Burnham's Beat

What Will IBM Do?

Back in the 1990’s, Lou Gerstner helped engineer one of the great turnarounds in corporate history.  In just a few years, he took IBM from a cash hemorrhaging techno dinosaur on the brink of being broken into little pieces and turned it back into one of America’s most admired corporations.

To help facilitate its transformation into a services-led business, IBM made many strategic decisions but two of them arguably had particularly important impacts on the rest of the IT industry:

1. IBM decided it would effectively cede the network equipment business to Cisco via a “win-win” partnership.
2. IBM exited the enterprise application business and instead focused on getting ISVs to adopt IBM’s middleware stack.

A Vintage Strategy?
Most would agree that by tech industry standards these two strategies were very successful for a long time.  However as we enter the second decade of the 21^st century both strategies are also showing their age. 

First and most importantly, IBM’s alliance with Cisco has come to a sudden and, at least seemingly to many in IBM, shocking end.  For years the writing has been on the wall that the networking and Server/Mainframe worlds were on an inevitable crash course, yet IBM and Cisco still maintained publicly that they did not see conflict as inevitable.  It was much to IBM’s surprise then that early last year Cisco launched a line of data center servers.  At the time, most of the press ate up Cisco’s party line that this was about competition with HP, but I doubt that fooled anyone in Armonk, NY.  Cisco’s server launch was was the tech industry equivalent of Pearl Harbor; it was a public declaration of war against the single biggest technology company in the world by an upstart competitor thousands of miles to its west.  Much like the United States in 1941, IBM was unprepared for war with Cisco in 2009, but I suspect that it will have no choice to respond forcefully in the next year or so and its responses may well rewrite the networking industry map because, while IBM may not be fleet of foot, it is the equivalent of a tech super-tanker and once it turns and points its bow, watch out.

The other key strategic decision that IBM made, to stay out of the application business, did indeed help IBM develop a strong “ecosystem” for its middleware offerings, but it also provided Oracle with an uncontested path to consolidate the living daylights of the enterprise application space and that’s exactly what it did.  Fast forward 15 years and Oracle has gone from a very small, but pesky competitor focused on a single software product (databases) to a much larger and well diversified competitor with total software revenues just 10–15% less than IBM’s.  What’s more, through it’s acquisition of Sun, Oracle gained control of Java, the key technology underpinning much of IBM’s middleware stack and it also gained the ability to sell an entire “stack” of both enterprise data-center software and hardware, something that arguably only IBM could claim before .  It’s hard to see how IBM just continues to sit back and let Sun consolidate the enterprise application space, yet getting into that space would violate IBM’s detente with many smaller ISVs.

Thus IBM enters 2010 with two huge strategic problems on its plate:  1.  How does it respond to Cisco’s flagrant attack on its data-center turf.  2.  How does is deal with Oracle’s continued expansion within enterprise applications, as well as its rapid emergence as a legitimate “soup to nuts” IT provider.

Your Move Sir
At a high level, the enterprise tech industry, ex-Microsoft, is now consolidating around 4 $100BN+ market cap companies: CSCO, HP, ORCL, and IBM.  All of these companies, except IBM, have recently made major strategic moves with HP acquiring EDS and 3COM (largely in an effort to catch up to IBM and Cisco), CSCO moving into servers (in an effort to take markets from IBM and HP), and ORCL acquiring Sun (in an effort to compete with IBM and HP). 

IBM, the biggest and most established of them all, has arguably yet to make a major move but strategically it appears as though it may be forced to do something big soon.   For example, it could bring the fight to CSCO’s heartland by acquiring Juniper or just head-off Cisco in the data center by acquiring EMC. Then again, maybe it will take on Oracle and acquire SAP.  I have no idea what IBM will do, but I do know there are a lot of smart people at IBM and I can’t believe they are very happy about the way the playing field shifted last year.  Perhaps they’ll do nothing but double down on their services business, and wait for their competitors to be tripped up by their overly ambitious expansions, or maybe they will open up a case a whoop ass and make some stunning moves of their own.  Whatever they do it will be fun to watch because IBM is still the super-tanker of enterprise IT and whereever they go they are guaranteed to leave a very big wake.

The Consumerization of Enterprise VC

(My day job is investing in the public markets, but I have a small personal portfolio of private investments, mostly angel investments in Internet and software related startups. In the past six months I have spent some time helping a few of these companies raise venture capital and this is the second of three posts I am writing on some of the key trends I have observed during this process.)

In my last post I wrote about how VCs were essentially abandoning the early stage Internet market and instead waiting to see which firms gain traction before placing any bets.  As I said before, I don’t have a problem with this trend in theory because it makes rational sense given how the consumer Internet market is evolving. 

However, a more personally disturbing trend that is emerging in the VC marketplace is one in which VCs are taking the behaviors they have learned in the consumer Internet space and trying to apply them to the enterprise IT space, especially to any SaaS based software/service (which is basically a huge chuck of enterprise IT start-ups these days).  Indeed it is not uncommon for enterprise SaaS startups to get the same line from VCs that consumer Internet companies are getting, namely “come back and see me after you have a site up and a bunch of customers”. 

A Whole Different Ball game
At first blush, such demands don’t seem that unreasonable, after all, many of the same trends impacting the consumer Internet space, such as the decline of up front capital costs, are impacting the enterprise IT space.   However, the enterprise IT space remains a very different animal from the consumer Internet space.  Three key differences between the two are:

1. Enterprise customers don’t do betas. Consumer Internet companies can recruit beta customers easily because they are literally giving something away that while useful, is still relatively trivial in the grand scheme of most people’s lives.  In contrast, what enterprise manager is going to risk their career entrusting sensitive data or business processes to a site that officially declares itself as not ready for prime time?  Sure they might help test the site with dummy data and provide feedback on it, but in general “beta” is not a good word when it comes to recruiting enterprise customers.  This means that for any enterprise site to get real traction it has to formally launch the site and be willing to represent it as reliable, scalable, and secure from Day 1.
2. Enterprise SaaS infrastructures are inherently more expensive than consumer infrastructures.  While building a reliable, scalable and secure enterprise web service is a lot cheaper than it was 5 years ago, it’s still relatively expensive.  Enterprise customers tend to ask pesky questions about things like data security, disaster recovery, peak capacity, application integration, financial viability and even (gasp!) customer support. At most consumer Internet sites these questions are never asked, but enterprise sites have to put these kinds of things in place before many companies will even consider trying them.  Yes, you can build an enterprise site for $250K, but no enterprises will actually use it until you support that site with a lot of expensive infrastructure and services which makes enterprise sites inherently more expensive to build and operate.
3. Enterprise services must still be sold.  Most consumer sites have a very simple business model:  give away your service for free and hope enough people like it that you can start to make some money from advertising, referrals, and perhaps subscription frees.  In contrast, most enterprise sites have no realistic hope of ever getting significant advertising or referral revenues and thus they must charge each and every customer.  Sure, they can come up with innovative ways to lower up-front adoption costs, such as “freemium”, “try before you buy” or what have you, but at the end of the day they still have to convince companies to pay them money and that takes sales and marketing in the form of lead generation, inside sales, and pre/post sales support, at a minimum.  Yes,  that’s less expensive than the old model of hiring $250k/year direct sales reps to go elephant hunting, but it still costs money.

Net, net, despite the fact that enterprise IT sites look somewhat similar to consumer Internet sites, the fact remains that enterprise IT sites are still significantly more expensive to build and operate.

Shrewd or Lazy?
Given all this, the position that VCs are increasingly taking in the space, that of  “come back when you a have a product and customers” is highly frustrating for enterprise entrepreneurs.   Should an enterprise site be fortunate enough to build out its entire infrastructure and then recruit a bunch of customers to its platform, the question really becomes: What in the world do I need a damn VC for when the hard part of the startup is over?!?   Granted, expansion capital will still have a role, but by asking enterprise entrepreneurs to go build and operate fully functioning businesses before they will even consider making an investment, VC’s are establishing an awfully high Ask, one that has some of the same implications as it does in the consumer space, namely it makes angel investors the king makers and creates a selection bias in the expansion stages towards “small ball” investments. 

Personally, my problem with VCs doing this is that I don’t think it has the same rational basis as it does in the consumer space.   VCs all know that you can’t just wing it with an enterprise business.  They know that enterprise customers care about financial viability, customer service, and infrastructure and that all those things take money.   The only thing I can come up with is that the consumer space is training VCs to be lazy investors.   Why go out and do a lot of work to understand a company’s target market, gauge potential customer interest and assess the competitive landscape, when you can just declare success a crap shoot, go golfing and tell someone “call me when you have traction”.  I understand the attraction of such a stance, but whereas it has some basis in consumer Internet because it’s arguably anyone’s guess what big trend is going to hit the tween set next, within enterprise IT, there is usually a very objective set of demonstrated market needs and you know that companies will pay for products that cost effectively meet those needs.  I guess what I am saying is that applying the same set of investment criteria to enterprise IT startups as you apply to consumer Internet startups strikes me as intellectually lazy and the anti-thesis of true venture capital. 

All that said, I don’t believe that this is the predominate mentality within enterprise IT investing just yet.  It’s just that over the course of the past year or so I have seen the trend gain more and more prominence.  For the sake of innovation and a healthy enterprise IT market, here’s one trend I hope gets nipped in the bud.

2008 Software Stocks: An Oveview Plus The 10 Best and 10 Worst

While software stocks got hammered in 2008, they basically declined "in line" with the rest of the market as the total software market cap was down 40.9% which is just about equal to the NASDAQ's 40.5% decline and just slightly worse than the S&P 500's 38.5% decline.  As I noted in my piece on 2008 Software M&A, total software market cap now stands about 25% lower than it was five years ago.  Ouch!

Out of 231 year-end stocks in the software sector, the average stock declined -45.8% indicating that large caps out performed small caps during the year.  The median stock declined -49.3% or put another way, about 1/2 of all software stocks declined by just about 50% or greater during the year.  Yes, it was as bad as you think it was

Just 16 out of 231 or 7% of software stocks managed a gain in 2008.   For amusement's sake, here's a list of the Top 10 stocks in 2008:

Top 10 Best Performing Software Stocks of 2008

A couple interesting notes about this list of winners:

1. Medical Administration was the clear "Defensive Niche" of the year winner in software.  While overall the sector still declined 8.5% (the next best sector, network management, declined 20.4%), it obviously rode out the market much better than anywhere else.  Some of this out performance undoubtedly was due to speculation that the health care sector will benefit from an Obama administration.  It will be interesting see if that actually turns out to be the case in 2009.
2.  6 of 2008's Top 10 actually declined in 2007, a year in which the software sector was up 14.2%.  This indicates that most of these "winners" were stocks that recovered from poor fundamental performance in 2007/2006. 
3. Autonomy and S1 were the only stocks to the make the Top 10 Gainers that also posted double digit gains in 2007.  Autonomy was up 72% in 2007 while S1 was up 32.5% in 2008.  S1's gain is all the more impressive given that it's core customer base is composed of retail banks.

In terms of losers, the competition was fierce, but a handful of stocks went the extra mile and were able to qualify for the Top 10 Losers in 2008.  To gain entrance to this elite group, a stock had to decline by a minimum of 85%!

Top 10 Worst Performing Software Stocks of 2008

Not much to say about this list other than it was interesting to see that three gaming companies made the list (Atari would have made it too but it went bankrupt earlier in the year) which suggests that gaming is indeed a "hit or miss" sector and this year it had quite a few misses

2008 Software M&A: Year in Review

Unlike the Internet M&A space, the public software company M&A market was actually fairly robust in 2008 with 33 deals worth over $40BN closing.  That's actually up from 2007 when 28 deals worth $18.5BN closed.  That said, most of the increase has to do with several large, complex deals announced in 2007, including Nokia's purchase of Navteq and TomTom's purchase of Teleatlas, taking almost a year to close, but it remains that despite the terrible market, public software company was actually fairly robust in 2008.

2008 continues the long term trend of increased public software company M&A.  As the graph below makes clear, software M&A has been in a solid uptrend since 2004. 

# of Public Software Company M&A Deals

As outlined initially in a post several years ago on the incredibly shirking software industry there are a number of trends driving increasd M&A in the software space and these trends appear to accelerating.  The total number of public software companies decreased 11.5% in 2008 vs. 11.2% in 2007 and 11.1% in 2006.  Total market cap of the software sector is now $618 BN, down 25% from 12/31/03.  Good lord.

One interesting observation is that this consolidation does not appear to be driven from the "top down".  Despite significant M&A activity on the part of the "Big Four" software companies (Microsoft, IBM, Oracle, and SAP) over the past five years, their share of the software sector's market cap has actually decreased from 70% to 68% over the past 5 years. I wouldn't have believed them if somebody told me this before today, but it's true.  Granted, most of this decrease has to do with a 27% decline in Microsoft's market cap in the last 5 years (16% if you exclude their $3 special dividend).  Of the Big Four only Oracle has seen it's share price and market cap increase in the last 5 years. What this suggests is that consolidation within the software industry is taking place at all levels and that the largest software companies are ultimately not really taking share from the market.   Pretty much counter intuative to conventional wisdom within the software space, but right now that's what the numbers say.

Click on this link for a complete list of all the public company software M&A deals in 2008.

2008 Software IPOs: Year in Review

While the Software sector did not fare as poorly as the Internet sector when it comes to IPOs in 2008, it did not do much better.  In fact it did just 1 better; as in 1 IPO for all of 2008. This is obviously the smallest # of Software IPOs since we began compiling a list of them 5 years ago.

Who was the lucky winner?  It was a security software company called ArcSight (ARST).  ArcSight managed to get public on Valentines Day, 2/14/2008, at a price of $9.00/share.  Things were looking grim for ARST in mid November with the stock trading close to $4/share, but they fortuitously reported a "beat and raise" quarter in early December and the stock rallied furiously.  So much so that Arcsight closed the year at $8.01, off only 11% from its IPO price.

Other than Arcsight, the Software IPO space was a quiet as a country mouse and based on the paucity of recent S1 registrations it will be awhile before there are any more Software IPOs to speak of.

Dear Microsoft: Please Buy Plaxo

Dear Microsoft:

I saw over at TechCrunch that Plaxo is for sale.  Now, I realize that you guys may not know what Plaxo is because you didn't create it and it isn't located within 25 miles of Redmond, WA, but let me explain to you why I think it might make sense to part with a very small portion of your $21.5BN in cash to acquire it.

You see Plaxo is, in theory, one of the single most useful plug-ins for Microsoft Outlook.  I say in theory, because Plaxo is only useful to the extent other people you know also use it.  That's because Plaxo automatically synchronizes contact details between yourself and other Plaxo users.  In theory, if everyone used Plaxo, then your contact list would always be up-to-date and 100% accurate.  This would be fantastic for me and just about every other Outlook user because it would not only insure that we have always have accurate contact data but it would eliminate the numerous annoying e-mails we get from people throughout the year who are changing jobs, cell phone numbers, etc.

As one of the earliest adopters of Plaxo, I remember feeling giddy at the prospect of everyone soon adopting Plaxo and thereafter entering into a state of perpetual contact bliss.  Alas, this never happened as a result a lot of creepy spam-like user acquisition strategies and other generally bone-headed moves by Plaxo.  Sometime around 2005, I entered into a state of depressive resignation that my Plaxo-inspire contact bliss would never be realized, but now with the "leaked" news of their hoped-for sale by their bankers, my own hopes have been raised that contact nirvana may yet be achieved.

Why should you guys in particular buy it?  Well I can think of three very good reasons:

1. No one is in a better position to have Plaxo reach its goal of near universal adoption than you guys.  You have the clout to embed Plaxo into Outlook.  In doing so, you would practically guarantee that adoption would skyrocket and as adoption skyrocketed the perceived and actual value of Plaxo to its end users would also skyrocket.
2. Plaxo recently released something called Plaxo Pluse, which is basically a social network built on top of your contact list.  This is a pretty interesting idea and one that holds great promise in existing professional circles where someone's contacts are basically their social network to begin with.  By supercharging Plaxo adoption, you could also rapidly grow Plaxo pluse which would very quickly create a highly credible competitor to Linked-In and probably give you a great chance to establish a professional version of Facebook.  What's more you could buy 100% of this social network for far less that the $240M you shelled out for just 1.6% of Facebook.
3. What with all the other things you guys have going on you may not have noticed that Outlook really hasn't added a significant new feature since, oh, let's be generous and say 2001.  I can assure you as daily user I have noticed this, especially as other mail clients have rolled out all manner of cool new features.  Sure you've added support for all manner of obscure Microsoft products such as Groove, Sharepoint, Microsoft CRM, etc., but in terms of actually adding new features that make my daily task of sending e-mails, scheduling events, and contacting people, I might as well be using Outlook 97 for all I can tell.  Yes, you bought LookOut and attempted to integrate indexed-search into Outlook, but the Windows team screwed this up miserably when they insisted that the whole thing be integrated into Windows Desktop Search.  Now I know you guys are great developers and all and that no one else appreciates the massive complexity of adding features to a mail client, but perhaps you guys could suck up your pride a bit and actually go out and buy a feature that is truly useful to your patient, but increasingly suffering users.  After all, if there's one application that I spend the most time in, its Outlook, yet this application seems to have been completely devoid of innovation in recent memory while folks such as Zimbra and GMail make it look like it was coded in Fortran in the 70's.  So, do us dumb-ass end users a favor and throw us a bone, add something new, sexy, and truly useful to Outlook (and don't screw it up the way you did LookOut).

Now I know that buying Plaxo won't be easy for you guys.  After all it's a hosted service that uses the Internet and does not take an hour to install or require you to type in a 30 character sequence of random numbers and letters.  Still, take it from me, it's actually a useful application and it has the potential to help reestablish the relevancy of Outlook in an age when it is increasingly looking like it will soon go the way of the dodo bird.

Sincerely,

Bill

Top 10 Software Stocks of 2007

2007's list of Top 10 Software Stocks is a mixed bag.  There is an IPO, a few turn-arounds, some SaaS companies and some security companies, but no consistent themes.  To be sure, Software as a Service and appliance-based software remain perhaps the most important software themes right now, but they don't dominate the Top 10.

To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service.  So, without further ado, here are the Top 10 Software Stocks of 2007:

1. ZIXI
   Price Change: 287% Ticker: ZIXI
   Comment: Pioneer in SaaS-based digitally signed e-mail and prescriptions sees stock soar as revenue growth picks up and speculators target stock.
2. VM Ware
   Price Change: 193% Ticker:VWW
   Comment:  The software industry's most anticipated IPO of 2007 lived up to its top billing.  VM Ware dominates the rapidly growing virtualization space and the market has rewarded it with a premium price.
3. Phoenix Technologies
   Price Change: 186% Ticker: PTEC
   Comment: Living up to its name, PTEC rose from its own ashes in 2007 on the backs of successful restructuring and new management team.
4. BlueCoat Systems
   Price Change: 175% Ticker: BCSI
   Comment: BlueCoat saw rapid growth in its core markets of WAN security and acceleration as well as increased adoption of appliance-based solutions by the security market in general.
5. EBIX Inc.
   Price Change: 162% Ticker: EBIX
   Comment: EBIX accelerated in 2007 as its focus on providing Internet solutions to the insurance industry helped it rapidly grow revenues while avoiding any fallout from the problems hitting the rest of the financial sector.
6. Innodata Isogen
   Price Change: 148% Ticker: INOD
   Comment: Innodata saw revenues accelerate as its "flat earth" approach to content management and production gained favor with customers.
7. Vasco Data Security
   Price Change: 136% Ticker: VDSI
   Comment: Years of trying to convince banks to deploy authentication software and tokens (as well as a few hackers making some big scores) finally paid off in 2007 as Vasco benefited from a  surge in interest in multi-factor authentication.
8. Broadvision
   Price Change: 130% Ticker: BVSN
   Comment:  After a near death  experience in 2006, Broadvision bounced back as a stable and profitable player in the content management space.
9. Concur
   Price Change: 126% Ticker: CNQR
   Comment:  This SaaS poster child benefited from its domination of online T&E reporting as well as software investor enthusiasm for all things SaaS.
10. Taleo
    Price Change: 118% Ticker: TLEO
    Comment: Taleo saw its stock rise as investors began to recognize the importance of the talent management sector and wanted to own the #1 player.
    

Stratify: A Post-Bubble Success Story

So Iron Mountain, the world’s biggest record management company, announced today that they are going to acquire Stratify, the leader in legal eDiscovery,  for $158M in cash. Stratify just happens to be the first early stage investment I ever made and I thought I would write a bit about the deal because I think it’s an interesting story of a “bubble” company that went through some very tough post-bubble times but ultimately achieved success thanks largely to the perseverance and flexibility of a great team. This is a long post but I think VCs, entrepreneurs and investors will find many of the details interesting.  Before I get into that though I just want to congratulate all the people at Stratify, especially George, Meena , Joy, Sanjeev, Hakan, and Ramana.  You guys hung in there in the face of a lot of adversity and you deserve all your success. 

A Bubblicious Beginning…
I made the original investment in Stratify back in September of 2000, although it wasn’t called Stratify then it was called Purple Yogi and it wasn’t focused on legal eDiscovery back then either , it was focused on a “widget” that automatically categorized news and information in a way that enabled consumers to discover related information easily.   Underneath the widget was an incredible unstructured data management platform built by a team of technology “rock stars”.  While Purple Yogi had undeniably amazing technology (man was it cool!), its business model was a little less impressive in that it really didn’t have one, which kind of explained why it didn’t have any revenues at the time either.  I am embarrassed to say it now, but I invested what was clearly a crazy “bubble” era valuation in their first round of VC funding. That said, 2.5 months after we put that money in, the company raised another round of capital from a new lead investor at an up-round valuation and I was looking at a nice mark up on my first early stage deal in less than 3 months.  I had gone from crazy to genius in 3 months!

Reality Sucks
Reality soon set in though.  As the consumer advertising market collapsed in the wake of the bubble bursting it was clear that Purple Yogi wasn’t going to be making any money selling advertising alongside its widgets, so we decided to focus the business on building an enterprise version of the technology.  This had been part of the plan all along, but it now became the sole focus of the company.  In conjunction with the new focus, we brought in a very accomplished enterprise-focused CEO, made a lot of painful staff reductions, and changed the name to a more corporate sounding “Stratify”.

The newly christened Stratify focused on building a world class unstructured data management platform and thanks to its fantastic tech team it quickly had an awesome product.  For the next two years Stratify tried its hardest to make this business work and it actually had a good deal of success selling to some of the most sophisticated buyers of information management software in the world.  The only problem was that every sale was like fighting trench warfare because Stratify was selling a very “heavy” traditional enterprise software product that not only required customers to write a very large up front software license check, but also required them to make significant investments in ancillary software and support services.   What’s more, because Stratify’s software was so sophisticated and so high-end the addressable universe of potential customers that could A) understand the value it brought and B) had a big enough problem to justify buying it was actually pretty small. The reality was that they had a fantastic product in what was effectively a very small market.  Everyone put their heads together to try and figure out how to build the business faster, but in many ways the company was stuck.  And then something totally unexpected and very fortuitous happened:  I got sued.

Thanks for Suing Me!
In late 2002 I got sued because I was on the board of another company that was embroiled in a legal dispute with its founder who decided to sue the board and company.  As anyone who has had the pleasure of getting sued knows, one of the first things that people do after getting sued is that they collect all the information, typically mostly e-mails, surrounding the issue(s) in question and review them to try and see what the facts of the matter are.  Shortly thereafter you are usually required to give most of these e-mails to the person suing you in a process that lawyers call “discovery”.   As I tried to sift through the morass of e-mails related to this case, I immediately thought of Stratify and asked the CTO if it might be possible to use Stratify’s system to review the e-mails.  The CTO told me that it was in fact possible and that the crack tech team had actually been working on some skunk projects that could be adapted to this purpose.  They quickly cobbled together a makeshift solution and after some initial tests we were all uniformly amazed at how well the system performed and how much easier it was to review e-mails when Stratify’s technology had been used to filter and classify them first.  I was even more amazed when I asked some lawyer friends and they told me that large law firms can easily pay $500K to review e-mails for a single large case.  That sounded like a very promising market.

As it happens, at the same time that we were just starting to think about legal discovery as a potential market for Stratify’s technology, a large software company, who had been flirting with the company for awhile, made a surprise offer to acquire the company as they sensed that due to investor frustration with the slow growth of the enterprise business they might be able to acquire the deal on the cheap.   While I personally thought that there couldn’t be a worse time to sell, practically every other investor wanted to take the deal. They were fatigued and generally freaked out by the market, which at that point in early 2003 was just about reaching rock bottom after almost 3 years of declines.  We settled on a compromise where we took the existing cash in the business and bought out everyone that wanted to sell, which turned out to be almost everyone but us.  After closing that transaction, I set out to try and raise another small round of funding from other VCs and despite a few months of trying I didn’t get a single taker, despite the fact that the legal eDiscovery business had quickly moved from product concept to making a few large sales in less than 6 months.  Nobody was in the mood to take a risk back then.

A Perfect Match
As it turned out though, the legal discovery business not only began to pick up steam, it was quickly becoming clear that the opportunity was even larger and more attractive than we had hoped.   It was like night and day from the enterprise software business.  Instead of 9 to 12 month sales cycles we now had 2 to 4 week sales cycles.  Instead of having to get internal IT to sign off on a laundry list of integration and implementation issues, we sold the product as a fully hosted SaaS solution that was up and running in a matter of days.  Instead of making one big sale per customer, we could make numerous small sales, often to the same partner at a law firm.   Finally, instead of having a very small set of potential large enterprise customers, we now had every law firm in the world and any person or company that had been sued or was suing someone as a potential customer.  Business was so good that Stratify stopped trying to raise the extra capital from VCs and in fact never raised another dollar of equity financing.

I had to resign my board seat at Stratify when I left Mobius, but for the next few years, with the able assistance of Jason and Chris, the team kept building the eDiscovery business to the point that it was clearly a very successful business.  I stayed in touch with the team and tried to offer encouragement and assistance, but they didn’t need any help; they finally had a market and a business model that took full advantage of their fantastic technology.  With growth and success came multiple suitors and it was inevitable that one of them would offer a deal that made too much sense to pass up and that’s exactly what happened today.

Lessons Learned
I learned a lot of investment lessons from Stratify, the most important of which are:

1. Don’t underestimate the value of a great technology team.   Great tech teams can quickly adapt a product to suit changing markets and priorities.  They also create products and technology with lasting value that can be leveraged in multiple ways.
2. If at first you don’t succeed, find a new market and/or a new business model.   It’s often said that very few start-ups achieve success with their original business plan and after my Stratify experience I believe it.  Start-ups should always keep an open mind about potential changes in business model or market focus that might increase the chances for success and should be honest with themselves when it is clear that they are “stuck”.
3. When everyone else is selling, it’s not a bad time to think about buying.  In the public markets they call it capitulation; in the private markets they call it fatigue.   It’s hard to fight the urge to run with the herd, but if you can, you can often make a lot of money.

Venture investments can be real roller coasters.  Stratify went through two business model changes before they found the market, model and product that clicked .  Through it all a core team of people stuck it out and ultimately built a great business that everyone can be proud of. Congrats again to all involved!

Contributors Wanted: M&A & IPO Transaction Lists

The other day I published some lists of M&A and IPO transactions in the Software and Internet industries.  A reader made an excellent suggestion that I should turn those lists into Google Spreadsheets and then allow other people to contribute to and use the lists.  This is exactly what I have done and I am now inviting anyone else that would like to contribute updates/edits to the list to e-mail me (just click the "E-Mail Me" link on the left) and I will add you as a contributor to the list.  In return for becoming a contributor you will get several privileges:

1. You will be able to update, edit, and expand the various transaction lists as you see fit.
2. You will be able to use the transaction lists as you see fit.  This includes republishing them on your own blog or website, turning them into an RSS feed, and manipulating them via Google Spreadsheet's APIs. Go crazy, I don't care.
3. Invite other people to contribute and collaborate with the rest of us.

To contribute you will need a Google ID, if you don't have one you can sign up here.

Hopefully we can harness the power of our collective efforts to provide some pretty useful transactions data that will be useful to a wide variety of people.  BTW, I reserve the right to kick out any "contributors" who are free loading and just trying to pick up good content for their site.

As an aside, it's interesting to think of how projects like this may dis-intermediate some of the data brokers that collect, collate and resell this data (such as Factset).  For example, in the financial services industry there are several services that re-sell transactions data to people.  Those folks had better hope projects like this don't take off!

Software and Internet IPO and M&A Lists

Every month I keep a record of all significant public company activity in the sectors I am most interested  in: Software & Internet.   I keep records of all IPOs in those sectors as well as all public company M&A.  I've decided to try out Typepad's relatively new "page" feature by open sourcing these transaction lists.

The links should be good forever and I will try to update the lists each month as I already do this internally.  The lists start in 2004 and are current as of 5/30/07.  Recently announced M&A deals are not listed because they have yet to close.  It's kind of fun to take a walk down memory lane, and see just what has happened over the last few years in each sector.  So without further ado here are the lists:

Internet IPOs
Internet M&A
Software IPOs
Software M&A

If you see anything missing or anything that needs a correction just e-mail me.