Ruminations on Russia

Telephony Software

Niklas Zennstrom on the emerging realization that telephony is just software; a fact that anyone in the telephony world cottoned on to at least 5 years ago - its just taken the software world a while to catch up with the practice. Link via A VC. As with any recent convert they have a habit of skipping over inconvenient facts and making statements that are not based in reality. Or at least in any reality that we are likely to face in this investment cycle.

The main thesis of his argument is accurate, provided that we stick to fixed-line networks.

"One key factor is that when telephony becomes a software application, it will live on the edges of a network. There will be no centralized control. Telephony development cycles are still very long. But their carriers' services are very much commodities, and there isn't much differentiation.

When we can change telephony to an application, we'll be able to change the economics of it. That will increase software innovation, new products, services, features. And that will be in the hand of small, nimble, software development companies. There will be higher competition, and the services will live on the Internet."

Hoever, he overstates his case. In this generation of telephony software, JAIN SLEE-based advanced intelligent networking, it takes less than a month to build and deploy an enterprise VPN. It takes less than one day to build a SMS marketing app, or location-based service; i.e. if you are watching Euro 2004 / the Yankees etc live from their stadium then you can get free calls over such-and-such network. These services are available today with some mobile providers in Europe, none in the US (albeit one fixed-line provider could if it had a marketing department worthy of the name,) and increasingly across Asia. Becasue the mobile operator is capable of gathering information from its network they are able to provide considerably more intelligence in an application.

The Internet is the ultimate stupid network. Client-side software cannot completely replace IN and that "information from the network is needed to provide new applications. And its the new applications that are supposed to pay for giving voice (still the killer app) away for free. Without which Skype and the like remain disruptive tecchnologies and not disruptive business models. I continue to believe that network ownership provides the information that is required to provide really innovative applications.

The article goes down hill a little after that:

"There will also be increased robustness. If you have a switch go down or a gatekeeper, that's not a problem to the end user. They can go to the Internet and find another route of communication. That will not be a problem for a decentralized network."

Unless of course the switch / node etc happens to be the one to which you are connected. The quality of service difference between my ISP and my mobile provider is the difference in call completion between 80% (ISP) and mid-90's (Vimpelcom). Move that quality differential to Europe where Vodafone et al really does buy equipment with 99.999% relaibility and any piece of network software has to have the same reliability. He also continues to believe that existing networks are centralized - they are not as decentralized as the Internet - but intelligence is increasingly at the edge and controlled by the same software of which he talks.

He goes on to make some good points about the commoditization of voice. Which as an overall point even the FCC gets. However, to Skype, voice is just another form of data, albeit one that the "higher quality" Internet can cope with, whereas video is, as yet, not enterprise standard. I suspect his emphasis on the death of voice is poorly masked marketing. As is the plea not to be regulated. VoIP should not be regulated, not because its not a monopoly. His desire not to be regulated is because Skype, and others, do not want to have to guarantee connections for emergency calls. It's business model precludes it from taking responsibility, but it also won't take responsibility becasue their QoS is not good enough.

My bet stays with the cable companies, the telco's that are willing to innovate quickly and Vonage - in that order. And that's before we start talking about Skype security issues.

Pitch Me This

From Brad Feld on what questions a pitch to a VC / me should include and why PowerPoint is so badly used. Feld Thoughts: The Torturous World of Powerpoint.

Please, please, please if you are pitching read this first.

Stock Options

A leader in the FT of 21 June on the cash flow impact of options. The title Will reform pull the plug on technology profits? (requires subscription) might give you a hint as to the writers initial leanings.

The net transfer of wealth diagrams at the bottom of the page are instructive. The article suggests that the furore over options is a back lash against the expose of how much value is being transferred from owners to employees. Over-stated I would imagine. A buy-side analyst worth his pay packet will already have factored in the dilutive/cash-flow impact of stock options. The greater issue is their ability to align interests all the time, not just when things are going well. Not being particularly well versed in motivations in large companies, my comments will be limited to start-ups (though they are inherently the same for people who value their work rather than their ability to climb the corporate ladder.)

When do start-up founders / employees worry about stock options?

a. When things are going well
b. The day they join
c. Every new financing round

When do start-up founders / employees worry about cash remuneration?

The rest of the time.

In particular stock options have almost no impact on employee behaviour when life gets difficult (sweat equity yes, options no.) As the article points out there is a growing feeling that options are a poor way to incentivize employees.

Not that I am trying to do away with options altogether. Better a stock option than cash, especially when the cash is limited. But lets not pretend that a talented sales guy is tied to the company (aligns his interest with yours) through stock options. Not being seen to fail is a better incentive.

Which leads to the follow on question. With what do you replace stock options? Maybe like democracy they are the worst system we have; except for all the others.

RSS and email

A good post here from Many-to-Many on ID and push versus pull communication models. Because I am looking at a deal that crosses in to this space (P2P information updating; this time push versus pull) the post touches upon a number of the areas that I think about.

I think that both Ross and I exist outside the big company way of doing things ("behind the firewall) and therefore think about email in a different way from an IBM'er. Michael Sippey comment makes the point better than I can. He concludes; "We�?re doomed to a life of infoglut, push or pull!"

Maybe the question we need to be asking is not trusted versus untrusted, push versus pull; but restoring quality of information. Is it really better if a meeting note is posted to a corporate blog-site or mailed to the everyone who might want to know about this. The same information has different meanings to different people. Since I started pondering corporate information networks I cannot count the number of times that I have been told that the seemingly useless dissemination of information (cc; all) has resulted in a bad decision not being made byforcingg someone to turn up to a meeting with additional information.

Whether the information is pushed or pulled matters not. We have to read an enormous amount and discard 99% of it so as not to miss something.

With one of our companies (a $5mn+ 2nd year start-up) they are blogging the softer elements of sales/marketing meetings. I receive the RSS feed more as an experiment in communication than trying to play a role in product marketing. The writers are all "trusted" emailers and the VP sales, a founder and board member, will regularly email me as well. He'll get in to my inbox whether he pushes or I pull. However, I rarely get informational email from the company, instead I get actionable email. I pay more attention to the actionable email when that has to be dealt with because they want me to pay attention. And when I set aside time to be informed I get more out of that. Better quality information.

You could argue that if I managed my time better I would achieve the same purpose.

More On Mobile

Earlier today I had a mini-rant on the US not getting mobile services then via Om Malik comes this super rant from Russell Beattie Where's the Mobility? It took me a while to get through the comments so I have not had a chance to get the rest of his blog but I agree with the theme of what he says if not all the content.

First of all the means of communication is (relatively) unimportant. There are great things to be said for CDMA2000 versus W-CDMA v's WiFI, WiMax and on and on. In short there are inherently better ways of delivering bandwidth to the place and time that it is required; some suffer from poor economics others from integration issues, others still from pure stupidity by carriers. However, the issue is not the means of connectivity but the services that can be provided by connectivity. Just because a person's connectivity is limited to a desk top PC does not reduce the communication services that he can access via SIP (to his machine) and via SS7 to other communications devices.

It is the services that matter; these used to be called apps. To build them quickly and to utilize all the services that may be required to make them easy to deploy and easy to market you rapidly move in to the great convergence that is rarely covered; networks and IT. Some quick definitions; what do I mean by services? Parlay does a pretty good job of defining them but here they are anyway;

Generic Call Control
User Interaction
Mobility
Terminal Capabilities
Data Session Control
Generic Messaging
Connectivity
Account Management
Charging
PAM
Policy Management

A mobile operator looking to build an app on a 2.5 - 3G network needs to use some or all of these capabilities in different mixes depending on the nature of the service; a PAM app requires PAM, location, terminal capabilities, call control, charging. A video call requires call control, charging and data session control. Just think of the charging capabilities required - do you charge per mb, or for the type of the call at the time of day? Imagine if a filewas transferred during a video call - how would that be charged. Ask a Bell-head what chance of developing these services in an AIN environment. And yet as I mildly ranted earlier US operators are building services using stovepipe solutions that don't allow these services to be easily offered and easily changed.

From hosted-PBX to VoIP services over any network the convergence of networks and IT (as well as object oriented programming) has fundamentally changed the way that services can be provided over networks of any kind.

I would be remiss not to acknowledge that there are issues, substantial issues, in provisioning data for different devices; securing enterprise data; marketing the need to enterprises and on and on. However, it strikes me that these are implementation issues not technology issues.

So I conclude its not just mobility, its mostly mobility but its about services over any network.

Venture Over Funding

A great post here from Bill Burnham via Fred's A VC's blog on massive overfunding in the mobile application space.

I am not going to add to the comments on over-funding of hot companies; but actually rubbish the technology and then take a poke at technology acquisition. Seven is a great example of a stove-pipe solution. Great if you want to add just the ability to send and receive mobile email, but once a network operator wants to add other services / applications and charging capabilities with slightly greater sophistication than $x per mb, or per email then the system integrators get to rub their hands and put their hands back in to the cookie jar. All these cool apps, are just that apps. They aren't technologically advanced, they aren't future proof and they are difficult to integrate.

A semi-literate Java programmer could replicate Seven's technology in about a week using this generation open standard; if you don't believe me go to the Parlay org's website or Sun Microsystems JAIN (Java for advanced intelligent networks) JSLEE websites and think about how much more these two technologies can offer than Seven.

So why has Seven raised a chunk and the ISV's that form Parlay and JAIN / JSLEE next to nothing. Superior marketing may have something to do with it but there is also a trend in the US to keep on acquiring stove-pipe solutions - and then complain that they don't do the job advertised. It has been suggested that as US carriers, in particular, have cut back on R&D they have lost the ability to spot technical bullshit in the marketing blurb.

Somewhere between the US super-charged attitude and the European ultra-cautious approach would make sense for everyone.

Energy Conservation

Flipping marvellous post from Jeff Nolan on the downside of depending upon gas guzzlers for your means of transportation Dependent on Gas. Not exactly SAP stuff but isn't that the point anyway. Anyway I am sure that he will be delighted to hear that I support one of the main tenants of his piece. Namely that electricty driven motors are the most obvious solution; provided that I remember the physics that I was once taught. If we had finished capital raising I would have backed a very smart brushed-electric motor. Instead its got Russian money and risks heading to oblivion.

Just got to find a way to create cheap electricity!! That will do for the next challenge.

RAISING CAPITAL

I am on the road raising capital for our next fund � DFJ Nexus. As an affiliate of DFJ we are targeting globally applicable Russian technology. This is now my third time doing this; cannot say that it gets any better but I get the feeling that this may be a sweet spot in the VC capital raising cycle. Yes LP�s are focused on performance, terms (transparency) and fit. As an emerging manager targeting a truly novel space we should command attention. But this far up the value chain?

All that being said I truly hate the process. Skepticism, is high among the skills that I bring to the table as an early stage VC. LP�s, Gatekeepers and the like should not be listening to me because of my ability to pitch but my ability to be intelligently skeptical. We are all intelligent people but the rules are written in favor of snake oil merchants.

BTW � I am totally in favor of transparency. I would be willing to omit an LP if they did not understand the J-curve; not because they wanted to publish the figures.

TRAVEL

I am coming to the end of one month of travel. Which included 16 separate flights, 2 train journeys and 1 long car drive. Some of observations: US major carriers will go out of business. I have flown Jet Blue, South Western and ATA over the last few weeks. Jet Blue is the clear winner. In all of them the service was better than the established airlines, the prices were cheaper and we landed on time and they were FULL. My international travel on American Airlines was scandalous. It was low cost travel at high cost prices. The US and EU have to come to an agreement on open skies as soon as possible. However I assume that national carriers, which includes Delta, AA and United, control over landing slots will preclude this and leave us all subject to cartel pricing.

The winner however is rail journeys. I write this on board Eurostar from London to Brussels � not cheap but comfortable. The same is true for the Acela (?) from DC to NY. Travel, waiting, check-in (try travelling around the US with an Uzbek, Ukrainian and Turkmen visa pasted in your passport � more security officials have had a close up of my feet than is good for an individual) are completed in 5 minutes. There is real space on the train and the wine is not bad. My next trip to the NE of the US will be done exclusively by train.

ECONOMIST RUSSIA SURVEY

It�s rare to openly praise journalists in a blog, much less those you have never met, albeit he taught my wife to salsa whilst I was traveling. However, I have to unreservedly recommend the Economist�s Russia survey to anyone even slightly interested in Russia.

Gideon Lichfield, the Economist�s Russia correspondent, has done a fantastic job of presenting a readable, accurate and balanced account of Russia today. In particular the section on the Silovki (the men of power; the ex-KGB) is as good an article as could be written by a reporter � as opposed to an interested commentator. In his Yahoo Group�s commentary he apologizes for his �inability to understand the place.� Actually his balanced, nuanced approach shows far greater understanding than his predecessor who was both a Slavophile and phobe, sometimes in the same sentence. Anyway if we understood the place what would we spend the weekend at the Dacha discussing?

I have criticisms of omission; which could be equally blamed on editors as on Gideon. The first is that he is absolutely correct to emphasize the paltry nature of real reform. That is reform that is actually implemented by the bureaucracy. But the nature of the reform deserves more praise. Without letting on how much tax I paid in 2003 the Government has agreed to pay back $6,000 of it as a result of me buying an apartment. The income tax rate is 13%. This is an intelligent policy to bring the populace into the �white� economy.

The second criticism relates to the one-sided nature of the sausage factory story. Small and medium-sized business is booming. Fredrik Ekman, my partner at Mint Capital founded Oriflame in the FSU. Oriflame is an Avon-style cosmetics business. Earlier this year it went public on the Stockholm Stock Exchange. Some 30% of its revenues and 40% of its net income is derived from the FSU, principally Russia. The numbers made good reading for its owners bank managers.

Mint�s investments in the local-economy are booming and our interaction with organized crime is zero. I have my reservations over Russia�s medium-term viability but if we can get out before Putin becomes a lame duck (which maybe a western term with no meaning in a non-liberal democracy) they will return substantially over our risked cost-of-capital.

VOIP

An interesting piece entitled Broadband Wireless: BWIA VOIP = New Generation Phone Company from Steve Stroh. That's precisely what my provider in Moscow gives me and its the most reliable broadband I have used anywhere - and it's voice product is cheaper than Vonage's.

Not The Valley

A great piece here from Always On on the real value that the Valley / Bay Area (whatever) has. Serial entrepreneurs, connections and capital make a real difference; and that is what the the Valley has to offer. But as this piece on The Two Californias of Venture Investing so very clearly points out the rewards for getting it right in other clusters are huge.

Here's hoping that Russia is a cluster; and not just a general missing a "l".

Iraq

Possibly the most damning indictment of UK (aka US) policy in the Middle East. This letter is from the who's who of UK Middle East experts. Blair's policy in Iraq followed by his European Constitution u-turn should be enough to elect a Tory at the next election. That it's not a foregone conclusion is a testimony to the power of Murdoch. But Blair may have just lost his ally through the referendum. When he turns the power of his media against Blair his time will have come. The question is whether Murdoch will support Brown or Howard.

And this

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Here vs. There: Foreign-Born Entrepreneurs Compare :: AO

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Business Models for Entrepreneurship :: AO

The Valley Endeth

Two good blogs in Always On this week and this: The Silicon Valley Diaspora is the second. They should let President Putin know it would be one less thing for him to worry about. My reply in its entirety below:

"Lots of good points, all well made and the trend line is right. However, sitting in Russia looking to commercialize disruptive technologies you have to view a start up in its whole life cycle to get the full picture.
From start up stage through to first meaningful sales companies can be run from not-the-US, and at a fraction of the cost etc. However, for many tech companies and all that I have invested in, their main customers and ALL their potential acquirers have their decision makers based in the US.
Which is where management has to be.
Talented sales and marketing people with the credibility to execute with the largest companies in the world cost the same whether the technology originated in China, India, Russia or Palo Alto. Finally as a VC I want out at some point. Ask your friendly Investment Banker to tell you the premium that a NASDAQ-listed company gets over a directly comparable company on the London Stock Exchange. Or how much Europe's leading tech company pays for a start up compared with the US. Our successful technology companies will look and feel like US companies to get that premium.
The Valley pretty much had a monopoly on innovation until recently. It's still the leading place in the world to sell innovative products and to obtain liquidity. When Russian, Indian, Chinese technology product companies have more IPO's per year than Valley ones I will join the list of worriers."

VoIP / Skype

Not always a fan of what Rafe Needleman writes but his last two pieces on VoIP, including this on Skype economics from Always On is once again pretty close to the money. It's a. well written, b. well thought through and logical without reverting to journalistic stock phrases to fill space and c. he's pretty much right.

VoIP is a convergence application - it makes most sense to the IT community, but its a telecom application in the broadest sense. The telecom industry is going through the same issues, internally. If you are in need of a more edifying sport than wrestling, toss the "who will be out of a job soon" question to the IT and Network divisions of a large telco. The answer is those who try to separate the two - they are one and the guys who learn both disciplines will be left standing at the end. As I have said repeatedly below, a fundamental undertsanding of the network is required to make this work.

I think that this means Skype could well be late to the party - but don't bet against DFJ's ability to sell it for a fortune.

Social Networking

Clay Shirky on why you cannot program a machine to replicate a relationship here via Tim Oren.

Some of the comments make the assumption that the brain is a computational machine and therefore should be replicable in code on another computational machine.

This morning whilst waiting for the guys from Mosenergo (Moscow energy utility company) to come to finally authorize the meter in my new apartment (I have only been living there 3 months) I was reading the story of the Spassky / Fisher chess match. The book moved away from history and politics briefly to talk about the mathematical permutations of a chess game, as close to infinite as I will ever get. The authors stated that the number of permutations available in any move were far too great for the brain to compute them. Some were clearly excluded immediately from experience and knowledge with a few options taking the most time. The conclusion was that great chess players used their computational ability as a base but that they were actually artists. It was their ability to "see" or visualize the chess board that made them brilliant, not their computational ability. In one section they described how players "felt" that a piece was in the right place rather than computing its ability to be there.

What's the relevance to Shirky's piece? The brain is computational, but it is also multi-layered in a way that computers just aren't (yet?). Social networking software is a tool which is fairly useless just now and will improve, but it will still have to be employed using human intelligence. Some will be better at creating relationships than others and it will have nothing to do with software and everything to do with emotional intelligence.

The Russian Infosys?

In a piece of news that will go mostly unread across the entire world Epam Systems agreed to merge (acquire) Fathom Technology. The press release is EPAM Systems Continues Expansion through Strategic Merger with Fathom Technology. Its been a long time in the making.

There will be 1 maybe 2 real powerhouses in the offshore programming business based on talent in the FSU. I believe that Epam is a contender for that position. Fathom's senior management is good and understands that they will never compete with India etc on price - it has to be quality and complexity. Time Warner Music's CIO got it right the other day when he commented that the competition was not $/hour, or people at a desk, or lines of code produced, but the quality of the programme at the end. If anyone knows any metric to measure that please let me know.

Israel Dismisses China and India

and fails to even mention Russia! The European Tech Tour is in Israel this week (well Israel qualifies for the Eurovision song contest so they get a bunch of VC's as well) The article is here from Forbes.

Not entirely sure how you are supposed to compare Israel with China and India. There may be some great technology in China and India, but its the spending power that drives deals there. Not many people in Israel but it would be the third most VC-active state in the US if it were a US state. Which is apolitical discussion that I am not even willing to start right now.

Theoretically Russia should compete with Israel more than India and China. However the article is right - we are not yet on the radar screen. Hopefully, an article in 3 years time will not make that mistake.

Skype

Following the post a few daysa ago on Skype and its need to link to physical network - here from BoingBoing is link to a ZDNet story that says the same thing. Skype via BoingBoing.

I stand by my earlier comments - its way more difficult than IT guys think. I'll buy Vonage anyday.

Is the US Declining?

Dan Gillmor's Sunday column hits on the issue well. Can Silicon Valley, U.S. Lead in New Global Economy?

The majority of the posters then wander off in to concerns about offshoring and outsourcing, which IMHO slightly misses the point. I think the issue here is about globalization. Pre-bubble (I prefer telecom to Internet) the Valley was THE center for innovation. Scientists and engineers both conceived new technological solutions and partnered with business teams that built the business models that executed them.

The Valley no longer has an exclusive license on new technological solutions. If you examine the geographical origins of the nano deals that Steve Jurvetson has led at DFJ you will find that very few, if any, originated in California. So much for no investing more than 2 hours away from Sand Hill Road. Nano investing is an example of innovations happening away from the core Valley, there are plenty of other examples. The Valley was a leading exporter of globalization - we all looked, admired, enjoyed the schadenfreude and then tried to emulate. In particular, we focused on being technologically better / different.

However, its not just about the technology, the business plan is fairly important as well. It strikes me that there is a fairly unique DNA that is fostered in the Valley / Bay Area (call it what you like) that encourages people to take risks. Not just risks with your personal life, but with business plans and approaches to business. Name a technology business (not a technology service business) in the last 15 years that was not born in the Valley that is a meaningful part of the NASDAQ composite. I am sure there are plenty, but not more than 20-30% of the index and probably less. That's an extra-ordinary concentration of meaningful business start-ups.

So what has this to do with Russian technology? Or what's the take away? Innovation is increasingly global, but the change is less marked in the business leaders who will make the technology in to a business. Which is why DFJ Nexus is being born.