Ruminations on Russia

Arun Sarin; Vodafone's CEO on 3G, Life and the Universe

Arun Sarin here giving a full interview to the FT on Vodafone's strategy. For those of you with a subscription here is the link. For those without, a quick cut and paste;

"But are we investing seriously? - the answer is yes. And the point is it's not just that we're investing in 3G networks which are an important piece but we're investing in 3G handsets, we're investing in 3G content, we're investing in 3G service delivery platforms because it takes much more than just some infrastructure and a handset out there . That's kind of 2G thinking. The 3G world is a little more complicated and requires a little more systems integration on our part to bring these new products and services to light."

The interviewer immediate follow up question was back to handsets, which as I have pointed out before is neither the question nor the answer to the future of wireless connectivity. How players control the service delivery platform ("SDP") is. Vodafone are a mile ahead of their competitors in this. I don't think that this is generally understood. Too many VC dollars are still being thrown at the handset end of the market and far too few in to the engine.

Which seems a little counter-intuitive. The telecom downturn has seriously hurt the incumbent telecom manufacturers from Ericsson to Lucent and Nortel and just about everyone else along the way. To make it worse their pain happened as the telco world and the IT world really started to converge. IBM will start to eat Lucent's lunch because Lucent cannot compete. To paraphase Claude Leglise from Intel Capital; whenever this firm of disruption occurs there is money to be made by start ups. And if the VC community was clever enough to spot it by VC's. However, I am not sure that this train has pulled in to the station yet. There are a few plays out there - some of which make more sense than others; Opencloud, Apertio, Appium amongst others fit that bill. Then there are a group that seem to, but to my mind miss the point - tw leading contenders amongst these are Aepona and BayPackets. Each of these companies covers a different part of the new network ecosystem. There are plenty others out there, these together with our bet, see below, are the market leaders.

Stovepipe solutions and high integration costs are no longer acceptable. Unless startups use technology to differentiate and protect themselves from resurgent TEM's they will lose business to better funded incumbents. This is not a game of incremental improvements.

Disclosure - we have a big bet in this market BET

ACOL Technologies

Blatant link venturewire to an investment we closed Monday. I have mentioned the CTO, Alex Shishov, before. The best Russian technologist I have ever met. It was great working with Amadeus and Apax - a good team.

Open Innovation

I have been doing some research in to the role of internal R&D and innovation in large corporations. Slightly behind the times I came across Open Innovation by Henry Chesbrough via Amazon. The core of the idea is expressed in this interview that he gave to IdeaFlow Creativity & Innovation IdeaFlow - Corante:

This distinction between open and closed innovation is at the heart of the book. Closed Innovation is fundamentally about scarcity of useful knowledge. In order to do anything, you have to do everything. It is inwardly focused, and deeply vertically integrated. It takes little or no notice of external knowledge and resources. Open Innovation is fundamentally about operating in a world of abundant knowledge, where "not all the smart people work for you", so you better go find them, connect to them, and build upon what they can do. It seeks ways to build upon and leverage external knowledge, and focuses internal activities upon filling in the gaps, and integrating internal and external knowledge into useful systems.�

IdeaFlow has just joined my Powermarked list of must reads. Chesbrough's book is at this very moment being Amazoned to my parents in the UK (no Russia branch just yet) where it will be great I'm hiding reading.

FT.com Home Europe: "Mr Blair said he had signed a joint letter to Romano Prodi, president of the European Commission, with the leaders of Germany, France, the Netherlands, Sweden and Austria, calling for 'budgetary discipline'." If ever there was a case of the pot calling the kettle black. I jsut about fell off my chair.

Games We Play

First is this article from the Economist Invaders from the land of broadband about the success of online gaming (as in games played online, for UK readers) in S. Korea. As if the South part needed spelling out.

The second is a headline $18mn investment by Highland and Polaris in to Turbine Entertainment here via VentureWire.

Third, I have been following SeeStorm for what seems like forever. Started out as an add on to IM and has morphed in to an avatars for mobile licenser. It seems to be taking off in Korea and Japan, having (very) limited success in Europe and absolutely none whatsoever in the US. I thought long and hard about investing in 2002 and was, rightly, rebuffed by my partners. I have been thinking long and hard about the same in 2003 - but to be honest don't have the guts. For those of you interested its worth researching potential revenues from low ARPU mass appeal apps on mobiles in Korea. They don't exactly make a company but they will make you smile as you build one.

The reason is that each region and, as the Economist article points out, countries within each region use mobiles / PDA's / smart phones / PC's and gaming devices differently. I used to think it was enough to be platform agnostic but its more subtle and harder than that. Furthermore, who ever thought that 3D virtual environments would ever make a comeback - which is what the Korean gaming world is all about.

There is definitely a gold mine to be made for the person who can work out what it takes to make this happen. What is absloutely certain is that what works in Japan, will only just work in Korea (S), will fail abysmally in Europe and won't even do that well in N. America. And that's just the means of delivery. The game, the nature of the game will have to be very specific.

To my mind this is a steer clear investment area unless your ability to connect with your eyes closed is very good.

Outsourcing Again

A classic piece of lowest common denominator journalism on Outsourcing hereOutsourcing via Rocky Mountain News

It probably would not be worth the effort to comment on it except that it makes the point that if you outsource then you cut off the engineering life blood that creates start ups. The fact that there is no lead in to the story or explanation of why it makes the claim does not point to the highest standards of either journalism or, more likely, editing.

3G - Focus on Handsets

A fair enough article as far as it goes. Yahoo! News - Third-generation mobile phones fail to connect in Austria

However, Mobikom not only faces problems with its handsets but also with its IN. As indeed does everyone, including 3. They cannot provide all the sexy services which journalists and pundits like to write about becasue they cannot roll those services out quickly and effectively. They are locked in to providing stove-pipe solutions to each service and that's a whole bunch worse than crappy handsets. Next generation IN will become a major story over the next 12 months.

Social Networking

He could not be more right if he tried. Which is not to say that someone wont' make money out of it - I just cannot see it being a way to get to the people I want to get to. VentureBlog on Social Networking The only reason that I will give to change my mind is spam killing email and we therefore use a different medium to make contact. I'm not sure that I believe that as a statement.

3G - But Not What the Business Plan Says

Vodafone plans data-only 3G services for Germany and Italy

Last night I was explaining to my wife why 3 (Hutchinson in the UK and Italy) was struggling. More importantly that Vodafone with its PMCIA card targeting buiness customers was getting it right. And there it was a journalist agreeing with me / and vice versa.

Boeing's Woes

Boeing's Failure / Airbus' Greater Bribery There was a fantastic article in The Economist sometime ago (sic - I can't find the link) about Airbus bribery and corruption. Not that the article used those words - the meaning was implicit.

Strange now that Boeing is suffering for the same reason. Strange that a French led company is not. Strange that there is no link between a Republican attack on Boeing and Yukos.

Russia does that to you - conspiracy theories abound.

Zero Sum Game

From today's FT. Does not require registration. It refers to Germanny and the Vodafone / Mannesman takeover. But it struck me as a phrase that would apply well to Russian business. I have referred to it before as a zero sum game. FT.com / Industries / Telecoms: "Foreign investors suspect the charges reflect a German cultural mindset of destructive social envy and a dislike of business success. "

More on Outsourcing

Red Herring interview with Gerard Fairtlough on the venture industry Venture Bouncebacks He makes some good points and some less so. There still needs to be a venture shake out. I think many people, and Gerard is one, have not thought hard enough about the outsourcing industry. Theoretically engineers can sit anywhere in the world, provided that the link between architecture, marketing (the link to the market) and management is strong.

Markets for early stage products is still predominantly in the west; that's where the marketing and management people will sit. I am not sure that it's really possible to build a product without closely linking marketing / architecture and engineers.

Outsourcing from Tim Oren

Tim Oren covers a piece from the NYT and a discussion on outsourcing here. Where I think that he may be wrong is his assertion that outsourcing may be good for nth degree programming, but less good for complete architectures.

The question should actually be; is out-sourcing is a good way to create products. The inherent question being whether marketing can interact with a time-separated programming center. We'll let you know.

Our most successful companies have foca both in the market and in Moscow - I'm not sure that it can all be done remotely.

More on Management

This time from Private Equity Online. Reflecting its European nature the magazine tends to be later-stage oriented. Yet the lack of management due diligence is stage neutral. The writer is pitching for work, nonetheless, some of his early comments are apposite. The right team for the job

Political Factions In Russia

A typically pithy and on-the-spot set of remarks from the Economist's Russia correspondent.

I make little effort to keep track of which unheard-of party with no ideology and no obvious support base represents which splinter faction of what clan within the ruling elite's three big groupings. It's enough to remember what those
groupings are:

- the siloviki, people linked to the security services, whom I always imagine as thin men in ill-fitting suits who spontaneously cause lightbulbs to fuse as they walk past them;

- the business-linked "family" - in my mind's eye, portly types with flashy cufflinks fearfully glancing over their shoulder to see if one of their bodyguards is planting a landmine under the armoured Mercedes;

- and the "liberal reformers" - intense, sharp-eyed, desperate men overloaded with files who have long since discarded the moral dilemmas that their work involves and live their lives trying not to pick fights with either of the other two.

But at any rate, the fact that at least 50 Duma deputies switched parties after the last elections is a good sign of how little the election itself has to do with politics and everything to do with who can manipulate the balance of power to their own advantage.

President Putin Hails Election as "another step in strenthening democracy" I suppose that principally depends on your definition of democracy. As his is something close to - I'll do what I want, when I want, to whomsoever I care to - then I guess democracy was strengthened.

It would be nice though to point to a truly democratic country where democracy is working; Tony Blair carries on Thatcher's assault upon Britain's "unwritten constitution." Bush stole the election and then employed Ashcroft to steal democracy under the banner of Homeland Security. However, Churchill had a point: democracy is the worst form of government, except for all those others that have been tried here

More on Khordokovsky (MBK); it would appear that the cat slipped out of the bag this week. We now all understand the meaning of minimal - its $10bn. Having previously said that this conflict was a battle between MBK and the Kremlin and not an assault on Yukos the lie was shown to be just that.

In a marvellous piece of cynicism the Kremlin has been repeating to anyone who wants to listen, and lets face we all do, that they have no intention of reversing privatizations. Of course they don't. They intend to divert the wealth created at Yukos in to their pockets. Privatizing it would mean that they could only steal cash flow. In short we have been asking the wrong question.

IBM GS � Another Step On the Road to Global Domination

IBM software and Global Services are going to be more closely aligned to better serve industry verticals (link to every newspaper and tech journal in the world.). Ever since IBMGS bought PwC Consulting it has (or was it always this way) been slowly ending its historical policy of being software / hardware agnostic. Sometime ago I believed that eventually this would eventually lead to IBMGS becoming just another services division of a large corporation. Well I was wrong. IBMGS is not just the 800lbs Gorilla it is the all encompassing Gorilla. Scott McNealy joked that of the $80bn that Bush requested to rebuild Iraq, 90% would go to IBMGS. Hate them if you must, but there is nothing else to do but work with them. They are after all the largest re-seller of Sun equipment.

What is more the convergence of telecom networks and IT will just add to their powerbase.

The only piece of news that cheered me from the announcement was the realization that for this strategy to succeed IBM Software is going to have to integrate a lot or 3rd party software to be able to build best-of-breed products. They cannot build it all in house though they do try. There will be space for ISV�s to build great products � as long as we understand that they will become a building block in someone else�s portfolio. My only concern is who do you sell to?

Om Malik on Sun's Problems. I think that he may have a point - they provide great equipment at a pretty good price point. Their problem is not that they can't get their PR right but that they have not got their sales comp in line with their revised strategy.

A sense also emanates from Sun that they would struggle to organize a piss up in a brewery.

An interesting report from Crescendo Ventures on investing in the Storage Industry Crescendo Ventures Report on Overspending it claims that there are a number of surprising results. Amongst them that the companies with the most cash weren't the most succesful. Firstly as a VC with a massively under-capitalised fund I am glad to hear it. The so-what that they draw is that it allowed companies to follow misguided strategies for too long. My take would be that it allowed the management to feel too comfortable and did not challenge them.

Treat em mean; keep em keen.

SAP Ventures Comments on Sales Teams I liked this post - salesman are whores. Pay them and they are happy; don't and they aren't. The unspoken link is don't bring in a charging salesman in to an early stage team. They go after the easiest accounts because they want to get paid and aren't that keen on market development.

Ed Sim on Capital Efficent Investing

Ed Sim from Beyond VC on Nov 19 writes about what I have been wittering on about since I started this blog namely Capital Efficient Business Models : You will have to scroll down to find it as I cannot work out how to go straight to the place.

His point is absolutely correct. Marketing costs may stay the same, but if you can create a product for a few million, smartly get the first product to market whilst running a low cost organisation then hopefully the initial and most painful burn will be limited. Once the product has real "traction" (presumably its a car wheel) then people can be hired to really sell the product. Given that these are always the most expensive part of a team hopefully they will be brought in commensurate with real sales opportunities rather than hopeful hype. At the end of this year all our companies will be cash flow positive. Some will require more cash to grow more rapidly. But if we cannot find it then they should be able to grow organically. Given that none of them were that expensive to acquire even a low growth scenario should see a reasonable return.

More from Ed Sim, this time on the US IT market. The Economy and IT Spending : "
It looks like the economy in Q3 grew even faster than we initially thought, 8.2% annual rate versus 7.2%. It was not too long ago that the Department of Commerce released numbers showing 7.2% annualized GDP growth for Q3. If you take a closer look, 'equipment and software' spending was at a 15.4% annualized rate. I obviously have concerns about the revised 8.2% GDP growth and certainly do not believe that is sustainable due to one-time factors like tax cuts and mortgage refinancings. While it is nice to see a 15.4% annualized growth rate in 'equipment and spending' for Q3, let's not assume that this is the beginning of a huge ramp-up in IT Spending. To bolster my thinking, I like to look at a number of data points. For one, Goldman Sachs recently issued its October IT Spending Survey. Its latest survey calls for an increase of 2% spending for 2003 versus a December 2002 survey which forecasted a decline of 1.1% for 2003 spending. So it is nice to see that the trend reversed in terms of IT spending, and that it looks like there is a small rebound happening. That being said, the October 2003 survey forecasts spending growth of only 1.3% for 2004, down from an August 2003 spending survey forecast of 2.3% growth for 2004. That is a negative trend and does not promise earth-shattering returns to IT Spending in the bubble years. As Goldman Sachs mentions, hopefully there is just a lag in terms of how the economy performs and where each company is in its budgeting process. If this is the case, we shoud keep an eye out for data from future surveys.

Another data point that I look at is how the fund's 30+ portfolio companies are performing. We have a number of companies in the Enterprise IT space selling security, storage, network management, wireless, and other related software. Some companies are performing extraordinarily well "