Category Archives: Entrepreneurship

Entrepreneurship

New Market analysis – The data center “server” market #napkinStage

Another weekly feature I want to start is an analysis of a new market, so I can understand trends and learn about opportunities.

The hardware market for servers is a fairly large market overall. These are expensive high end systems that have a 7-10 year life-cycles and tend to be shelved and end-of-life-ed after that.

According to IDC and Gartner over $50 Billion dollars is spent on server hardware each year. That constitutes about 8-9 million units each year. So, the average unit price of a server is about $5000.

There has been a dramatic shift on both sides of this market – the buyer (service providers and data center owners) and the sellers (OEM’s, ODM’s and Contract Manufacturers).

First the buyers. The biggest tend has been the rise of the cloud. From 70K to 85K buyers and service providers in 2000, there are now only 25K buyers. The rest of the companies have “given up and gone to the cloud”.

Data Center Server Market Distribution of Buyer
Data Center Server Market Distribution of Buyer

The second trend, related and a resulting effect of the first trend, on the buyer side we have gone from a even spread at the top (long head) to a sharp head (consolidated top buyer profile).

What that means is that in 2000, the top 100 buyers accounted for 25% of the server purchases. Now in 2015, the top 10 buyers are accounting for 25% of the purchases. That indicates consolidation in a significant level. Companies like Google, Facebook, Twitter, Baidu, Tencent, Alibaba, Sina, Microsoft, IBM (with acquisitions) and Amazon (AWS) now account for a quarter of all server purchases annually. The next set of buyers – traditional ISP’s such as AT&T, Verizon, GoDaddy and about 1000 others account for 10% of the market.

Finally buyers are now also purchasing more “commodity” servers with cheap hardware components and systems and going away from expensive OEM servers. While HP,Dell, IBM and Lenovo continue to be the market leaders, more ODM’s such as Quanta, Wistron and Invetec.

What this means is that the major OEM vendors are losing market share to ODM’s and contract manufacturers or Electronics Manufacturing services (EMS) such as Foxconn and others.

 

Entrepreneurship

How accelerators make money to manage operating costs

There are over 500 startup accelerators in the US and over 1000 worldwide. Most accelerators are aligned with Universities (at over 35%), some are government funded (local government mostly) at 29% and some (15%) get grants from rich individuals and institutions such as Kauffman Fund. The remainder (21%) are privately funded accelerators such as 500 startups, Angel Pad, etc.

First, the definition of a seed accelerator, so we can understand the scope of the program:

A fixed-term, cohort-based program, including mentorship and educational components, that culminates in a public pitch event or demo-day.

While there is no reliable data on how many of these accelerators are doing well, graduating great companies and surviving, there is some data on how they are managing to stay afloat and “keep the lights on”.

Most accelerators, raise some money to invest in the startups they fund. Many (over 61%) offer some form of space to their startups to operate in during the cohort. Accelerators also have a staff of 1-5 people (some even more, but the average is 1.8) to manage the program, support the startups and recruit, select and engage the local community and ecosystem of entrepreneurs.

All this costs money. In the US, that’s usually upwards of $400K (that’s the low bar) and in other countries, more than $250K per year.

Typically the cost of the space and maintenance is about 30% to 40% of the budget, the cost of people about 40% – 45% and finally the cost of programs, marketing, etc. tends to be about 20%. This excludes the investment in the startups.

While investors in the accelerator are willing to fund the startups (and take a % stake in them), most are unwilling to pay a “management fee” for running the program.

Having interviewed and talked to many accelerator programs, over the last year, I have a list of 9 different ways programs have tried to raise the operating costs of the accelerator. I thought I’d document these so it would be useful.

  1. Sponsorship: The most frequently used means to raise operating funds, is to have large corporate sponsor. Some local government organizations also sponsor these accelerator as a means to be connected to the community. Many accelerators also raise sponsorship from local legal, accounting and real estate firms who benefit from the startup community or wish to target entrepreneurs and startup talent with their products and services. Nearly 60% of companies and 30% of all operating budget funding is sponsor driven for the 15 accelerators I know.
  2. Events: Many accelerators run events that aid future entrepreneurs, community participants and local businesses. These events are typically networking opportunities and charge attendees a nominal amount of money to cover the costs, enable marketing for the accelerator and pay for the “marketing resource” at the accelerator. Some accelerator programs also put together hackathons and still others run large industry events to generate operating cash. Typically the problems with running these events is that they take up resources and time, but if you can generate enough cash from these events, you can support 1-2 resources who can help with other activities at the accelerator during the non-event days.
  3. Entrepreneur-in-residence programs: A relatively newer program is the EIR, where employees at large companies or those at smaller ones who want to learn how to be more entrepreneurial, end up spending time at the accelerator in exchange for a fee. Typical fees are between $25K to $50K in the US. These EIR programs are full immersion programs and last 6-12 months or 1-2 cohorts. During the program, the EIR is going through the entire process from start to finish and “learning on the job”. Many of the participants end up becoming investors or entrepreneurs at the end of the program and return to their companies, learning about lean methodologies, innovation approaches and how to build on an idea and bring it to market.
  4. Grants: Both government and private donors typically give grants (no strings attached usually) to accelerators to support entrepreneurship, which promotes local jobs, makes a city more attractive to larger companies and also helps the local economy.
  5. Rentals: Many accelerators charge a portion of their investment as a fee for the space during the program per seat. So, if the accelerator invests $100,000, and the startup has 3 founders and employees, then $5000 might be charged per month of the startup for the 3-4 months they are in the accelerator space. This is more of the domain of co-working spaces, but many accelerators are starting to do this as well.
  6. Research Reports: Few accelerators I know write research reports based on their startup data for larger companies. These companies pay for the syndicated research reports so they can use them in their internal presentations. These research reports tend to be focused on a particular area of expertise and also a market domain. It is not unusual to see companies pay $50K for a syndicated report for the year about the startups within a specific area of their interest.
  7. Code Academies and Hacker schools: Many accelerators have also joined with coding schools, which teach programming to new and interested talent. This serves two purposes. First, the accelerator can raise cash by conducting training and second the graduates become good source of talent for the accelerator startups, who pay a fee to recruit the talent.
  8. Innovation scouting for larger companies: Many larger companies are also looking to recruit talent, acquire companies and learn about new disruptions and innovations. These companies are willing to pay a little money to scouts who can help track, recruit and manage a startup pool of entrepreneurial talent. Many accelerators provide this as a service to larger companies.
  9. Distribution, Sales, Design and Marketing consulting: A few early stage accelerator are also providing the equivalent of the “coding” school for non developers by running marketing and sales training programs. The difference is that the graduates are employed by the accelerator program and they end up being consultants to the startups who charge a fee for their services.

These are the various programs I have seen, and I’d love your input on if I have missed any that you have seen.

Entrepreneurship

Why some apps and websites have never changed their user interface #DontFixWhatsBroken

The Google search “user interface” has been the same for over 17 years now. The simple text search box with a button for Google search and “I’m feeling lucky”. That’s it. Nothing has changed at all.

Feeling Lucky
Feeling Lucky

Same for iOS and similarly for Instagram, etc.

Media properties go through several changes every 12 to 18 months. Some even undergo changes more frequently than that.

Why do some websites and apps – Facebook, etc. change so often and have the users go through the pain of learning the new experience?

And why do some services NEVER change at all even after user feedback about their experience.

The basic user interface theory suggests that once your user / customer knows how to make something work, they like it and get used to it. After that it is hard for them to change. Many of your users may not even like the change, since it forces them to learn new things and be productive at the same time.

I have a theory of User interfaces, which is just a theory, but I’d love contrasting opinions on this. I believe that most users dont care about the User interface. They care about the experience and want it to be seamless, easy to understand and simple.

Which means, they expect the complexity to be hidden.

As an example the search input for Google has not changed, but the response pages have dramatically changed over the years.

From a simple list of blue links, now, Google provides contextual and relevant information.

That means the search engine has changed a lot (in the back end), but the complexity is largely hidden from the user.

Which is the reason why most apps in the future wont have a User Interface is my belief.

The user interfaces we know of are mostly there or will be there soon. Learning new interfaces will take us a long time.

A combination of micro services and service based apps, will result in the death of mobile apps and pretty much most apps.

 

The input elements for apps will likely be questions (business apps) or statements (communications) via voice, gestures, etc.

The output elements will have multiple levels of detail (overview, specifics and detail) and while I think they will evolve, they will start to coalesce around the known.

I’d love to know if you think I am wrong.

Entrepreneurship

Granular Pricing and Event based Pricing as a Service – (Praas) #NapkinStage #WillFund

One of the things I’d like to do every week from now is to talk about problems that I know about. I am hoping I can get entrepreneurs interested in working on these problems. Of course, most of these will not be fully vetted or even viable. That’s where customer development comes in. Honing in on the specific problem set will be something that needs work.

The problem I want to talk about today, is pricing. As more software companies offer their products on the cloud, and more companies are becoming “full stack“, there is a big need to help them optimize pricing to capture value instead of usage alone. Pay for performance instead of pay for usage is not a new concept.

Pricing by usage means that as people use more, you will charge them or they will pay more. That’s typical of mobile phone plans for example, the more data you consume, the more you will pay. That’s consumption pricing.

Pricing by value or pricing by outcome are two other means. As companies get more “full stack”, it is becoming more clear that they intend to not price on standard known means. For example Uber’s surge pricing is “value” pricing based on demand. GE has started to price its jet engines on availability and uptime instead of a maintenance fee, which increases its ability to execute differential pricing. If the engine is available more, GE benefits as does the airline, which leads to lesser downtime and hence more profits for the airline. This extra profit is what GE wants a part of.

More specifically, in terms of software defined pricing, it is becoming clear to me that granular pricing, the associated billing is equally important.

The solution is “Pricing as a Service” or PraaS.

I can envision an API driven offering, which is used by the developers of any SaaS company. The offering will manage the pricing pages and the billing for the company (different from recurring billing and transaction that’s done by Recurly, Chargebee, etc.)

The API’s will also be available to customers who want to bill granular components of their product. It should provide the ability to manage pricing tiers or create “packages” and also allow for multiple SKU’s to be created from base offerings by segment of customer.

I think this is a sketch of the idea, and there needs to be a lot of work done to talk to SaaS companies to understand their problems with pricing their products.

The other part of the pricing problem is metering and billing. I know of many SaaS companies who are looking to expand their customer footprint by offering their products via public clouds (AWS, Microsoft Azure) to large customers. For these companies, new metering and billing by components, or value based is a lot more profitable than plain usage or user based pricing.

I think Pricing as a Service is an important solution, so if you have a background (been an entrepreneur – failed or succeeded before) in a SaaS company, and a team of 1 or 2 cofounder who can build large scale API based systems and have the desire to build a company, you should reach out to me. I’d love to learn more and if your team fits the bill, I’d be willing to fund this idea. If you are a solo entrepreneur, I’d not be interested. If you have not been an entrepreneur before, again, it would not fit my criteria.

Entrepreneurship

Lessons from 3 founders on surviving the “near death” of your #startup

Startups were largely meant to be an experiment. An attempt to solve a problem (that may or may not exist), or to bring to bear an idea whose time “has arrived”.

Experiments, though unlike many startups, have a hypothesis, are conducted largely in test environments and have the ability to come to a logical conclusion after their period of testing.

Most founders I know have survived at least 3-4 “near death” experiences at their startup. Most of the near death experiences come within the first 18 months of forming the company. Surprisingly, they dont come in the first 3-6 months, but after that.

A near death experience is categorized, as a point where the founders believe there’s no point in continuing to build the company any more and they would like to shut down. Most times it is because they ran out of money. A few times, even when they have the money, they decide to shut the startup down since what the founders signed up for is now different from reality.

statistics-on-failure
statistics-on-failure Credit: http://www.statisticsbrain.com

I had a chance to work with many founders over the last 10 years, and the thing I have noticed about founders who survive the journey is that there are 3 things they all seem to have in common:

1. A bias for action, not deliberation. It is not as if you wake up one day and suddenly feel like your startup is going nowhere. The buildup to your closure is usually a series of events and feedback that points to inconsistencies with the assumptions you made when you started your venture. The best entrepreneurs have a very strong bias to take action on the data and quickly put new experiments in place to validate the new ideas and tactics.

2. They take an extremely short term (hours, day) view of their survival needs. There is an old saying in cricket, paraphrased – “When faced with a daunting score or a large total, instead of trying to focus on the target, focus on the next ball. Leave the rest to time. If you focus on the next ball and surviving the next ball it is likely you will worry less about the many other distractions that come with figuring out scale and other “to be solved later” problems.

3. They focus only on revenue generation activities, after cutting costs to nothing. I notice that many entrepreneurs say they cut costs to “bare minimum”. Which, in my opinion is still high. If you are spending any money at all (for development, marketing, etc.) you should cut them to zero until you have your revenue plan in place. They remove their “small office” space, eliminate “web hosting charges” but looking at creative ways to use free resources to “keep the lights on” without spending money.

 

Entrepreneurship

Why has someone not disrupted the Indian Grocery store in the US

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There are over 4 million Indians in the United States and this includes those who are on business, work and other visas, besides American citizens of Indian origin.

Over 50% of Indians in the US are in the top 5 states: California, New York, Texas, New Jersey, and Washington.

There are over 750 Indian grocery stores in the US as well.

The typical Indian grocery store is about 700 Sq. Ft, located in the suburb (not the major cities) and tends to operate on 21% net margins, with some items (biscuits, Indian vegetables) topping over 50%.

It is not unusual to see 100% markup on items such as masalas, basmati rice etc.

The stores are small, cramped, usually not in the best shape, in highly trafficked neighborhoods, and offer pretty poor customer services.

They all thrive though. The average ethnic grocer will experience a 29% closing ratio in the first 18 months, whereas Indian grocers experience < 10%.

The average Indian grocery store also makes about $350K to $1 Million (Sunnyvale, Santa Clara) in profits.

Most of the produce and the packaged food is rather old, some way past their sell by date and many products are rarely replenished quickly enough to categorize them “fresh”.

Indian Grocery Store
Indian Grocery Store

They all make money though, and are pretty profitable.

So why have they not been disrupted?

There are some attempts: Increasingly Wal Mart and Costco are offering Rice, some Dal and some packaged foods such as Ready to eat meals (MTR, Gits). The “Asian Foods” aisle at your local Safeway and QFC is also a good source of some spices and masalas.

There has been no large scale attempt to cut out the expensive Indian Grocery store. I can easily imagine the 100% monthly subscription model online store doing well, but of course, I am neither a supply chain expert, nor an expert in Groceries.

I am curious though, to learn why none of the ethnic stores have been replaced or are being threatened by Internet distribution and discovery.

Entrepreneurship

Android ecosystem vs. the Windows ecosystem

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Android as an operating system for mobile can be likened to the Windows operating system for PC’s. There are so many differences and similarities that it is worth comparing and contrasting them instead of comparing PC’s to smartphones.

While we cant call the smartphone market at its “peak” yet, there are over a billion Android users right now. If you look at the PC market, there are a billion PC users as well.

At its peak, there were 195 Windows PC manufacturers and 1400+ models of PCs.

There are 400 manufacturers (known) and 4000 models of phones and over 500 carriers in the Android ecosystem.

What’s different in the PC world vs. the phone world is the carrier.

Few of them (primarily in the US) subsidize the phone with an ongoing payment for usage of the network.

The carriers ensure that you will continue to use the phone and pay a “subscription” fee monthly for usage. In the PC world, without the “Internet” the system was pretty useful.

Without the carrier the phone is pretty much useless. You can possibly use it as a MP3 player or a screen, but trying being productive without a mobile plan.

While there were other operating systems (MacOS and linux) in the PC world, (iOS and Windows) in the phone world, the similarity is that the “winner” has a dominant market share or profit share, rarely both. Similar to Google in search, they dominated the market share and profit share for the PC OS.

Another key is is profit share.

In the PC world, the closed Windows operating system made the majority of profits, and in the mobile OS world, as well, the closed iOS operating system has made the majority of the profits.

The difference is the the “open” operating system in the PC world – Unix did not fare as well as the “open” one in the mobile world – Android.

Which leads us to some questions – What matters for the health of the ecosystem? What matters for the health of an individual company? If you were to project what happens in the Internet of Things world – which “OS” might win?

For a healthy ecosystem, I think both open and “closed” systems matter. The closed system tends to make most of the profits. The open one, either gets no traction at all, or tends to dominate marketshare but not margin share.

For the health of an individual company, being there first to get developer traction matters most. Developers go where the consumers spend good money, not where they use the product as a utility.

Finally in the IoT world the “operating system” will likely be the cloud. The likelihood of a dominant operating system taking both marketshare and profit share seems very high.

So I were a betting person, I would go long on AWS (Amazon Web Services) and Microsoft Azure. If there were to be a dominant system, it is likely they would be the contenders.

Most “Internet of Things” are focused right now on the Things,not on the Internet. That will change, resulting in more data driven models for IoT than device models.

What do you think?

Entrepreneurship

Goodbye Microsoft Ventures, 3 years of fun comes to an end

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3 years ago to the month, I was at the crossroads. Having moved back to India and grown, then sold BuzzGain, I had founded my next startup and found a way to grow a new business.

I was spending more time helping entrepreneurs and was interested in starting a new company, but I realized that having a bigger impact is what I was seeking.

I met with Amaresh, at an event called Think Next in May and he was a very nice, humble and wicked smart guy was my impression. When he started talking to me about the Microsoft Accelerator program, I was keen to help. He then offered to get me on board full time and I was (as was everyone else) very surprised. I agreed because I thought the money and resources that Microsoft had, directed at the right places to help the startup ecosystem would go a long way to help India.

At about the same time, Rahul, Neda and David started the Bing Fund, with similar interests – to help entrepreneurs by investing in startups. Similar initiatives were started by others in other locations. A small, but passionate crew at Microsoft were keen to engage the startup community and help entrepreneurs.

Microsoft Ventures was formed in March 2015, when we brought all the startup resources into one single organization. We announced it in June 2013. It was going to comprise of an ecosystem program – BizSpark, accelerators to help startups grow and a fund to help startups scale.

From 2012 to 2014, I was in India, and built some great relationships there with investors and entrepreneurs. Microsoft Ventures was name the #1 accelerator in India by Economic times.

Microsoft Ventures and American Family Insurance presented 10 inMicrosoft Ventures and American Family Insurance presented 10 in
Microsoft Ventures and our demo day

Late last year, I decided to move to Seattle to take on a bigger responsibility, but also to bring the startup culture to the large corporate Microsoft entity. After Satya became the CEO, it was more acceptable than before to be entrepreneurial at Microsoft.

Microsoft is big, large and great at many things, and is learning to be nimble and move quick, is my sense, after being here for a year in Seattle.There are many folks who have been here for over 15-20 years who are resistant to change and many folks who are very open to change as well.

Nonetheless, I had a lot fun, I think we had some impact and we certainly made a lot of friends. We helped many entrepreneurs and not a day goes by when I dont get an email from someone who wants to work for Ventures or be funded by the organization.

I think I will miss the entrepreneurs I interact with daily, the most, as part of Ventures, but I suspect I will continue to work with startups. Mostly I will miss working with an entrepreneurial team of folks who care deeply about startups.

Entrepreneurship

The modern app developer

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Two interesting things came to my attention yesterday. The rise of coding schools (NYTimes piece) and the most popular languages used at hackathons.

As I had written before, coding schools are graduating close to 20K students in the US – almost 1/3rd of the # of graduates from all computer science programs. Most of these students are from fields outside of programming, computer science or engineering. Many studied political science, history or literature and were pizza delivery folks, baristas and even Uber drivers.

While many of their starting salaries are about $60K, even 6 figures are not unheard of salaries for “data scientists”.

Over the last 6 months, I have noticed that these students make up nearly 10% of startup development teams. Many are hoping to get 1-2 years of experience to either a) go independent or b) get a much better paying job (read $150K) at a hot startup with stock options.

The modern apps have 3 characteristics that is changing the way apps are developed.

1. First, since there is a rise of Dev Ops and No Ops, many more developers are developing apps purely on Javascript and some Swift, with Python, Java and C++ taking the back seat. With the simultaneous rise of Javascript libraries and frameworks, it wont be too long before we see more Javascript only developers who focus on building interfaces quickly with little backend code.

2. The rise of composers instead of coders. Many app developers focus a lot of effort on coding skills and writing monolithic applications that are self contained. The future of apps and hence app developers is microservices which use many 3rd party API’s. This will result in coders and developers becoming more composers who snag code snippets from other places and spend more time building an experience end-to-end and less time on systems programming.

3. Finally given the rise of consumer apps and their influence on enterprise apps, many app developers will start to incorporate images, video, and other media elements (voice) into their apps and have “voice enabled” assistants in their apps to replace the standard productivity and ERP / CRM apps that are developed for the enterprise. Many enterprise apps are expected to have a “longer” life cycle than games and consumer apps, which are constantly in fashion and out, but the shelf-life of enterprise apps will reduce thanks to consumerization of work-apps.

The Modern App
The Modern App

Increasingly the skill that is needed more than architecture and coding is identification of key API’s, rapid prototyping and experimentation and very few people who are going to help “scale and grow” the apps.

I wonder if you are seeing the same?

Learning, Tips

Double opt-in email introductions are painful, but more useful than blind intros

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A typical week for me is about 15-20 introductions to entrepreneurs and VC’s. I love that part of the job, in fact. If I could do more, with less time, I would any day, but I am getting more judicious lately.

There are 3 primary reasons why I am slowing down my “warm” introductions.

First, even though I know both the parties well enough to make the introduction, turns out many things change in 3-5 months that I am not on top of. One of my friends at a VC firm, decided to focus on B2C later stage instead of B2B. After 2 introductions, which I made to entrepreneurs, I found that out and also found out that he was “forwarding” my emails to his colleague. What I thought was “helping” was actually creating more work (useless and unnecessary) for him.

Similarly, an angel investor wanted an introduction to an entrepreneur who was looking to raise money a few months ago. Turns out by the time I made the intro, the entrepreneur had changed roles to be  the product guy, got a new CEO and also had finished raising money. Again, creating more work for him was not my goal but I ended up doing just that.

Second, in many cases the entrepreneur or the investor is not a good fit at all. Take a case this week. A very smart investor is a hugely sought after lady in my network. Not a week goes by, when I am asked to make an intro to her. I was asked this week by a good friend and entrepreneur to make an introduction to her. I like the team, so I was willing to help. Turns out, the investor had already looked at the company and decided to not engage because she has a competitive deal in the space.

Now, I had obligated her to find a way to “help” my entrepreneur friend in some way. That’s negative brownie points for me, even though I wanted to actually help them both.

Finally, there is a power dynamic in play with most situations. The “requester” of the introduction and the “recipient” are not sure in most cases who will actually benefit. Neither am I am very clear about who needs who more. In most cases, when entrepreneurs ask for an intro to an investor it is clear, but in many cases when I have a “hot” entrepreneur in my network, it is not unusual to have 3-4 investors seek my help for a warm introduction.

While making introductions is a critical part of the role that I play, it is becoming clear that the work that it generates for me is becoming onerous.

The best approach is to email the person who is the recipient of the introduction if they’d like the introduction, then wait for their response and then respond back to the requester of their response.

Double opt in Email Introduction
Double opt in Email Introduction

So one email introduction now becomes at least 3 if not more in some cases. Multiply that by 15 a week and I am spending close to an hour making introductions. There has to be a better way.

What do you suggest? I like the connecting and the introductions, but the work involved in doing this is getting to be too much.