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Silicon Valley Leadership: The Quest for a Legacy

Posted on Friday, Apr 22nd 2005

I once worked on a company funded by Pierre Lamond, veteran Venture Capitalist at Sequoia Capital. During the interview, Pierre asked me, “How old is your father? What does he do? Is he retired?” I explained, that my father (in his sixties) is an entrepreneur, and will never retire, because he still has too many things that he wants to accomplish, and that he will die trying to get through as many of them as possible, and not run out of things to try. Pierre nodded and said, “I don’t understand 50-year old executives who want to play Golf all day.”

I had another conversation with Jim Hogan of Telos Venture Partners over lunch one day on the same subject. Jim said, “You know, when a man is successful, has made money, what he is looking for is his Legacy.”

If you look around Silicon Valley today, there are lots of executives and entrepreneurs who have been successful, made money, and are “waiting in the sidelines” looking for the right next opportunity. VCs and Executive Recuiters recruit CEOs out of this bunch. More than ever before, there is a large population of people today in technology with prior CEO experience, many of them dreaming of something really sizeable, high-impact, game-changing and sufficiently exciting to get their juices flowing again.

The bulk of the opportunities out there, however, are, for example, a CEO job at one of 600+ Security companies, where the best exit one can hope for is becoming a feature in the larger offering of a Symantec or a McAfee. Not terribly inspiring, is it? Even though, there is a bit of money to be made, it certainly doesn’t qualify as a Legacy-building opportunity. Additionally, it’s fairly boring to do the Nth gig in the same narrow domain, even though the mantra in hiring is Domain Expertise. (I go out of my way, on a regular basis, to broaden the range of domains that I get to play with, and that’s what keeps me engaged, challenged, interested.)

So, what’s the point? The point is, you cannot blame 50-year old executives for choosing to play Golf or do Origami, over running an incremental business in a domain that they already know well, are bored by, and find positively uninspiring. Anyone who has been a CEO, knows, that trying to be one without oozing enthusiasm for the business is not sustainable. And with these little businesses, the CEO is effectively a glorified VP of Sales, another uninspiring little detail.

This is a contrarian and counter-intuitive point-of-view for VCs and Recruiters: Try to recruit experienced CEOs to your promising company by offering them opportunities to learn and grow as well, rather than just milking them for what they bring to the table based on their history. Look for people’s internal fire and ability to figure things out, and be fresh and creative, without being boxed in by a 25-year history in one narrow domain.

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Good. Next Apple should buy Adobe!

Posted on Monday, Apr 18th 2005

Today’s News: “Adobe Systems Inc. announced the acquisition of Macromedia Inc. for $3.4 billion in stock in a deal that will bring together the software of two companies with broad resources to distribute documents, video and other media to personal computers, cellphones and hand-held devices. The transaction, part of the long-expected consolidation in the software industry, also could set the stage for an anticipated showdown with Microsoft Corp., of Redmond, Wash.” reports the Wall Street Journal.

This deal has been due for a long while, and makes perfect sense for both companies.

Now the next deal that one wonders about is the consolidation of Adobe and Apple. John Warnock, 64, is like a spiritual father to Steve Jobs, 50. Adobe created a suite of killer apps that made the Apple Macintosh platform widely popular amongst the creative professionals. It was what Microsoft Office was to Windows. Cultures are synergistic and in tune. It would provide stability to the Apple portfolio, which currently has quite a high volatility risk rating due to the over dependence on the iPod. Numbers look okay!

AAPL:

2004 Sales $8,279 Million
1-Year Sales Growth 33.4%
2004 Net Income $276 Million
1-Year Net Income Growth 300%
Market Cap $30,670 Million

ADBE:

2004 Sales $1,666 Million (Plus Macromedia’s Sales $370 Million)
1-Year Sales Growth 28.7%
2004 Net Income $450 Million
1-Year Net Income Growth 69%
Market Cap $14,831 Million (Plus Macromedia’s Market Cap $2,461Million)

What do you think, Steve?

What’s after Starbucks?

Posted on Saturday, Apr 16th 2005

It would be fair to say that Starbucks has penetrated the cultural fabric of America quite extensively. Now, it is also attempting to do the same with the rest of the world. It has become a place to get together with friends, an extended office, a pick-up joint, and many other things – different things to different people.

Starbucks is a consumer concept that was pretty much unimaginable until it was implemented, scaled, funded, and scaled further. Howard Schultz envisioned the concept after experiencing the popularity of coffee bars in Italy. For those who were gutsy enough to invest in the concept (Jamie Shennan of Trinity Ventures, for example, who is still on the Board, and invested in 1990; Starbucks went public in 1992) the deal paid off handsomely.

The world’s #1 specialty coffee retailer, Starbucks operates and licenses more than 8,500 coffee shops in more than 30 countries. The shops offer coffee drinks and food items, as well as beans, coffee accessories, teas, and CDs. Starbucks operates more than 5,200 of its shops in five countries (mostly in the US), while licensees operate more than 2,800 units (primarily in shopping centers and airports). It reports an employee count of 96,700 in 2004.

As the US continues on its quest towards finding business concepts that cannot be off-shored and out-sourced, clearly, high-touch retail and consumer concepts such as Starbucks are highly desirable.

Here is one that I like to fantasize about: Jazz Bars and Dance Floors of the ambience, musical quality, and vibrancy that we see in the movie, _Ray_, celebrating the life and music of Jazz legend Ray Charles.

As American culture degenerates further into becoming more and more sedentary, obese, isolated, on-line, and uninteresting, I wonder when would the pendulum swing far enough, that someone will get frustrated enough to start something new. A new place to “connect”, a new way to “enjoy”, and consequently a new way to “employ”…

My hope is, that those who will launch that quest will rediscover the joys of Swing and Foxtrot, as Herman Hesse described in his celebrated novel _Steppenwolf_.

I haven’t done the business plan, and I haven’t run the numbers but I sure hope there would be money in such a venture, if done creatively, with the thoughtfulness and business savvy of how Starbucks was launched upon the world.

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Coke, Pepsi & the Indian Heartland

Posted on Thursday, Apr 14th 2005

December 2004. We were traveling in India. As we waited for our train at a small railway station in Bolpur, a small town near Calcutta, we watched a boy of 10 or 12 arrange his merchandise in preparation for boarding the train to Calcutta. He stacked up hundreds of packets of chips, cookies, and snacks from various multi-national brands in a basket.

I asked him how much he buys the merchandise for. He said, Rs. 9 (20 cents). And sells for Rs. 12. Looks like a 25% gross margin business. He sells about 200 of these packets on the train back and forth, makes a gross profit of Rs. 600 ($12) a day.

This kid is an unbelievably successful micro-entrepreneur, and does not belong in our 4 Billion consumers in question. However, he exemplifies one of those 4 Billion consumers who has managed to lift himself out of the hole.

More interestingly, he is a representative of the distribution channel of the major MNC brands like Pepsi, Coke, and many others. This boy of 12 is one of the thousands that are essential for the Coca Cola’s of the world to penetrate the heart of India, China, Africa, and Latin America.

So. Does Coca Cola have a program to offer financing (and training) to micro-entrepreneurs like our micro-hero?

Should Netflix own proprietary content?

Posted on Wednesday, Apr 13th 2005

Tiffany does. HBO does.

Jewelry designer Paloma Picasso designs exclusive pieces for Tiffany. It gives consumers a reason to come to Tiffany and only to Tiffany to buy designer jewelry by Paloma Picasso, Elsa Peretti and others.

Roger McNamee writes: “If you are a content owner, proliferating distribution offers lots of opportunity for incremental profits. The key is to behave like a consumer packaged goods company: give customers what they want, when they want it, at a price they are willing to pay. In most cases that means more, rather than fewer distribution channels. As a result, the best strategies for optimizing the value of content conflict with the best strategies for distribution. If they cannot deal with this, the major media companies will continue to produce suboptimal results.”

True, but not if you own the distribution channel. If you are Tiffany, you need to merchandise exclusive items, which would bring consumers to your store.

If you are Netflix, therefore, competing with Blockbuster and Amazon with a “commodity plumbing” positioning will become increasingly tougher. Amongst other brand differentiation strategies, Netflix needs to consider a carefully thought through Content strategy.

KQED Radio is perhaps one of the best proprietary content strategy I have seen. Sharply segmented to cater to a Thoughtful Intellectual segment, it also nicely aligns with a relatively higher income demographic, which allows it to be funded by listeners.

Netflix needs to learn a few branding tricks soon, so that it can position itself out of the shackles of its Geeky origins, and begin to do justice to its Hollywood style audience.

Mentor Graphics: Target for SilverLake?

Posted on Monday, Apr 11th 2005

Mentor Graphics is No. 3 in the Electronics Design Automation (EDA) market, after Cadence and Synopsys. The EDA market itself is not that large, roughly $4 Billion, declining rapidly to $3.5 Bilion due to its tough price-wars. Such a market cannot support 3 major players, and Mentor ought to be a classic acquisition target for Silverlake or Francisco Partners to be subsequently chopped off into pieces.

More specifically, Mentor has a few good franchises that independently could be very interesting businesses for other companies to acquire: their Calibre Physical Verification portfolio, the PCB business, the FPGA tools, for example. However, it is otherwise a very badly put together product portfolio that does not leverage channels, customer segments, or design platforms. There is no organizing principle behind the product strategy.

Chopped into bite-sized pieces, however, it IS a very interesting asset that can make a private equity firm beaucoup money. The PCB tools market is about $500 Million, in which Mentor is the leader, along with Cadence and Zuken as two other serious players. The products are sold primarily through VARs to 3000-5000 Small-Medium businesses worldwide. A major trend in the Electronics industry is that purely Mechanical products are morphing into Electro-Mechanical products, and hence absorbing new Electronics. Mentor’s PCB business could well become a good vehicle with which to align with such a trend.

But this has nothing at all to do with the Calibre business, which attaches itself to Physical IC Implementation tools, and is serviced by a completely different channel – one in which Mentor is missing the anchor component: a market leading Place and Route franchise.

Now that big private equity deals is the rage, this one should be a no-brainer!

Indo-Chin talks: Implications

Posted on Monday, Apr 11th 2005

Wall Street Journal reports on the recent Indo-Chin talks: “Burgeoning economic ties are the drivers of much of the goodwill. Two-way trade reached $13.6 billion last year, up from $3 billion in 2000. To push that figure higher, they agreed a joint task force should consider a free-trade agreement between their nations. If created, it would be the world’s largest tariff-free area and cover one-third of humanity.”

Thank God, that countries cannot execute friendly M&A activities and hostile take-overs, or else India and China could merge (bad for the US), OR China could acquire Pakistan (bad for India).

Well, what exactly are the points of synergy?

India is dramatically bad and behind in Hardware / Chips, which China clearly rules. Now, Intel and Nokia are about to set up manufacturing facilities in India. China is trying to learn Software and Services from India, as well as train its vast population in English.

It is obvious that India will need a huge volume of cheap commodity hardware of all kinds – Televisions, Cell-phones, Networking Equipment – that most likely, China would supply. What is not as obvious is what India will supply to China! India has made most of its money by being a low cost service hinterland for US/Euope’s high-end IT needs. China is unlikely to have such large-scale business software needs, nor is the Chinese market very conducive to software businesses due to rampant piracy issues. May be, they will need a bit of embedded software, some UI programming – but nothing that China cannot do on its own. One thing China needs in plenty, that someone else has – is raw materials. That someone else, in this case is Africa, not India.

It looks to me, therefore, that US, Europe and India are all headed for trade-deficit economies, while China reigns supreme as the trade-surplus nation.

Microsoft’s two should-be M&A considerations

Posted on Sunday, Apr 10th 2005

Microsoft has stagnated, much to the chagrin of its investors. The powerful vision of the eighties and nineties – of putting a PC on every desktop – no longer seems like a big, hairy, audacious goal. Instead, they are looking for greener pastures – mobile handhelds, digital homes, internet telephony – so forth and so on. In that effort, Microsoft had also articulated a desire to go after the small-medium enterprise (SME) markets, but at the end of 2004, Microsoft Business Solutions (formerly, Great Plains Software) scored a paltry $667 Million in sales – only 2% of total revenues. Great Plains was acquired in 2001 for $1.1 Billion. In 1995 antitrust concerns had scotched a $1.5 Billion acquisition of personal finance software maker Intuit, a supremely logical candidate for the SME market.

John Madok at Applied Materials suggested over lunch the other day: “How about Paychex?”

Indeed, how about Paychex? It’s at $1.2 Billion revenue, and a $12.3 Billion market cap, so pretty expensive, but just as synergistic as Intuit, and can probably offer great leverage. And it may actually be permissible, even, without an anti-trust issue. Something to consider.

The other good one would be Autodesk. A leader in multiple markets that serve small-medium businesses, from the small time manufacturing shop floors, to the architect’s office. Autodesk is at ~$1.2 Billion revenue, and $7.5 Billion market cap, and services the $20 Billion Mechanical Design (MCAD) and Product Lifecycle Management (PLM) Market, among others. The Manufacturing software market has lots of players, so no anti-trust issues, presumably. Channels are also well-aligned.

A billion here and a billion there … Microsoft can certainly afford to buy some market leading products, especially since their internal engine hasn’t succeeded in producing the necessary winners.