Friday, December 28, 2007

Small companies are like small theatres

Sitting at my mother's kitchen table on a stormy English night...

I had the privilege of going to two very small theatres in the the last week. First was to see Othello at the Donmar Warehouse - starring Ewan McGregor as Iago and Chiwetel Ejiofor as Othello - and then a few days later to see Honk at the Watermill. Both theatres seat about 200 people and in each case we were seated within 4 feet of the stage.

When watching a production in such a small venue you see the inner workings of all aspects of the production. You are close enough to see every bead of sweat, every small facial expression. Close enough to see the machinery behind the stage changes (even if it is only a character picking up a glove while running off the stage). It is quite unlike the large London or Broadway productions where you are struck by the machinery of the production - where hundreds of people are organizing in the background instead of a few players and musicians plying their craft at arms reach.

It's like a small company. When you work in a small company every employee pretty much sees everything. There's no room to hide anything or make it look like a major production. There's no one working behind the scenes like you have in a large company where the system makes things happen around you.

Because I believe in the transparency of small companies I hold a meeting with my employees every quarter where I make a short presentation on how things are going and then take questions. At these meetings I will answer any question (unless it is clearly confidential personnel information) and share all the inner workings with my employees. I figure a) they are investing in the company with their time and careers so they have a right to know and b) seeing the inner workings is a big part of the fun.

So, like the theatre, when you are in a small team, or a small venue, you certainly see the sausage being made.

Too much of a stretch guys ? :)

p.s. Othello was stunningly good. Ewan McGregor was brilliant and chilling as Iago and his evil manipulation would fit in well at the more political large companies. Chiwetel Ejiofor was heartbreaking. It's the first time I've had tears pouring down my face watching the death scene.

Thursday, December 27, 2007

Is 2008 the year bubble VC firms fold?

Back on line after 5 days of Christmas: food/drink/kids/siblings/parents and no time to think.

Pundits have been predicting the demise of bubble era venture capital for years now, but maybe it is finally going to happen. The article Time nearly up for bubble era venture funds predicts that 2008 is the beginning of the end - a result of approaching the 10 year life of many funds that were started in 1999/2000.

There are many reasons funds may not renew and living in the valley I see many close up through my friends. In one case the fund was very successful prior to the bubble, with many big telecomm and semiconductor hits, but when the bubble happened they over extended and had one fund which was a disaster. The senior partners had the track record to raise another fund, but they were tired and, as if often the case, they had made enough money earlier to want to focus on other parts of their lives.

The generational change is definitely challenging for some firms too. Seasoned partners have run the firms for 25-30 years. Junior partners have come in off the early bubble companies, thinking they know how to run venture capital but not having the gravitas for it. I do believe the great firms will sort this out, but the middle rank firms will struggle without luck, although their demise will take another 10 years to be visible.

Two firms are named in the article as not raising new funds: Worldview and Diamondhead. Interesting though, since I am close to both funds, is that both could have raised new funds, but are chosing not to. While the bubble effects definitely conrtibute to their decisions, there's a human story in each case that is just as much of a contributor. In the end all businesses are about people and what they want out of life.

Thursday, December 20, 2007

Investors: friend or necessary evil?

I had a question yesterday that got me thinking - do management and directors view investors as a necessary evil or as helpful?

As I thought through my answer I can see that the question is more complex in the case of a public company vs. a private company, and my opinion is colored by my experience.

For a public company, investors are very helpful when they
- put the time in to really understand your business
- are long in your stock and believe in the strategy
- coach you on what they care about so you can serve them better
- support you when you go out to the shareholders for approval on a transaction or for shareholder votes.

All these activities help you build the company, and help you (the CEO and management) serve the stakeholders: investors, customers and employees.

However, investors are not helpful when they
- don’t put the time in to understand your strategy and why you are taking the actions you are
- churn or short your stock
- try to control the company without working in it (since I believe the CEO is the only person who has all the information needed to integrate good decisions for the company).

At Simplex, and then in follow on at Cadence, I spent a lot of time with the largest institutional shareholders, and while they quizzed me and pushed me hard, a few became friends through the process. And it was clear to me that the majority of the shareholders made the company stronger and were an asset. I would travel to New York and Boston a couple of times a quarter to discuss the company with major shareholders because I valued the interaction both for the investors support of the stock and for our understanding of what their issues and questions are.

(One of the very fun things about FirstRain is that when I turned the strategy to serve the buy-side, some of my previously major shareholders became early, demanding users of the product, coaching us on how to make it better – it’s terrific to work with such smart people is a totally different context.)

For a private company I think the question of whether investors are friend or foe is black and white. Investors need to do heavy lifting to help get the company off the ground, and if they don’t you don’t want them involved. (see my prior post All venture money is not equal). If your investors are your foe it’s even worse – they can take down the company.

My experience has been that investors in my private companies have been incredible assets to the company. They
- push the team really hard to perform, and then continuously raise the bar
- write a check when the company needs one
- listen and give advice when you ask for it
- and most importantly, trust and support the CEO.

In VC backed companies it’s well understood that the #1 job of the directors/investors is the hiring and firing of the CEO, and to provide strong support in between. It's really very simple.

Tuesday, December 18, 2007

New York or London?

I'm in New York this week, but on my way home to England for Christmas - and one of my staff sent me a great article in Hedgeworld (which needs a subscription) on the ongoing debate of London vs. New York.

Per this article, the battle is now on for hedge funds and the British Government is working hard to attract them. On the positive side, London is much closer to the broader investor market and the FSA, while highly regulating the market, is considered predictable. On the positive side for New York though, it's cheaper to do business there and the US savings market is supportive of alternative investments. But while New York still leads the hedge fund market today, the London growth rate is 63% vs. the New York growth rate of 13%

I think the trend is a challenging one for New York, although the weak dollar may turn the tide back. At the base of New York's problem, as was much reported in Jan this year, are two issues: the litigious environment and geography. The stranglehold of regulation on US public companies is not going to go away soon, and while some of it was good to correct for the issues of the past, some of it is ridiculous (for example the way accounting firms now behave during audits - it's hard to believe until you live it).

And the perfect location of the British Isles has been an advantage for England for 500 years. Money can flow in from the West and the East with ease, into a large, modernized airport with fast rail to London (unlike arriving at terminal 7 at JFK).

The best thing about what's happening is the fun of the healthy debate. Whether it's semi serious about the financial markets or amusing about lifestyle, the press (for example this running commentary) is now documenting the debate that has been active at my family's dinner table for 20 years, ever since I left England for California.

My personal observation - London will always have the emotional pull of "home" for me, the streets are the streets I roamed as a romantic teenager and the theatre is hard to beat. But New York offers an unbeatable combination for me now: exciting work, building a new company, fantastic entertainment and a place my teenage kids love to come to and roam around while I am working.

Thursday, December 13, 2007

Will Sarbox accelerate M&A?

FirstRain picked up an interesting post on the deal architect blog which I could really relate to: Oracle's M&A trump card: Sarbanes Oxley?. The speculation is whether the tough regulatory environment that public companies find themselves in makes M&A more likely because management teams want relief from Sarbox.

The specific case being discussed is in software – as it relates to Oracle’s acquisition binge, but it could apply to any low capital intensive industry with a set of smaller public companies – and the personal liability risk can show up anywhere. I don’t believe most CEOs would be unduly influenced on whether to sell or not by the relief they’d get because most will do the right thing for their company and their shareholders, but I have to imagine that there is a background nudge to their decision making process – a small voice saying “hey dude, you could relax for a while….”

Hedge funds under pressure - or not?

I’ve been watching the increasing pressure hedge funds have come under since August (following the sub-prime meltdown). Pressure like:

- MAN Group’s Peter Clarke said he expected 1 in 10 hedge funds to fail, up from the 5-7% historical attrition rate;
- it is becoming clearer that many hedge funds are inflating their reported size by including borrowed amounts, where a “$2 billion” fund turns out to have had less than $100 million;
- institutions like universities are starting to feel/fear their exposure to hedge funds;
- and European politicians increasing their agitation for regulation of hedge funds.

But in contrast, at the same time the “ultra-wealthy” continue to increase their investment in hedge funds – and where the smart money goes, so the rest of us will continue to follow.

(As a fascinating aside the same report says the over-$50M crowd are also, for the first time, getting more of their news online than from newspapers)

So while it’s been a tough environment, most of our hedge fund customers are managing well--employing discipline and the short strategies that they pioneered. What’s more, there are continued signs of innovation and growth across the community, with big moves out of Japan to the rest of Asia and new products for Russia.

Tuesday, December 11, 2007

Beacon: Bridging Over Troubled Water

Since Facebook introduced its Beacon program on November 6, 2007—online advertising and privacy debates have flurried. Online tracking and behavioral targeting for the purposes of marketing are not new practices: Internet behemoths like Google, AOL, and Yahoo have done it for what (in the scope of the Internet) seems like eons. So what’s all the hoopla about? Simple—sharing should be a choice.

Until recently, behavioral targeting in an online world served up ads or recommendations on a specific site based on an individual customer’s preferences on that site. Now, the growth of online social network sites (e.g. Facebook has grown a whopping 118% from October 2006 to October 2007) has prompted building better mousetraps to secure the ad revenues that support these sites. Enter Beacon—which attempts to bridge together advertising, pseudo-endorsements, and ecommerce by broadcasting members’ online purchases to their networks and to the advertising partners of the site.

Ad spending on social networks is expected to reach $2.5 billion by 2011 and this has created a lush landscape for behavioral targeting and affiliate marketing programs. It has also sparked a recent wave of consolidations in the ad-networks market—2007 alone has seen Google’s acquisition of DoubleClick, AOL and Tacoda, Microsoft and aQuantive, Yahoo and RightMedia, and WPP and 24/7.

Clearly, there’s money to be made…but where does that leave the customer like you and me?? While targeting our preferences is one thing—monitoring and broadcasting actions out to the world at large is quite another. And this is where Facebook’s strategy in deploying Beacon is fundamentally flawed: they should have considered their customers first.

Amidst member backlash, a petition organized by Civic Action, and after (ironically) CEO Mark Zuckerberg’s own privacy was compromised, Facebook has instituted some fundamental changes to Beacon including making the social advertising program opt-in and allowing the feature to be disabled completely by the user. Mark Zuckerberg has even issued an apology; but, is it because Facebook realized the error of its ways or because their partners (like Coca Cola, Overstock, Travelocity) are stepping back from them? Only time will tell.

It’s like that old cliché: those who don’t learn from history are doomed to repeat it. With Facebook’s privacy clash last year regarding the News Feed feature—which resulted in member protests and another public apology—most people would have thought Facebook would have deployed Beacon with more savvy and sensitivity. As it stands now, even with the new modifications Facebook has instituted, they’ve got more work ahead of them to get it right.

The good news/bad news story of women director’s statistics

It’s a mixed bag when you look at the statistics of women in board room – as reported by the CWDI. Over three-quarters (77.5%) of the 200 largest companies in the world, as ranked by Fortune in 2006, have at least one woman director on their board – but only 11.2% of all board seats in the Fortune Global 200 companies are held by women.

From 2004-2007, the total number of board seats held by women increased from 285 female-held seats to 308. However, men still hold 88.8% of all board appointments to the 200 largest companies in the world - and half of the companies with women directors (45.6%) have only one woman director. A token perhaps?

At least the U.S. is still in the lead – I suspect we are more politically correct. Of the 75 U.S. companies in the Fortune Global 200, all but one has at least one woman on the board. In Europe the UK and the Netherlands lead; Japan has the worst board diversity statistics (having spent a lot of time doing business there this hardly surprises me).

Disappointing that 45 companies in the Fortune Global 200 have no women directors – and perhaps most disappointing of all – while women held 11.6% of the board seats within the Fortune 100 in 2006 – they were only 6.6% of the senior executive officers – a mere 73 out of 1,113 positions.

Sigh. Back to work doing my part to change this aspect of our world.

Monday, December 10, 2007

The joy of flying

As I took off from SFO early this morning I was jolted out of my usual sleepy, somewhat disgruntled Monday morning travel mood. Seated on the port side of the airplane as we took off to the north, I was transfixed by the glory of the sight outside my window. Crisp, blue sky with probably 100 miles of visibility. San Francisco, unquestionably one of the most beautiful cities in the world, clear and sparkling in front of me with the Golden Gate bridge behind it – for once with no fog hiding it. And this fantastic sight was framed by the airplane wing – as much a part of the beauty to me as the geography.

I learned to fly gliders when I was 16, at a club which launched the old fashioned way - with a winch off a 1000 ft ridge. It was in Shopshire and I was the only teenager in a group of adults learning how to fly (I had pestered my parents endlessly until they finally caved and let me go!). This was the most freeing thing I have ever done and was one of the key milestones in my development to becoming so independent. Gliders are the purest form of flying. - because you have no engine your ability to stay aloft is purely a function of your skill. Can you identify where the lift is? Can you control your plane to climb in the thermals and so can you navigate your way across country from cloud to ridge to cloud? It’s just you, the plane and the air.

I forget how amazing that feeling is – it’s been many years since I put gliding aside for real life, but occasionally I see a sight like the carpet of beauty I was honored with this morning and I am reminded of the sheer joy of flying.

Friday, December 7, 2007

The power of a subscription revenue model

Synopsys announced Q4 results today and, apart from being very good, they illustrate the fundamental power of taking revenue ratably. Primer on the difference at the end of this post…

Now, going to ratable (subscription) revenue is not a new idea, and both Cadence and Synopsys (the two leaders of the EDA industry) had been flirting with this idea for more than 15 years. Both had done a partial shift, reported what percentage of new business was coming in as subscription vs. term, postured at each other as to which was better, but both were fundamentally still playing with structuring the revenue on big deals to make the quarter. The problem with that approach is eventually it catches up with you and you a) miss the quarter or b) can’t hide the growing percentage of your business that is revenued up front. But for a CEO it takes courage to restructure for the long term, sustainable health of the business and put himself at risk as he does it.

In July 2004 Synopsys missed a quarter and made the brave step to move to almost 100% subscription revenue. It was tough. Investors punished the stock and management had to cut costs to deal with the reduced revenue. But today the courage paid off and Synopsys not only beat expectations but (I speculate) probably has fantastic visibility going forward because of the smoothness of the model.

Consider Cadence in contrast. These two vendors run neck and neck in market share, they both have excellent products and loyal customers. But Cadence never took the bold step to restructure its business model to the degree Synopsys did and as a result they don’t have the same visibility. In October 2007, even though Cadence beat street estimates, they reported that their up front license revenue exceeded 50% and so they were downgraded by Raj Seth of Cowen because of reduced visibility and reduced backlog. As a result the stock dropped 15% and has continued to decline in the rough market.

To put FirstRain in context, when I took over the company it had a blend: some perpetual and some subscription business. I’ve done a lot of modeling on this issue over the years and so I made the decision that FirstRain would be 100% subscription – and SaaS (more on what on that later). Subscription is much tougher on cash consumption, but if you are playing to win over the long term it’s worth the initial investment.

My crystal ball prediction: the visibility and stability of the Synopsys business model will cause SNPS to pass CDNS in market cap in 2008 – although they will continue neck and neck in true – seat count based – market share.

Primer (skip if you know this stuff)
In software there are two basic business models:
License revenue – this is typically a perpetual license to use a piece of software; the revenue for the product license is taken up front and then the customer pays maintenance over time. So, for a $100,000 software product the customer will pay $100,000 up front and then maintenance thereafter. The revenue treatment in this case is:
Quarter 1: $100,000
Quarter 2-n: $0

Sometimes you see a slight innovation from this called a Term license where the license lasts 3 or 5 years and then has to be repurchased but then revenue treatment is the same. Term is typical in EDA.

Subscription revenue – this is typically a 1 to 3 year license to use the software, paid annually or quarterly; the revenue is taken smoothly over the period of the license. For a $100,000 3 year license the revenue would be
Quarters 1 – 12: $8,333 per quarter

Over time, as the business grows, the subscription model provides smooth, predictable revenue growth – plus you tend not to build the P&L too far ahead of revenue because of the cash impact. In contrast, with license revenue, you are always vulnerable to one deal slip blowing the quarter – and so companies discount, play with terms and do all kinds of unnatural acts to get a deal in, instead of allowing the business to build naturally.

Thursday, December 6, 2007

Tech finance hype? and a song

I was amused by today's cynical report from Venture Summit West. The reporter, Richard Waters, interviewed my friend Paul Wick on his observations on the quality of investment banks relative to the deals they bring public. It tickled my funny bone not only because, being a valley rat, my friends are involved in some of the companies mentioned, but also because this morning a friend sent me one of the funniest “tech bubble” videos I’ve ever seen: “Here Comes Another Bubble”. It will definitely evoke a smile and stretch your facial muscles.

That said, the same group who put the bubble song together also posted “Fine-line: Sub-Prime Decline” which (while just as hilarious) is very sobering and makes Tech look stable in comparison.

The Downside to Innovation

Being a small, nimble technology company, innovation has to be integral to our daily lives. For us to build a successful company we know that we have to constantly discover new ways to deliver our service, improve client experiences, and exploit needs in the marketplace.

When you innovate, however, everyone needs to be mindful of the risks and downsides. As the innovating firm: are you making a bet on a new feature that the market can’t support? Could the money spent on sales people be used to make the product better? How do you best support a growing client list and turn your customers into raving fans? As the customer: how will the new way of doing things positively impact your business? Are the implementation risks too great in relation to the upside the innovation can deliver? What if the product doesn’t work?

There was an interesting article in the NY Times this week about how we are currently experiencing the downside of innovation in the financial markets with the growing fall out from questionable sub prime lending practices and the housing bubble. It is scary to see how the lure of significant short term financial gains forced credit lenders to ignore the inherent risks in the system they were creating – they figured it was the responsibility of the buying public to know better. With hindsight this was, of course, completely irresponsible. The fallout has been dramatic, far reaching, and unfortunately it doesn’t look like we have seen the bottom yet.

The moral of this story: innovation can be truly great when there is a partnership between the innovators and the consumers of the innovation. One where everyone understands the upsides and the risks, and the customer understands that the value the new innovation is far greater than any downside associated with it.

Fun (or not so fun) facts about Wall St research

We pulled together some facts around sell-side research for a press interview I gave this week, and when you put them all in one place it’s a sobering picture. Did you know that:

- Between Jan 2002 and Jun 2006, 703 public companies have been orphaned and have no analysts covering them – according to Reuters

- 35% of public companies in the U.S. now have no coverage

- An additional 30% are under-covered (they have less than 3 analysts)

- The number of analysts working for the 10 largest investment banks has declined 21% to 2,641 as of November 2006 from 3364 analysts in 2001 – according to Thomson Financial

- The Tabb Group estimates that the total number of analysts fell by approximately 42% from 2000 to 2006 with expected declines reaching an additional 35% by 2008.

- and so… not surprisingly Integrity Research Associates estimates that buy-side institutions will increase spending on internal research capabilities by 28.8% over the next few years from $5.8 billion in 2006 to $7.4 billion in 2011.

No wonder "alternative research" products like search-driven research, expert networks (like Gerson Lehrman) and independent research are exploding.

Wednesday, December 5, 2007

To auto-categorize or human tag?

It’s not obvious how to make people and machines work well together. We deal with the interface between targeted human effort and computer automation every day at FirstRain – and our technology for categorizing content is an integrated mix of human analysts and algorithms. It helps that we have a fairly uniform set of customers (investment managers, analysts, CxOs and marketing types) when compared to the challenge the consumer search companies face. But because we have a wide diversity of customer interests within that base, we filter, sort, and tag documents with a variety of techniques from the purely human, librarian-like research to the purely mechanical, algorithm-based tagging.

In the history of consumer search applications, this dichotomy is interesting. Yahoo’s early success was built on a human generated directory. It was extremely effective in an early, smaller web. A map was both feasible and necessary since the web was smaller and people hadn’t yet embraced the web’s breadth. The Open Directory Project (DMOZ), was (and is) an attempt to duplicate Yahoo’s human effort through a team of volunteers. Google, of course, is almost entirely automated. Attempting to swing the pendulum back is Mahalo, a “human-powered” search engine based on the belief that the focus of the list of keyword search terms is short enough, and that human common sense can create better results than Google for this small number of commonly searched terms.

FirstRain solves a different problem – but an adjacent one. We support very demanding clients who require precise information across differentiated sources about global markets, events, and trends. Our technology is honed to identify these documents, allowing us to ignore much of what consumer tools must digest, and to deliver extremely high quality and targeted results in as close to real time as possible.

So we wrestle the human/machine interface every day – and incrementally improve our technology and methodology to scale and still get the best results possible in information discovery.

SEC driving internet distribution

It's great to see Christopher Cox, chairman of the SEC, evangelizing use of the internet for investment information. It's coming like a train down the tracks and it's refreshing having the official body trying to move the market ahead of the train. I've commented on whether CEO blogs can create inconsistency from management - but at least, so far, the SEC has been somewhat supportive of Sun's push to use the web as an investor communication medium.

The issue of the potential for this being a problem for the over-50 crowd (as raised by the AARP) is real though. We see in our own customer base that some of our most aggressive, creative users are younger and our older clients are definitely more comfortable with a push model (email reports) that with on line access, RSS, IM or - what is bound to come next - widgets.

How to run a board meeting

I’m on my second company as CEO now, have run a public company, sit on two public boards and sit on several small private company and non-profit boards. It’s surprising, given the diversity of size and objective, how much there is in common between the good and bad practices of boards.
So – here are my top 10 things to pay attention to when preparing for, and running, a board meeting:

1. Plan the agenda – seems obvious right? But you need to remember the purpose of the board meeting when you plan it. It’s for corporate governance and advice. So to achieve that objective you must ensure, whether in the meeting or in the materials, that all the pertinent topics that need to be are covered: sales, R&D, marketing, HR, finance, legal etc.

2. Get materials out in advance – this is my personal pet peeve. Nothing annoys me more than a CEO not getting materials out. a) if s/he can’t be bothered to put the time in to prepare in advance why should I bother to put the time in to show up? and b) boards do significantly better work when they have thought through the issues on the table in advance.

3. Assume board members do their homework – see #2 – in my experience the good board members know their responsibilities and will read through what you send them so they are prepared. If they’re not willing to do that then maybe they should not be on your board.

4. Work on the hard stuff – see #1 and #3 – If you have your board’s attention for a limited period of time – be it 2 hours or 6 – you want to use the time as efficiently as possible. That means focus on what’s not working, not what is. Yes, a little bit of advertising on how great a job your team is doing is helpful for morale – but it’s not useful to the task at hand for the board. What matters is that you educate, go through the challenges and get the boards advice. Be open, trust and get the issues on the table so you can tap into their collective brain power. After all, what’s the worst that can happen? – you get fired – but the alternative is to sub-optimize your success.

5. Remember what it means to be CEO – that means you are the leader. Even if you have a separate chair it’s your company and you need to be in control of the meeting. Make sure the conversation is rich and nutritious (not rat holing), make sure it’s direct (not passive aggressive) and step in front of the bullets for your team.

6. Don’t surprise them. Good or bad. Again, you want the best of their brainpower in the meeting and most people do better if they have 30 seconds to think about something before they respond. Good news – email is OK. Bad news pick up the phone, call your board members and talk them through it.

7. Use dinners carefully – yes board dinners can be useful time but only if they are thought through so they mean something. Just going out to dinner to “bond” i.e. eat good food and drink good wine is not a benefit to most board members and frankly I’d rather be with my kids unless I’m really working. But, bringing small groups together to work on an issue, or bringing a presenter in to update the board on fiduciary responsibilities can be educational and still leave time for social interaction.

8. Have good AV – again obvious but so often neglected. It’s a fact that today you will often find one or more board members have to phone in. Just a side effect of our global economy. As a result, a quality phone system where those on the phone can hear what’s going on in the room is a must.

9. Always have an executive session & an outside director’s session. For the first, ask management except the CEO to leave, for the second ask the CEO to leave as well. This is important both for substance and for hygiene. The session with the CEO enables the board to have frank discussion about highly sensitive topics (for example if a board member believes the company should be broken up or sold – usually not a productive discussion in front of execs who are working 24 hours a day to hold it together) and about the performance of the executives. Then the outside director’s session enables the directors to express their brightest and darkest thoughts to each other. In both cases if you have the session every single meeting then there is no sense that “something’s up” when you go into executive session.

10. Finally - don’t let the meeting get you down – in my experience the most useful board meetings have been the ones that (in the moment) seemed the most brutal. That’s when you are getting your money’s worth from your board because they are telling you the truth no one else can tell you.

Other posts you may find helpful
How to run a board meeting part 2: in a market crisis
How to run a compensation committee

Tuesday, December 4, 2007

Search x.0

The fight is heating up among the search cognoscenti, with Danny Sullivan at Search Engine Land laying out his scheme for Search 1.0, 2.0, 3.0 and 4.0 and what each means. It’s an elegant, amusing article summarized as:

1.0 – on the page ranking
2.0 – page link ranking
3.0 – blending vertical search
4.0 – humanity in the mix

FirstRain uses search as the beginning of what we do- and by these definitions we’re a 4.0 kind of system. But, as I said, for us search is just the beginning. Having found and categorized, we then apply our pattern detection technology so we can find trends. So search is important, but it’s just a subset of what matters to make money for our customers.

Defining IP in search-driven research

Intellectual property in a business like ours typically refers to software technology. Code, algorithms, patents, methodologies – all required to recreate and build the product and protect it under IP laws.

In the business of search-driven research, it turns out that models are as significant a part of our IP as the traditional software code is. We have an excellent search engine and surrounding systems, but more importantly we have models of what’s interesting to the professional user. For every “topic” that’s to be detected we build adaptive market models which characterize the company or topic the user is interested in seeing - and because we have their portfolio or relevant topics we show high precision in selecting only documents that are of interest to them. (These we then send in a daily report of links and summaries or store in the online user database.)

We did not have this all figured out in the beginning. FirstRain is a classic case of working with a market to determine where the value is and then continuously course correcting the product until users say “yes!”. When we made the strategy switch in early 2006 to focus on investors first and then come back out to C-level executives we had a hunch that the topics (i.e. the models) that we would develop would be interesting but we had no idea how big a part of the secret sauce they would become.

Today we have team of analysts – over 100 people and growing – who develop and manage the analytics IP. We have developed high precision models for
- companies – representing 95% of the world wide trading volume
- industry topics
- competitors
- suppliers
- customers
- products
- markets
- events
… and the list of types keeps growing too. The more we work with the buy-side and our corporate clients, the more we see the richness of experience we can produce if we can only model what’s critical and filter out the rest.

And, no question, industry topics produce the most fascinating results. Knowing what investors care about on a security, when the ticker or company is never mentioned, is what produces the cream of the information.

The biggest lesson for me and my team was that we need to always pay attention to where the IP really is. We had done a great deal of work on analytics but had not catalogued it sufficiently well when I had a eureka! moment - realizing that the analytics IP was as fundamental as it is. That’s fixed now and a great side effect of the realization and subsequent work has been the excitement and ownership that’s now developed in the analytics team.

Monday, December 3, 2007

Exercise as a path to Culture

I blogged a couple of days ago about our holiday parties being a means to develop culture. Well, they are just one of several and the healthier one - that is starting to consume big chunks of my time - is athletic competitions.

We have put together a FirstRain team for the Napa Vineman Aquabike race in August 2008. It is entirely voluntary and none of us (employees) has done anything like this before. The Aquabike is a swim/bike race - a triathalon without the running - swimming in the Russian River and biking up and down hills in the Sonoma Valley.

Our team is a great cross-section of (fun loving or crazy - who knows) employees. We have:
- 7 from New York and 7 from California
- plus 2 spouses (both of whom are serious athletes so they'll probably wipe the floor with us)
- plus 1 customer (a triathlete who kicked me to start this project in the first place)
- 6 of the 17 are women
- 6 of the 17 are over 40
- 7 of the 14 employees are from sales, 4 from operations, 3 from G&A (yes, we're the overhead contingent)

We plan to train together as much as we can in the Spring/Summer, compete together and definitely celebrate together afterwards. Several of our employees who did not want to sign up are still planning to come and cheer us on - and I'm sure we'll need their encouragement.

Culture is about how you interact with each other every day; what kind of team you form; how people support one another through challenges. So a race like this will bind us even tighter (assuming we survive it!).

CEO departure - not a surprise

Ed Zander’s departure from Motorola, while not a surprise, is a sad testament to the fact that the company has not really found it’s footing in more than 15 years.

I sold to Motorola in the late 80s and early 90s while at Synopsys. Then it was a company focused on quality and the Malcolm Baldridge award. The people were high quality, but the pace was slow and there was not much vision for a unified strategy. Semiconductor was still strong – living on the back of the smash success 68000 and derivatives and all the action in those days was in the pager division. Cell phones were on the horizon but everyone had to have a pager.

Fast forward to a couple of years ago and Motorola seemed to be on a high with the Razr (definitely one of my favorite personal gadgets), but I remember doing a quick study of the company and deciding to stay away from it because it looked like a multi-division company growing on the back of a single product success. At least they had spun out the semi divisions into On and Freescale which were a capital drain and no longer fit the business model.

Now look at 2007 and consider that with corporate culture things rarely change in a big company. In FirstRain we pick up management arrivals, departures and internal transfers by identifying signals in the web that people are moving. We have been demoing using MOT for a month or so now because we picked up a significant senior management reorg in July and then some significant senior division level departures in November. I’d been watching these results and know that these types of patterns are often a portent that something’s up and the strategy isn’t working.

So reading this morning’s news that Ed is moving on was not a complete surprise. I feel for him though. Given the Motorola I have watched closely for 20 years now I think it would not be an easy company to run and breathe new life into. Hats off to him that he walked away from his possible settlement too.

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