Friday, July 31, 2009

Rumored Oracle re-org

Update: Forgot to mention when I wrote the content below: I also hear there will be a significant layoff, reducing the number of VP and director level staff significantly as the groups mentioned below are consolidated.

There are some rumors of an upcoming or in-progress Oracle re-org after the departure of Chuck Rozwat and Ed Abbo, and with the impending integration of Sun. Only rumors at this point, but please let me know @dbmoore on Twitter if you have any additional information. All that follows is rumor, things I've heard, and is in NO WAY claimed to be accurate. And if you are a "journalist" and want to use me as a source, you must speak with me first ...


As I understand it, the "theory" behind the Applications re-org is to have all Fusion and "Unlimited" (legacy aka Siebel, eBusiness Suite, JD Edwards, Peoplesoft, etc.) applications under Steve Miranda, so that the older applications can be supported while the Fusion Apps get the key resources they'll need to be finalized and released over the coming year or so. Steve has been running the Fusion Apps project, and previously the other Apps were under Ed Abbo. Steve Miranda will continue to report to Thomas Kurian ("TK").

Each of the "TLA" (three letter acronym) apps (e.g. FI, HCM, CRM, SCM/PLM) would be under a single leader, enabling efficient allocation of resources between the older apps and the Fusion Apps. Note that this, if true, would really signal the beginning of the end for the "Unlimited" suite, but also the imminent arrival of the Fusion Apps - the best domain experts would be available to work on Fusion Apps, and would likely move. As one source said, no one on Fusion Apps wants to work on the legacy apps, and everyone on the legacy apps wants to work on Fusion. As I hear it, Anthony Lye will head up CRM, Rick Jewel will head up PLM/SCM, and other obvious candidates will head up the other topics.

The theory behind the re-org that will follow the Sun integration is also to group topics under one head. I'm not certain if topics like hardware and storage management will fall under Thomas Kurian. Other topics where there is overlap will be folded into the equivalent Oracle team, under the existing Oracle team leader/SVP - including middleware/tools, and database. As I understand it, the Java team will be a new team reporting to Thomas Kurian.

MySQL is an interesting topic in this integration. I've heard it will be under a long-time Oracle guy, one of the nicest guys I know of there. He is a person who has a real shot of being accepted by, and acceptable to, the mySQL team and the mySQL community. However, I've also heard that Oracle will position mySQL as kind of a free, entry-level database, squeezing SQL Server in a "pincer" maneuver between mySQL on the low end and Oracle database on the high end. I'm not sure how well that will be accepted by the many people running high end web sites on mySQL, especially if Oracle uses all the pressure tactics at their disposal against Monty and others who fork mySQL.

Lastly, while the door was left open for Chuck Rozwat's return, no one expects him to return - at least not in the same capacity (perhaps as a "fellow" or Board member).

That's all I have for now - please tweet me @dbmoore if you have any more info. Thanks!

Wednesday, July 29, 2009

When (and Why) to Accept Less Than Pmax

In my first blog entry on enterprise solution pricing, I described a model for understanding the drivers of pricing, from the customer's point of view (but for the benefit of vendors). I also introduced some ideas that may help vendors obtain a higher price from customers - and hopefully, deliver more real value to customers in the process.

But, just because a customer is willing to pay a certain amount for an enterprise solution, does that mean the vendor would be stupid to take less?

No.

In fact, the model itself shows the seeds of ideas for why a vendor should almost always be willing to offer customers a lower price - in exchange for something more valuable than (immediate) money.

As a reminder, the pricing model I suggested for enterprise solutions goes like this: the maximum price a customer is willing to pay is based on four key factors:
  • the fraction of the customer's benefit that this particular customer is willing to pay to any vendor (aka whether the customer considers vendors to be opponents or partners),
  • the customer's perception of the probability of success of the project to implement the solution,
  • The customer's perception of the competitive differentiation of the vendor's solution as compared to substitutes (including direct competitors, DIY, and "do nothing), and
  • the net benefit available to the customer as a result of implementing the vendor's solution (total benefit less implementation and evaluation costs).
The lower any of those four key factors, the lower the price the customer is willing to pay.

So, why should the vendor be willing to offer the customer a lower price than the maximum the customer is willing to pay? After all, you won't often find customers willing to pay a vendor more!

Some things are more valuable than money

Simply put, some things are worth much more to a vendor than to a customer. In the transaction itself, the money is worth more to the vendor than to the customer - at least to the actors in the transaction. The enterprise solution salesperson is usually compensated not at a fixed salary, but instead on an accelerating commission basis. If the salesperson achieves say 0% to 80% of their quota (target for sales, usually on a quarterly or annual basis), they often get paid a very low base salary and a very small commission. From 80% to 100% of quota, the salesperson gets an "accelerator," giving her a higher commission rate for those sales. At 100% of quota, the salesperson is paid their "target comp" (target compensation) - the compensation amount in their contract or offer letter. After 100%, things get interesting, with many companies offering the salesperson a "kicker" for higher sales. If an account does business with the company after a change in salesperson responsible for the account, generally the prior sales rep will get no commission for the sale. Things are a little more complicated in most comp plans, but - trust me - your salesperson is highly motivated to close the deal this quarter. And this motivation goes straight to the top of the company.

But - and this is a big one - some things are more valuable to the company than your money. Remember, the maximum price the customer is willing to pay is based on four factors. On the customer's perception of those four factors. A vendor will often be willing to accept a lower price in exchange for help in closing more deals with other customers, faster, at a higher price. Any customer can help the vendor to accomplish this goal - by offering to provide some kind(s) of testimonial(s), case study(ies), sales reference(s), or even to help better understand the benefits of the vendor's solution(s). By providing this help, the customer helps the vendor to raise Pmax in other deals. This kind of help can raise other customers' expected probability of success, their expectations about the net benefit available, and even the perceived competitive differentiation of the vendor's solution, thus raising the price other customers are willing to pay.

Think of it another way, for those "mathy" folks out there. The vendor is trying to maximize EBITDA (within certain constraints, such as stability of sales and earnings, acceptable levels of risk) over the long run - or at least that's what their legal, fiduciary responsibility requires of them. Assume "P" in these articles is the price paid adjusted for the time value of money. Let's call the price paid by each customer P(i) (read "P sub i"), and the costs associated with that customer C(i). The vendor wants to maximize the sum over i of [P(i) - C(i)]. If a lower P paid by a particular customer can be made up by and overcome by a higher P paid by other customers, then the vendor should be willing to reduce P so that it is less than Pmax - if the vendor believes the customer will follow through on the commitment to help, and if the vendor believes the customer's help will actually raise P for other customers, and if the vendor believes this customer's help will be less costly and/or more beneficial than trying to get the same help from another similar customer.

The time value of money

In economics, we are taught to understand a concept that was clearly understood by Popeye's friend J. Wellington Wimpy, who famously said "I will gladly pay you on Tuesday for a hamburger today." Money is worth more to someone who has none, than to someone who has enough. This is known as the time value of money, and is something generally understood by anyone who has ever had to calculate the net present value of something, or who multiplied their monthly mortgage bill by 360 to see what their house really is costing.

As we established above, the salesperson is the person who is put under the most pressure by the time value of money. Any customer who offers to accelerate a deal into the current fiscal period for the vendor is likely to earn a substantial discount for his trouble. Most enterprise software business is closed in the last few weeks or days of the fiscal quarter, and nearly half of the license sales part of the business (for traditional, non-SaaS vendors) is done at the end of the fiscal year's last quarter. Subscription pricing, and the compensation plans for sales reps in most SaaS companies, discourages this type of deep time pressure and its attendant discounts, but customers working with more traditional vendors can use the end of a fiscal quarter or year to obtain a lower price.

The flip side of this is that vendors really do not like to take less money than they believe is fair for a solution, and the sales team is compensated on total revenue (and sometimes profitability), so the vendor is also dis-incented from making pricing concessions. Generally, the vendor would prefer to offer additional "seats," products, or services to maintain the price of the deal. There are internal control mechanisms, like forecasts for each deal and deal reviews and approval processes, that also aim to discourage discounting. After all, if one customer earns a discount, then Ray Wang will learn of it and every customer will ask for an even steeper discount in the future!

Market share

A really smart professor, Subi Rangan of INSEAD, advised some colleagues and I on a project about pricing models once. He advised that companies that can command a pricing premium often will offer products at a lower price for one or both of two reasons: to increase market share, or to grow the market. When a vendor can offer a product in a competitive market with a hard-to-copy way of offering a greater benefit, less project risk, or an important competitive differentiation, that vendor can increase market share by offering their product at a price below Pmax.

One last thought

One idea that has not been well thought through by me (or by others I've found) is the notion of the benefits that can be created when the customer and vendor work together in partnership. Every customer says they want vendors to be their partner, but few will fairly share the rewards or benefits the vendor brings. Similarly, every vendor says they want to be the customer's partner, but few will fairly share the costs and risks, at least in the enterprise solutions space. I hope that someday, in this industry, vendors and customers, salespeople and purchasing people will walk hand in hand in partnership, raising the prices paid by customers, but greatly - disproportionately - increasing the benefits obtained by the customer. Perhaps not as inspiring as the Revered Dr. Martin Luther King, Jr., but a lofty goal for us all, nonetheless.

As always, your thoughts, issues, ideas, critiques, and contributions are greatfully welcomed.

Thursday, July 23, 2009

Enterprise Software Buyers' Bill of Rights and Pricing

There has been a great series of analytical posts resulting covering the topic of what rights customers should demand from their vendors when buying enterprise software. Ray Wang kicked off the series with his seminal analysis, which was reviewed and extended by Mike Krigsman, and commented on by Dennis Howlett, and extended by Vinnie Mirchandani. These four treatments are great analysis, and every buyer should read it. Every vendor should read it as well.

Customers should also think about why vendors behave the way vendors do. Is vendor behavior driven by greed? To an extent. Is
vendor behavior driven by fear (of litigation, bad press, or other horrors)? To an extent. Is vendor behavior driven by altruistic concern over what it will take to make a customer successful? To an extent. Is vendor behavior driven by customer behavior? 100 per cent.

All of which is to say, vendors behave the way vendors do, because customers drive them to do so. Vendors want customers' money now, and in the future, and they will do what they have to do to get customers to hand over money to them. Vendors want what they consider to be their fair compensation for the intellectual property (IP) they offer, and the work they do on behalf of the customer.

Still, many customers feel that they are being "taken advantage of" by vendors. From a vendor perspective, this is hard to understand. After all, if you don't like the product or its associated services, then as a buyer you can switch to a different vendor/supplier. If there is no alternative, or the switching costs are high, then why should the vendor lower its price? Customers are able to hire experts (like the aforementioned Ray, Mike, Dennis, and Vinnie) to learn from the experiences of other customers. Customers are able to network, demand references from vendors, and read industry news and analysis to understand what they're getting into. And no customer should make a major purchase without undertaking such efforts.

How products and services are priced

Over the years, I developed a theory of pricing that is based on economics and psychology (but let's be realistic, economics is macro-psychology -- the psychology in aggregate of some group of people). My theory goes like this: the maximum price (Pmax) a vendor can get a customer to pay is equal to a fraction (b) of the customer's benefit from the product or service (B), multiplied by the probability the customer perceives that the customer can achieve that benefit (s), multiplied by the perceived competitive differentiation of the offering (d). Written symbolically:

Pmax = bsdB

Put into words another way: a customer is willing to share some portion of its benefits with the vendor who made those benefits possible. The amount the customer is willing to share is based on how much the customer thinks is fair to share, how likely it is that the project will be successful, how many competitors or substitutes are there out there, and the total benefit expected. Prices will go down if the customer doesn't treat a vendor as a partner, expects that the project is risky, believes that there are many alternatives (competitors, or entirely different ways of spending budget to achieve shareholder value), or doesn't expect to achieve a lot of benefit from the project. Conversely, the price will go up if the customer views the vendor as a partner, believes the project will be successful, understands that there is a meaningful and valuable difference between the vendor's offering and any other market alternative, and has reason to believe that a significant benefit will accrue to the customer as a result of the vendor's offering.

The factors

b, the customer's willingness to share their benefits with the vendor, ranges from 0 to 1; 1 means the customer believes it is fair to give all its benefits to the vendor. Most commonly this number would be something between 1% and 50% (the customer would share 1% to 50% of their benefit with the vendor). This factor has little to do with any vendor or customer actions, but is really based on the customer's culture; a more arrogant culture will want to share less of their benefits (perhaps as little as 1% or even less). At customers with a culture where vendors are truly considered to be partners, the customer may be willing to share more of the benefit with the vendor (perhaps as much as 25% to 50%).

s, the customer's perception of the probability of the project's success in achieving the customer's desired benefits, ranges also from 0 to 1; 1 means the project is guaranteed to achieved the desired benefits. Most commonly, for IT projects, the probability of success should never be estimated above 50%; however, this factor is the customer's perception that the project will succeed. This factor can be artificially lowered or raised by the actions of the customer and the vendor. For example, a start-up will generally be considered a riskier partner; when offering the same product, this factor will be about 3 times lower for a start-up acting alone, as compared to the same exact product when sold by or bundled in by a large, established vendor. Vendors can increase "s" by providing evaluation copies, demonstrations, customized demonstrations, case studies, responses to objections ("objection handling"), customer reference calls, user group meetings (with happy users!), transparency about uptime (e.g. as Salesforce.com does), by offering various services to ensure project success or solution completeness, by creating a fixed-price bid, and in many other ways.

d, the customer's perception of the competitive differentiation of the product offering, also ranges from 0 to 1; 1 means there is no substitute for the offering. Now, there is always a substitute for any offering - the "do nothing" option (and often the "build it ourselves" option) - in corporations, this might also be considered to be the "do something else with the same budget" option. Although "d" is hard to quantify, it sometimes seems to be as simple as the reciprocal of the number of direct competitors (including "do nothing") - when there are two competitors, "d" might be 1/3 (two competitors plus "do nothing" = 3). Vendors can increase the perceived competitive differentiation in many ways. Vendors can offer a different business model (e.g. prepaid phones, freemium model, subscription pricing, open source, guarantees), complementary services (e.g. 24x7 monitoring, backstop service to ensure your SI is following best practices, annual user conferences, iTunes store, technical white papers, demonstrations, customer testimonials), or differentiated features (e.g. better UI, high availability, faster performance). However, no matter how the product is differentiated, none of that matters unless the customer sees the product as differentiated! The better UI must be demonstrated, certified by some authority (another customer, an analyst, an award of some type), and included in the evaluation checklist by the customer, or the vendor will be unable to increase "d" and thus capture a higher maximum price.

B, the customer's expected benefit, is a financial measure of the customer's net benefit (total benefits converted to currency, minus total costs converted to currency). How much would it be worth to the customer to have that benefit? Vendors, by virtue of working with many customers and speaking to many experts, often know of benefits the customer may not. Vendors and customers work together to identify "B," generally through some ROI study. Vendors can influence "B" by creating a good process for capturing benefits customers expect across various industries, geographies, and enterprise sizes, and then sharing these benefits with customers (and trying to get them onto evaluation checklists). Testimonials, expert estimates, studies, and other validating techniques help a vendor to establish the highest possible "B" with the customer. "B" is a "net benefit" figure, so any costs associated with the offering will reduce "B" - these can be switching costs, the cost of the evaluation process undertaken with the purchase, long-term costs, and implementation ("go live") costs.

All this, b times s times d times B, yields the maximum price the customer is willing to pay for the offering, or Pmax (pretend the "max" part is a subscript). Vendors may choose to settle for a lower P < style="font-weight: bold;">Example application of this theory


This pricing model is a model, or a theory. Let's apply it to an example case (or two) to see if it makes sense in a real-world context.

Let's consider a company who would like to implement a new customer service system, such as a customer community system. This system might offer benefits to the company including better customer satisfaction due to faster problem resolution, cost avoidance due to fewer calls to the call center, cost avoidance due to creation of a better knowledge base for problem resolution, increased revenue due to upsell and cross-sell opportunities, and perhaps other benefits (Lithium is one such system). In aggregate, the company expects to achieve $5 million in net present value (NPV) from the sytsem (using their weighted average cost of capital, etc.) - so B = $5 million. This customer tends to treat vendors somewhat as partners, so b is 0.3. The customer believes that the system has an 80% probability of achieving desired goals, given that it is a SaaS system with little technical risk, and given that many other companies are successful with this supplier, so s = 0.8. Finally, the company has identified 4 vendors in total who have such systems (perhaps not all as well-implemented and well-conceived as Lithium), and the ability to build a system on their own, so d = 1 / (4 competitors + do it in-house) = 1/5 = 0.2. In this example, Pmax = (b = 0.3) * (s = 0.8) * (d = 0.2) * (B = $5M) = $240,000. Fair enough, seems like a very reasonable price. The customer may be looking at this systems costs and benefits over a five year period in this example, and the customer and vendor negotiate this price.

However, what happens if this system stays in place after that period, or if the customer realizes that additional modules are required? Let's say the customer is looking at a new "knowledge base" module, which is only available from the original vendor. If the benefits of this module are $5 million in savings due to reduced call center costs, better customer satisfaction, etc., what is Pmax? Well, b is still 0.3. s is probably very high, since the major implementation is completed - maybe 0.9. The number of competitors is 0, so d = 0.5. Pmax is now $675,000, for the same $5 million benefit.

Dilettante industry observers will now tell the customer that the vendor is ripping them off due to "vendor lock-in" and "switching costs," but nothing could be further from the truth. Risk and competition for the second deal are now lower, so the price should be higher!
Both sides are acting in their own interest, and neither is being cheated.

In fact, many customers try to include a "standard discount" in their negotiations, just so they can avoid paying this kind of fair price later for their benefits. Vendors respond to this as expected, by creating new products (instead of adding features), or by reselling third party products, or by jacking up prices. In this case, instead of trying to creat win-win scenarios, the vendor and customer are locked in a "zero-sum game" (at best), and everyone loses out on the possibility of synergistic wins.

Industry observers, and customers as well, should remember this: any vendor who strives to raise Pmax will be working in the customer's interest - by reducing risk, creating differentiated solutions, and adding new benefits to their solutions. Obviously, some vendors also work to reduce the number of competitors to raise Pmax, but that is why we have anti-trust laws and occasional enforcement.

Customers should want to be good partners for their vendors. Customers should also strive to raise the value of their projects (Pmax), in a sense - they should also be striving to remove risk from projects and to increase the benefits obtainable. However, customers should also act in their own interest, by being aware of all relevant competitors, not introducing risk into a project, not overestimating probability of success, thinking into the future thus hedging risk and growth, and not expecting unrealistically high benefits from projects.

Any thoughts on this? Any good examples you'd like to share?

Friday, July 17, 2009

A Corollary to Metcalfe's Law

This is an update of a posting from a while back. I'd love to hear thoughts, comments, pointers to research on the topic, ...


Introduction:

Moore's "Law" is one of the most famous ideas in the computer business. Moore's law drove great benefits and value in this industry for quite some time.

Slightly less well known, but driving a great deal of today's business and Internet innovation and value, is Metcalfe's "Law." Again, this is not a law, but an idea -- that the value of a network increases with the square of the number of participants in a system (nodes, users, etc.). This is probably not true as the number of participants gets larger beyond some saturation point -- for example, temperature sensors are more valuable when they are in every zip code, but are they 100 times more valuable when there are 10 in any zip code? Is it (ten thousand times) more pleasant to live in a city of 100 million people than one of 1 million? Probably not.

Nonetheless, this "network effect" is pretty easy to understand -- if there are two phones, only two calls can be made (A to B, B to A); if there are three, then six calls can be made (A to B, A to C, B to A, B to C, C to A, C to B); and so on. This creates the potential for value.

A Corollary:

However, the growth of a network also tends to create a surety of cost, and here is the basic idea behind it. Simply put, this corollary states that the cost of participating in a network increases with the number of participants. There are reasons and consequences of this corollary to Metcalfe's Law. The most important consequences are that the cost/benefit ratio of a community tends to increase (becoming less desirable) as the community gets larger, and that a community cannot survive unless the cost/benefit ratio is low enough. Of course, when sentience is involved, exogenous factors can intervene.

Reasons for This Corollary:

The reasons for this corollary are related to the varying strength of relationships, inhomogeneity of the community and its interests, network overlaps, the cost of broadcast and "stay awake" messages, the cost of rules for a network (which generally vary from network to network and are often not explicit), and -- not to forget -- the costs on network (or ecosystem) participants placed by abusive participants (predators, parasites, criminals, scammers, practical jokers, enemies, etc.).

Think of networks like Facebook, cable/satellite television, the Internet, e-mail, a private forum like "The OracAlumni Network," or an open forum like Twitter. When the first user joins the network, there is no value. As friends or colleagues or those with similar interests join, the network can grow in value (proportionately to the square of the number of participants). Initially, the network may be not really valuable, or it might be quite valuable, per unit of time invested to participate. Over time, as there are more participants and more content, the cost to participate increases -- more redundant messages, more messages that are important to just a subset of the community, more "flame wars," more people on the To and CC lines, more CYA messages, more "people who don't bother to search," more sp-m, more attempts by scammers and other undesirables to penetrate the network, and more abuse. The cost to participate rises.

When most human networks or communities form, they form around some common experience (communities of interest) or purpose (communities of practice). The initial participants are often very homogeneous, with strong relationships between them. This applies to frontier towns in early American history, Usenet, mySpace, or LinkedIn. However, as the community grows, there is stratification in the participants (native San Franciscans vs. immigrants, descendants of Plymouth Rock vs. newer immigrants, newbies vs. experts), and the stresses that come from the new participants repeating the history of the old -- or interfering with the status quo ante. Messages and rules are created to manage change, and violators (even unwitting ones) are often made to pay a high prices (those who carried guns into Dodge City, a newbie who doesn't read the FAQ). Worse yet, parasites, criminals, and enemies realize that there is value being created in the community, and they come to feed off that value without creating any of their own (Nigerian bank scammers, other bank robbers, flamers, sp-mmers, and frauds).

The Math:

Let's define the Value of a network to be V, the cost of a network as C, the cost of participation in a network (for any individual i) as c(i), the benefit of participation in a network (for any individual i) as v(i), and the number of participants in the network as n. The number of unique connections in a network of a number of nodes (n) can be expressed mathematically as n*(n-1)/2.

The total value of the network would be the sum over i of v(i), = a * n^2 (according to Metcalfe), where a is the unique benefit of that community or network (as in helping find a job, defend against enemies, solve technical problems, or provide enjoyment). This would imply that the average benefit or value of the network to each particupant would be v(i) = total value divided by number of participants = a * n -- Metcalfe may not have been right here, as it stands to reason that a network does not always increase in value as additional nodes are added, and a community does not increase in value forever as its size increases. Of course, some participants could benefit far above v(i) and some could have a lesser benefit - or even zero benefit, or a negative benefit (those who got killed in Dodge City, those who get scammed on the Internet, those few who get stuck with the entire income tax bill of the United States).Similarly, C = sum over i of c(i), which I claim increases with the number of participants and related not to the specific community, but instead to the media of participation, and also to the effectiveness of the rules system in minimizing costs (moderation of a forum, ability to block scammers, lynchings in Dodge City). Media that have high costs will increase the cost of participating -- in-person meetings or cross-country migrations on foot would be more costly than videoconferences, which would be more costly than phone calls or e-mails (which are asynchronous, non-interrupting, and require little time for parsing), which are more costly than SMS text messages.

Let's define m as the cost of the medium for the network or community. A community moderator or good community policing would tend to reduce the cost of participation as well -- let's define r as the effectiveness of rules enforcement in the community or network. The cost to participate in the community goes up with the cost of the medium for participation, and down with the effective implementation of a common rules system. Thus C = the sum over i of c(i), where the average of c(i) = m / r * n. This implies that C = m / r * n^2, which would mean that the cost / benefit ratio of a network or community is C / V = (m / r * n^2) / (a * n^2) = m / r / a.


Consequences:

If the community offers enough benefits to the participants at low enough cost, then the community can survive. If the cost / benefit ratio is too high, the community dies off; if the cost / benefit ratio is low enough, the community will grow. This is why there were boom towns on the American frontier, as well as ghost towns -- also why many cities survive in the same locations after centuries and even millenia. It is also why fads like mySpace, AOL, and communes, decline over time -- and why they grew in the first place. "Coolness" can be a benefit, but that benefit can wane over time.

I contend that Metcalfe's "Law" is wrong -- the value of a network increases in proportion to the square of its nodes (or participants) only until it reaches some critical size, at which point the marginal contribution of additional users becomes smaller. If this is true, and if this corollary is also true, then the cost / benefit ratio in a network decreases as participation increases, to a point where it may become flat and then start to rise without limit. The cost / benefit ratio must be less than unity (1) for participation in a network to continue for any rational participant.

Summary and Next Work:

I need to do a lot more thinking here, to refine this to a workable model. Individuals will not value the network's benefits equally, and individuals will continue to join the network if they perceive the benefits of participation to be greater than the costs of participation (including the opportunity cost). Individuals will stay in the community until the costs of participation exceed the benefits of participation, at which point they will exit the community. There is a stochastic analysis I need to do to refine this concept. But I do believe there is an interesting and valuable kernel of an idea here ...

Please add comments if you can point me to work that has been done already on this idea, or if you have any contributions to make. Thanks!

Wednesday, July 15, 2009

Chuck Rozwat's resignation announcement

This is reputed to be the text of the e-mail Chuck Rozwat sent out to the company yesterday (7/14) morning, announcing his departure from Oracle.

Subject: Time for a change
From: Charles Rozwat
To: crozwat_org_ww@oracle.com
CC: [CC list redacted]

It is time for a change. After 15 years at Oracle (following 17 years at Digital Equipment) in software development, I have decided it is time for me to step away from my current role and broaden my knowledge and skills in another dimension. As of August 1st, I will be leaving my current position and taking a 12 month leave of absence to study public policy at Harvard University. Thomas Kurian will be assuming responsibility for overall Product Development.

I will take the next twelve months to gain a perspective different from my years developing software as part of the high tech, private sector world. I have accepted admission to a 1 year Masters program in Public Administration, at the Kennedy School of Government, which I begin this September. This program, designed for established, international leaders from both the public and private sector, will allow me to study a number of the issues that face public/private enterprise at a time when almost every policy area is being reevaluated. I look forward to a year from now, to see how I can add value to Oracle with an additional set of skills and an enhanced perspective.

This has been a long-considered and difficult decision in many respects, but one thing is extremely clear. The future is brighter than ever for Oracle. We are at the beginning of a new product cycle, with major new products and versions in Database 11gR2, FMW 11gR1/2, Enterprise Manager, Exadata V2, our Collaboration and Integration products and all of our Applications, now including Fusion. With the pending acquisition of Sun, we add yet another dimension.

The Oracle leadership team is the strongest it has ever been. I extend my thanks to every member of the Executive Committee and their teams for their support of our product efforts. It is impossible for me to express my gratitude to Larry for what his overall product guidance has meant to the product development organization and also the life changing experience it has been for me to be allowed to be part of his team. I thank Charles and Safra, not only for the skills and success they have brought to their roles, but also the support and direction they have brought to our product efforts.

I thank you for your commitment to our mission and your excellence in building and integrating the greatest software products in the industry. I also thank you for your personal support. Since joining Oracle as the head of our first "major" acquisition, I have been amazed by the talent and dedication of our people. We are the best Software Development organization on the planet. We have delivered the most functional, industry-leading products across all major enterprise software categories. You can be proud that the world runs on the products we have built. The world runs on Oracle.

Chuck

Friday, July 3, 2009

Polachi VC Survey: Pulse on the Industry

Interesting results in a survey of over 100 venture capitalists, run by Polachi.

According to the survey:

  • Worries:
  • 69% worried/very worried about ability to hold syndicates together
  • 56.1% worried/very worried with new deals, no one in hurry to act
  • 83.3% worried/very worried "Portfolio-it is all about survivability"
  • 92.7% worried/very worried about when exit markets will return
  • Hot areas:
  • Cleantech/Energy: 62.8%
  • Consumer Internet/Web 2.0:44.2%
  • Internet Marketing: 40.3%
  • Med Tech: 22.5%
  • Infrastructure: 17.8%
  • Biotech: 16.3%
  • Enterprise Software 10.9%

  • 52.9% of respondents believe the VC industry is broken
  • 60% of VCs not more confident about state of VC industry compared to 6 months ago
So, what's broken here?
  1. For the moment, there is an exit problem, which brings with it a lot of other problems. But what is causing the exit problem? If the start-ups were working on things that had high barriers to entry, significant and sustainable competitive differentiation, and which efficiently solved important and valuable problems for some buyers, then the start-up would become profitable and have no trouble with exits (or with staying independent and running off cash-flow). In other words, too many companies are starting with the hope that they will find a business model eventually; some may find such a business model, but it is unlikely that they will be able to have a significant and sustainable competitive advantage without figuring it out at the outset.
  2. Because there are few exits, there are few investors clamoring to put cash into the asset class. As the value of other asset classes has collapsed, investors have not shifted cash to the venture capital asset class, as there is no reason for them to believe that performance will be worth the risk. Venture has delivered a zero or net-negative return for most investors in this millennium.
  3. Venture capitalists were very quick to pull the "extend your cash" ripcord (after Sequoia's "memo of doom" became public), but very few followed their own advice. Many VC firms tried to keep existing portfolio companies operating, rather than winding some down while there was still cash to recover, and in some cases extended or reserved more cash for existing firms that had little hope of a successful exit. With few firms able to raise new funds, and with all existing funds committed to portfolio companies, precious little capital has been available to new start-ups.
  4. This would be the perfect time for a start-up to get going; there is little chance of twenty other start-ups entering the same field, many costs are very low right now (e.g. developers, rent), and the economy should be in better shape for revenues and exits in a year or so when the company has built a product or service offering. Unfortunately, there is little or no funding available from venture capitalists, and so the valuations and terms being offered tend to be very unattractive to entrepreneurs.
  5. I don't believe many people think of VCs as "unfair" to entrepreneurs, but the traditional VC funding system is broken for entrepreneurs. Here's an example. Assume a group of entrepreneurs work hard together, using their own money or obtaining funding from angels or "friends and family," to produce some IP and a team that has value after one year of work. To continue the example, if they were to sell the company at that point, they may be able to get $5 million, of which perhaps $4 million would be the value of the IP, and $1 million would be the value of the team. The acquiring company would presumably have some earn out for the employees (in the amount of $1 million), but they'd immediately receive $4 million for their IP and begin to get paid a market rate for their work. Three years after starting the company, they might receive a total of $7 or $8 million after returning the money to their investors (with interest and some share of the proceeds) - plus, the team would be on the forefront of some very important initiative for a larger acquiring company. The traditional VC funding approach would offer the company $5 million in common stock for the same IP and team, and typically a below-market compensation package going forward. The chances are very low that the team would ever realize the $5 million in returns for the work they did prior to funding. Thus, the smart strategy for many technology entrepreneurs would be to avoid the traditional VC funding approach.
  6. Anecdotally, I hear from many colleagues that they will stay with a larger company rather than starting a start-up at the moment because they don't see much potential upside in a traditionally funded approach. Others I know are moonlighting, starting a start-up with friends while all are still employed "full time" at a company, drawing a salary and benefits and working in free time. Still others I know are raising money from those few friends and family members, and setting their sites on building a profitable business that may probably remain private forever.
This topic has been worked over to death by many people smarter and with far more experience than I. Most of the analyses I've read focus on the problem from the VC point of view, and thus don't focus on the final three points from the entrepreneurs' points if view. I'd be interested to hear back from readers on their thoughts, things I've missed, or ways to improve the analysis.