoft Office

Recommendation services, collaborative filtering, and friends

There are millions of choices on the web. Search engines narrow the choices down to thousands. Does that help? Recommendation engines attempt to narrow the choices down to a handful based on your previous choices, and the choices of people deemed to be like you.

The New Your Times has a story today "Like this? You'll Hate That. Not All Web Recommendations Are Welcome" which details some of the problems with recommendation engines, and mistakes that were made by Wal-Mart and others. C/Net News also has the story.

Netflix and Amazon have recommendation services for movies, books, and music. They keep a profile of your purchases and ratings of previously purchased/rented items. They do a reasonable job of recommending new titles, but they tend to offer titles by the same artist, author, director, or something in the same genre. Pretty simple and very narrow. The variety and serendipity is lost. These services don't recommend the truly outstanding, yet unknown stuff.

Circuit City and other retailers use recommendation engines to suggest an extra battery or tripod when you buy a camera, or a DVD player when you buy a new TV. These are helpful suggestions because they suggest the correct battery among hundreds of choices, and remind us of what we might need with this specific purchase.

C/Net reviews, ePinions, and others offer consumer reviews of products to help us decide what we want. Consumers like you and me spend a lot of time researching and reviewing products to help other with choices. I have found these recommendations to be excellent and unbiased.

In the blog world we have Tech Memeorandum, Digg, Reddit, and other recommendation and ranking services to help us find the most popular content. I use these services and find them very helpful. However, for me, the best sources for new interesting content are the blogs of respected opinion leaders like Om Malik, Robert Scoble, Richard McManus, Brad Feld, Fred Wilson, Dare Obsanjo, Michael Parekh, and others. For me these bloggers are like editors or filters for the best information.

Search engines and recommendation engines also utilize opinion leaders and authority figures to rank results. Inside their ranking algorithms they give extra weight to certain sources, and penalize other sources known for spam. I worked at AltaVista for several years and was one of the few people who had access to the ranking algorithm. You might be surprised at the elements of ranking and the weights given to each. It is part rocket science and part intuition. In essence Google gives preference to "authority" figures too through their PageRank system. Pages that have lots of inbound links are thought be be authoritative, and are given more weight than pages with few links.

Recommendation engines are still an area ripe with opportunity. There is more innovation to be done, and big money to be made by entrepreneurs. Finding the right mix of ranking factors, authority ratings, personal feedback, and collaborative filtering will produce a new powerful recommendation engine that will boost sales for any site, and make a ton of money for its inventor.

Seen any good recommendation engines lately?

Three moves that could topple Google

There are three potentially huge search businesses where Google is vulnerable. Google will not crumble to the ground, but they can be seriously slowed down if another start-up does a great job at Mobile Search, Local Search, or Classified Listings Search. The major search engines have feeble offerings in these areas. No one has done it well. These are potentially huge businesses with no dominant leader.

It is important to remember that 7 years ago when Google was just emerging that there were already huge dominant players in search. AltaVista, Excite, Lycos, Infoseek, FAST, Ask Jeeves, and others were dominating the search business. It didn't look too promising for a start-up in the search business. Personalized portals were the rage. AOL, Yahoo, and MSN actually outsourced their search service. Search was simply one of many services, and not a good one at that because it didn't keep users on your site.

Today Mobile Search, Local Search, and Classified Listings Search, are opportunities with no dominant leader. Each one of them are billion dollar businesses.

Mobile Search is potentially the largest and most lucrative opportunity but also the hardest to do well. There are hundreds of millions more phones and mobile devices than there are PCs. Mobile devices will become the communication and computing platform of choice within 5 years. It already is the platform of choice with teenagers. Have you ever watched a teenager do text messaging on a phone? Have you watched them take pictures with their phone, send them to friends, download ring tones, share contact lists? Europe and Asia are way ahead of the USA in adoption and advanced use of cell phones.

The secret to success in mobile search will be the user interface design. This means both the ease of entering queries and the clear presentation of search results tailored for the mobile device. Phones use voice to communicate. Why not allow the user to enter commands and search queries via voice rather than text entry? Why not return the results via computer generated voice rather than text? Why not allow the user to get the results both ways? Voice recognition is way better today that it was 5 years ago. The problem with voice recognition on a PC has always been the lack of a good microphone. The phone has a perfect microphone already built in. I am sure there is someone out there doing this already but they obviously haven't solved all the UI problems. This will be big!!

Local Search is an enormous business opportunity that has been germinating for more than 5 years. It is about to pop. In fact, mobile search may be the catalyst to growing the local search business. Again, local search has been around for a while. No one has done it well or completely. No one has a business model that makes sense for the local merchants or advertisers. There is probably more advertising money spent on local advertising and Yellow Pages than there is on web marketing today. It is a huge market in need of innovation. Local search is hard because many of the local businesses, schools, or government agencies don't have web sites, or sites with good information. This might be an area where user generated content services and social networking/filtering technologies will help provide useful information. Today there is a huge base of users who are willing, even anxious, to contribute useful content. Look at Wikipedia, blogs, and other user generated content services. Providing an environment where users can contribute to providing better results will be one of the keys to success in this market. It will take a new and different approach to make Local Search work. There is a fortune waiting for whoever figures this out.

Classified Listings is the largest advertising business in the world. Newspapers make more money off simple classified listings than they do from the fancy display ads. Ebay is basically a giant classified listing service with an auction service attached to it. Craig's List is probably the biggest online classified service, but again there isn't a solid innovative business model associated with it. This is a fragmented market with poor data sources, that needs automation, scale, user interaction, and an innovative business model.

The secret to success in all three of these businesses could be the business model. Remember that Google was successful against its huge competitors because it brought a new business model to the table. They only allowed text ads, only allowed ads relevant to search results, and auctioned off the search terms to the highest bidder in a fully automated auction. They didn't have the expense of thousands of highly paid ad sales people. These business model approaches were responsible for the financial success of Google. There were also technical innovations that were responsible for their quality search results.

Mobile search may require a new business model that incents the carriers, or a new search paradigm that uses the phone number rather than a word as the search term, or employ GPS and mapping to target results. Mobile search may need user interface innovations that store previous queries, use those queries to refine new results, pre-load search terms and attributes, take advantage of phone numbers, contacts, and URLs already stored in the phone, etc. Maybe optical character recognition or photo recognition, or voice recognition could be used to enter queries. Good voice recognition software could be the key to success here.

Local search and Classified search are as much a business model problem as they are a technical problem. Ten years ago no one thought eBay could work on a national or global scale. It was the simple business model and eBay community protections against fraud that made it work. Innovative approaches to business models and user interaction will be the keys to making Local search and Classified Listing search work well.

These are huge markets that could be bigger than Google today. There is no dominant leader and there is lots of room for innovation. The perfect environment for The Next Big Thing.

Onfolio - Two thumbs up

Onfolio makes my job easier. I look at hundreds of start-up companies every year, research hundreds of topics using search engines, and read lots of blogs every day. I have a very good memory but keeping all of this information organized is a problem. Onfolio makes it easier to collect and organize information, add my own comments, and keep everything prioritized.

Search engines are great at finding information hidden in the more than 8 billion pages on the web. Bookmarks or Favorites are quickly overwhelmed. Saving snippets to Word or Notepad is tedious too. Onfolio makes it all fast and easy.

Onfolio is a web research tool and an RSS reader built into one clean intuitive interface. Onfolio is a browser add-on to Explorer and a plug-in to Outlook email. It can be used to "capture" content from web sites, RSS feeds, email, or even Office documents. The captured content can be organized into folders and sub-folders, or added to My Reading List for later reading.

I read tons of blogs every day, usually speed reading, looking for a few nuggets of new information. The "My Reading List" feature lets me blast through hundreds of posts and save the ones I really want to digest for later reading. It does the same sort of thing for web browsing.  You can surf hundreds of pages, follow links, and explore the depths of the web...without getting lost. You simply "capture" the useful pages for later reading and plow ahead.

The cool thing about Onfolio is that as you are blasting through all this content, it makes you organize the information into "Collections". It helps you keep information from hundreds of sources organized into neat collections. You can easily share your research with colleagues on your LAN. Anyone can add to the shared collection, or they can subscribe to the Collection Feed and be automatically updated with new information.

Onfolio appears as an Explorer Bar on the left of the browser window. When you find an interesting web page you simply hit the "Capture" button and Onfolio allows you to save it to a Collection as a link, a local copy on your disk, or as a snippet. You can add comments about why this page is important to you and set color coded flags to prioritize or further organize the data. Another cool feature is the Site Capture option. You can capture a local copy of a web site at any level of depth, for later viewing offline. If you spend a lot of time on airplanes you will love this feature.

Onfolio also has an RSS reader and feed manager tool built in as an Explorer browser add-on. It works very well and has a few unique features. Onfolio adds a little toolbar to the top of each post. By clicking on an icon in the toolbar you can quickly, "capture" an interesting post to a "Collection", add it to "My Reading List" for later reading, email it, or Blog it. This is really cool. If you are reading a blog post and want to write a blog on the subject you simply click on the "Blog This" icon. Onfolio will open up your blog, create a new post, insert the link, and the opening excerpt. Now you are reading to post on that subject. All with one click.

The Onfolio RSS reader also has some time saving features. It will automatically detect RSS feeds on a page and set up a feed for you with one click. No more searching around for the appropriate RSS feed option and going through feed reader subscription menus. Another neat feature is the Feed Newspaper option. Once you have subscribed to all these feeds you can easily organize them into a "newspaper" and browse through them at whatever level you want (single feed, feed folder, or all feeds). This is another great way to productively focus your reading time.

I have been using Newsgator as my RSS reader and feed manager for a long time. It plugs into my Outlook email and makes it easy to seamlessly read email and blog posts throughout the day without ever leaving Outlook. Onfolio takes the web browser approach to RSS feeds and management and works seamlessly with Explorer. Both work equally well. Onfolio has the added benefit of helping organize information from other sources.

When it comes to web research or keeping information from email, Office documents, web sites, and RSS feeds all organized in one place, Onfolio is the best on the market...by a mile. Onfolio has made my job easier and my time much more productive. I give Onfolio two thumbs up.

Onfolio launched in March of 2004 and is now offering Onfolio 2.02 which is available for download for a free 30 day trial. Onfolio was founded by JJ Allaire, formerly co-founder of Allaire Corp, makers of Cold Fusion, Home Site, and other software titles.

Fear is temporary, greed is permanent

The investment market is driven by two things; fear and greed. Fear is temporary, greed is permanent. Markets over time always move up but there are periods of fear and doubt that cause investors to retreat. Greed takes over when investors see others making money and want to get back in the game before the opportunities get away. This happens in the stock market and in VC investing.

When fear takes over it consumes everyone. Everything looks black. Investments that looked great 6 months ago look like risky charades with no business fundamentals. We saw this happen in 1987, 1994, and 2001. There are usually a few high profile examples of "irrational exuberance" that were indeed big mistakes. Then the rest of the market gets slammed irrationally.

But fear is temporary, greed is permanent. Greed is a much stronger emotion than fear. Greed in this sense is a good thing, more like motivation and risk taking.

Every year at this time investment gurus review the performance of the stock market for the year and make predictions about next year. Everyone has an opinion, but from all of this a consensus emerges, and it is usually pretty accurate. I am reminded of the book "The Wisdom Of Crowds" by James Surowiecki. The premise of the book is that the consensus opinion of the masses will be more accurate than the opinion of one expert. The book cites many examples where the wisdom of the "crowds" was superior to the expert. The consensus this year seems to be moderately positive.

Regardless of the environment, entrepreneurs are always going against conventional wisdom. We think big, we think about what could be, and ignore the naysayers. Yes, entrepreneurs do take big risks, but they don't look so big to us. It just looks like a big opportunity. If it were easy or obvious everyone would be doing it. Entrepreneurs ignore the fear and focus on the opportunity.

We had some dark years from 2001 to 2003, but the pendulum has swung back to where good deals are being funded at reasonable valuations. Angel investors have been very active over the past four years but are starting to see deal quality fall as the VC's grab the good deals.

Some might argue the pendulum has swung too far. Social networking and user generated content companies are attracting a lot of attention and investment.  Proven revenue models are still a question mark. But, greed is alive and well. There is lots of money sitting in VC funds that must be invested. 2006 is shaping up to be a great year.

Happy New Year!!

Three kinds of companies

VC and Angel investors put prospective companies in three buckets, and they only invest in one of them. Entrepreneurs looking for money should think about where they fit. The three types of companies are; Lifestyle, Cash Flow, and High Growth. When companies are just starting out it is sometimes not clear which category they will fall into. This is why investors spend a lot of time studying market size data and asking questions about customer scenarios.

Lifestyle companies provide a nice job and great compensation for the owner and top people. They might have a solid history of profitability, and a solid product or service. But, without significant changes these companies will never grow 5X or 10X from where they are now. VCs and Angels will not invest in this type of company. These companies should look for Friends and Family money, asset based loans from banks, or vendor financing.

Cash Flow companies are very profitable and throw off consistent cash flow. They grow at a reasonable (10% to 20%) rate and the cash flow covers all growth needs. After years of steady growth these companies might decide they need capital to staff up new sales offices in an attempt to double their revenues over a couple years.

VCs and Angels are not likely to be interested in this situation even though there is little risk. Little risk equals little reward. They are looking for 3X to 5X returns over a few years with an occasional 10X winner. From an investor point of view, a minority percentage ownership in a privately held company, where insiders control the BOD, is not attractive. The company can decide to keep all the cash flow or pay it out to executives. The investors are unlikely to see any of it, or enough to make the investment interesting.

Cash Flow companies should look for bank financing, asset based lending, or convertible secured loans from angel investors. Some angels will do secured loans with an optional conversion to equity feature.

High Growth companies have the opportunity to grow 50% to 100% per year for several years. They have products in fast growing markets where innovation and/or disruption is happening. It is a high risk, high reward, environment. Innovation often leads to entirely new markets or usage scenarios where value is added to an existing process. Disruption usually means that a new technology is applied to an existing problem or process where incumbent products will be replaced. Either way it is a high growth opportunity.

Investors need to understand the total addressable market and guess at what percentage of that your company can win.  They will spend a lot of time understanding the competitors and possible acquirers of the company. From the beginning investors are looking for multiple exit strategies.

VCs and Angels are really only interested in investing in high growth companies. They both want growth and big payoffs. The only difference between Angels and VCs is the size of their investment. They both evaluate investments in the same way and want the same types of exits. However, Angels are willing to make seed stage investments of $250K to $1M, sometimes even up to $2M, while most VCs will not consider anything less than $3M to $5M.

Both Angels and VCs want significant ownership and  BOD representation. Angels tend to get more involved in day to day activities during the seed stage and get you ready for future VC investment. VCs tend to get involved later in filling out the rest of the management team, helping you arrange partnerships, and paving the way for acquisitions.

All this stuff should be pretty obvious to people who have been in the technology business for a while. But, you would be surprised how many Lifestyle and Cash Flow companies try to pitch their companies to Angels for investment. Angels have a soft spot in their heart for entrepreneurs so they will often listen, but almost never invest. Save yourself the time. Unless you are in a high growth potential market space, don't bother pursuing Angel or VC money.

Good luck!!

The VC funding process - 12 steps to success

I get lots of questions about the VC funding process, how to be successful, why it takes so long, what to expect, etc. Rick Segal of JL Albright Ventures writes The Post Money Value blog and had an excellent post Inside the Process describing how it works at JLA. I was going to write a post on this but Rick did such a good job that I have little to add.

The first meeting is critical. I wrote "How to handle the first VC meeting" with tips from some of the top VCs on what they expect at the first meeting. Getting the first meeting is a process unto itself. Rick Segal is more open to taking first meetings than most VCs. My post above has a few tips on how to get the VC to take the first meeting.

The process is different at each VC firm but generally follows this pattern. I will just outline the steps. Read Rick's post for the details.

1. No harm - no foul 30 minute introduction. This can be done by phone, email, or in person. The goal is to get a full length first meeting.
2. Pre-meeting information package. Send an email with a 10 slide PowerPoint presentation and maybe a link to market sizing data.
3. The first meeting. Explain succinctly what problem you solve, who your customers are, how you will collect revenue, who your competitors are, and why your management team will be successful. Don't spend a lot of time on "how" the technology works. Save the demo for the end, if there is time. Again, read my post above, and Rick's post for more detail on how to handle the first meeting.
4. The Monday morning partners meeting. Most VC firms have a partners meeting on Monday morning to review their portfolio companies and new companies under consideration. Rick calls this "The Huddle". It is the first chance for the rest of the partners to veto the deal.
5. Send more information. Assuming you made it past the first partner test they will ask for more detailed information. Give them everything they ask for, and more. Make it organized and clearly address each point they raise. Don't send a generic package of materials. The VC will start to do some due diligence based on this information.
6. Face to Face meeting with more partners. You already have one partner championing the deal, but this is a partnership and everyone needs to feel comfortable with the investment. The other partners want to get a general understanding of the product, but more importantly get comfortable with you as a management team.
7. The second Monday morning partner meeting. Now that several partners have seen the company they will decide if they want to proceed with a term sheet, and the general parameters of a deal. Lots of deals die at this point.
8. The Term Sheet. Term sheets are pretty standard for VCs...they do them all the time. But for entrepreneurs these are scary, sometimes intimidating documents. There will be lots of legal terms and words you have never heard before. This is not a time to think you know it all. Get a good lawyer who has lots of experience with VC financing. Brad Feld has a series of great posts on term sheets. I highly recommend reading them. Some of these standard terms could come back to bite you later. You need to understand exactly what you are agreeing to. I recommend thinking up three scenarios and applying the terms to each of them to see what would happen. It may surprise you. Take the time to do it.
9. Due Diligence - Validation time. This is where the VC firm gets serious about investigating the company, the technology, the team, and the competition. This can can take a lot of time so be patient. You might think you have a deal "in the bag" when you get a term sheet, but this is just an outline of a deal. Negotiations start, the background checks start. Things can still fall apart.
10. Third Partner Meeting, they agree to move forward. Here the partners agree to do the deal, commit the money for lawyers, raise any concerns, etc.
11. The Lawyers. Lawyers can kill deals, or they can find creative ways to make deals happen. This can be a painful emotional process. Try to stay focused on the long term, bigger picture. Your lawyers job is to advise you of risks. You can decide to take the risk, but at least be aware of what they are.
12. Signing the deal. It has been a long process but you have made it. It can be somewhat anticlimactic after all the hard work, but it is time for celebration. Celebrate now. The real hard work is just beginning.

Sorry for the long post. It may only be interesting to first time entrepreneurs. But, let me tell you if you are going through this for the first time it is nerve wracking. Send a link to this post to any friends who are trying to navigate their way through the maze.

As I said earlier, every VC handles this slightly differently. There is a lot of detail and nuance behind every step. The deal can die at any step in the process. Try to have back up plans in place.

Good luck!

Selling your start-up to GYMA

Dare Obasanjo has an interesting post titled Flipping Your Startup 101. Dare references my earlier post Microsoft Will Acquire My Company which explains the logic the big players use when considering the acquisition of a startup. The "Flipping" post talks about the recent VC investment in Meebo and how that effects their chances of being acquired by GYMA (Google, Yahoo, Microsoft, AOL). While the subject is Meebo, the lessons and logic apply to all startups.

It is interesting to note that VCs invest in startups for the same reasons that the major companies acquire startups; 1)Great team of extraordinary people, 2)innovative technology, 3)growing user base, 4)a hot new market with huge growth potential. These are pretty much in rank order of importance.

Truly great engineering talent is hard to find. They are worth their weight in gold. Using a basketball analogy, Michael Jordan was only 1/5th of the Chicago Bulls starting lineup, but he was 100% of the reason they won so many games.

One superstar engineer/visionary like Ray Ozzie is worth 100 really great engineers. And, one really great engineer is worth another 100 good engineers. This is the normal order of things, yet few CEOs understand this. The truth is you need all levels of talent to build out a team, but without the superstar it will be tough to win.

I agree with Dare and Om Malik that Meebo is probably not now a good candidate for acquisition by the big guys, but perhaps for different reasons. The fact that they took venture capital raises the price expectations, perhaps beyond what they are worth as pure engineering talent, and their product competes with the other major players.

However, an acquisition by one of the majors is still a small possibility. It is not uncommon for big companies to acquire small companies with talented engineers and then redeploy them onto other strategic projects in the company. In other words, they are acquiring the people and their potential. The  product is of secondary importance.

It comes down to this; if the company in question has a product that is squarely in the domain of an existing Microsoft product than the valuation is a small premium over the internal development cost. If the company has market leadership in a new product space or market segment than the valuation goes up significantly.

VCs make investment decisions, and determine valuations, in the same way. Of course they want their initial investment to be successful, but if it isn't they could move the team into a different opportunity, or combine them into another investment,  and hit the jackpot. It is all about the people.

Real estate investment is all about location, location, location. Technology startup investment is all about people, people, people.

Google music search 8 years late

Eight years ago Nick Whyte and our team at AltaVista invented multi-media search. We were the first with Image (picture) Search, Video Search, and Music Search. Seven years ago I joined the team at Napster where we invented P2P music search and file sharing. Pioneers sometimes win fame, but rarely earn fortunes. In this case, the not so fast "fast follower" Google will probably make the fortune.

C/Net broke the story Google whistles a new tune. Funny, I went to Google this morning and couldn't find it. It only shows up as a secondary option after returning results of a search. For example, if you enter "Vanessa Williams" in the regular search box Google will return a results page as usual. One of the first results will have a link that says "More music results for Vanessa Williams". This link spawns a new page with music related results and a new "Search Music" button.

All that multi-media search technology we developed at AltaVista is now the property of Yahoo. Yahoo acquired AltaVista several years ago and many of the brilliant AV engineers are still there. In fact, the Image, Video, and Music search technology is still working on the Yahoo site today.

Incidentally, Nick Whyte now works with the MSN Search group at Microsoft. MSN Search already has Image Search and could add Music Search at anytime. Gee, could Video Search be next?

Both AltaVista and Napster were ahead of their time. The technology was great but the business model hadn't developed and the market wasn't quite ready. In both cases there were several strategic decision blunders as well. I wrote blog articles on my time at AltaVista and Napster that detail the story and lessons learned.

Maybe Google isn't 8 years late...maybe AltaVista was 8 years early. We had the technology at AltaVista and we tried to make ecommerce deals with Amazon and CDNow for music, and Corbis and Getty Images for Images, but we were just too early for the market. Eight years later, maybe the time is right.

Hot start-ups with cool technology

As part of my job with Microsoft's Emerging Business Team I get to work with lots of innovative start-ups with cool technology. Dan'l Lewin wrote an Always On editorial Checked My List Twice highlighting some of those companies. I encourage you to read the entire article but here is a list of the companies mentioned;

Adesso Systems—Mobile apps for an occasionally connected world. A Red Herring  100. Think "WinFS today."

Akimbi—Automates and accelerates the setup and teardown of even the most complex multi-machine software configurations using virtualization technology. Winner at Under the Radar.

Akimbo—The first functional marriage of TV and the Internet. "Your wish is on demand."

AtHoc—Alerting specialists for warning systems, emergency operations centers, and critical communications.

AviCode—Can pinpoint the exact source of any bug in a .NET application in real-time—during production or development. Identifies the exact line of problem source code.

BeVocal—Provides hosted self-service voice application solutions for carriers and call centers.

Cicero Networks—Voice over Wireless IP that harnesses the power of wi-fi and Bluetooth networks to deliver wireless voice services.

Colligo—Instant collaboration for teams in the field: Lets any wireless capable laptop, Pocket PC, or Tablet PC instantly and securely network to one or more computers no matter where you are.

Coveo—Specialized enterprise search with superior relevance ranking, document summaries, and integrated security.

CXO Systems—Web services-based dashboards that enable a one-touch, comprehensive view of multiple business functions in real time.

Digipede—Its "many legs make light work" and turn any combination of servers and desktops into a grid for .NET apps.

EchoPass—Offers complete solutions for on-demand call and contact center needs.

eSecurity—Security event management and continuous compliance monitoring for IT controls; makes sense out of the deluge of security log data that all the different systems on the network spit out.

Exact Target—A SaaS e-mail marketing company with a very slick AJAX interface that has achieved massive scale.

Fortify—Kind of like a mega-powerful cereal for your code; it figures out security problems during code development so you don't become the next statistic.

Forum Systems—Hardware appliances provide secure transmission and acceleration of XML data.

Fractal Edge—Cool visualization technology that lets you maintain and know your place anywhere within the hierarchy as you drill down on data. A Red Herring  Top 100 Private Company in Europe, 2005.

Grouper—Provides a way for friends and family to share videos and photos online via .NET smart client applications. Friends-only file sharing.

IdeaBlade—.NET on Rails. A framework for building service-based applications and distributed clients.

IP Commerce—Transaction payment platform and toolsets that enable the IP Payments Framework, a partnership Software as a Service system for incumbent and emerging players involved in electronic payments. Chase Merchant Services, a division of Chase Manhattan Bank, is an initial partner.

IDV Solutions—A visualization and geographical mapping solution. Integrates with MapPoint, Visio, and SQL.

K2.net—Enterprise scale workflow solution that automates any business process spanning people, divisions, technology, and distance. It has a powerful drag-and-drop design environment.

LoyaltyLab—Software service that lets merchants easily manage an online rewards/points system and create custom marketing messages to customers.

Newsgator—RSS aggregation from consumer to enterprise, from phone to desktop.

Onfolio—Built into the browser, it's a convenient and familiar tool that will help make web research more efficient, thorough, and organized.

OutlookSoft—Web-based solution delivers real-time planning, budgeting, forecasting, consolidation, analysis, reporting, score carding, and process management.

OSIsoft—Delivers performance management software to the world's leading process manufacturing, life sciences, and utility companies—anywhere real-time operational metrics fuel performance.

Oxlo Systems—Lets automotive dealers integrate their systems with auto manufacturers, service providers, and other partners.

Rackwise—Focused on automating the manual processes associated with designing, documenting, and tracking changing networks in a datacenter through an on-line subscription service.

Skelta—Superior yet affordable workflow technology has let software vendors and enterprises implement workflows rapidly and at significantly reduced costs. 100% web based, multicultural architecture for anywhere, anytime access. Red Herring  Top 100 Private Companies in Asia.

Tableau—The Visual Spreadsheet, it provides visual reporting and analysis solutions.

Workshare—Lets you exchange high-value business documents and be certain the right information—and only the right information—is in your document. Works in-line with Microsoft Office.

We work with hundreds of new start-ups developing products on the Microsoft platform. These are a representative sample of the kinds of companies and products we like. If you have a new start-up building innovative products and services on Microsoft platforms we want to help you. Drop me an email (ddodge at microsoft dot com) and I will direct you to the right person.