Weblog: 100 Blog

Pamela Marrone, Chairman and Founder - bio
AgraQuest

Pam founded company in 1995, took 3 scientists from her prior company. I had dinner with Pam last night at the conference dinner event; her enthusiasm for her company and its future is infectious. AgraQuest make certified organic fungicides. They reduce pest resistance to existing chemical pesticides, and can be sprayed on crops up until harvest (leave no chemical residues). Contrast that with chemicals, which need to stop ahead of harvest so that there's no residue (otherwise countries will & do impose import restrictions).

Agraquest's products get to market earlier (3 years to market, vs. 10 years for chemcials). Developmnt process is $3-6m vs. $150-200m for chemical competitors.

First product was Serenade - produces a unique set of anti-bacterial and anti-fungal compounds. Photos are dramatic; chardonnay grapes have mildew, rot - treated with Serenade, they're in perfect condition. 80%+ conversion from demo to sale. Every major name brand of California grape grower is using it today. Positioned as a natural product w/equal or better performance as chemical equivalents.

Their spray version ("Serenade Garden") is the first certified organic product in Wal-Mart's history. Sales are outstripping Wal-Mart's expectations, far exceeding traditional gardening fungicides.

Rick Klau

Josh Goldman, Founder/CEO - bio
Akimbo Systems

• enables broadcast-quality video
• service economics - pay per download video (5 minute golf videos)
• focused on small transactions, small downloads
• Dominant trends:
• Digital media acceptance (iTunes, WinDRM, DivX, etc.)
• Controlled disaggregation (PVRs, my Yahoo, blogs(!) )
• Access to diversity in media, not just mainstream (mentions blogs again)
• Timing & trends - six enablers
• cheap data transport costs ($30/gig in 2001, $1/gig today)
• High quality codecs (WMP 9, MPEG4) (1.5 mbps for DVD quality)
• Cheap hard disk storage < $.75/gb
• Consumer broadband penetration
• Cheap & Easy Home Networks
• DRM is accepted

Notes that video content distribution is expensive today. (Either satellite or cable)

Akimbo aggregates DVD-quality video to consumers TVs via a set-top box dedicated to playing back this content. Don't have to deal with PC setup problems. Their initial set-top box can accommodate 200 hours of video (out of a library of 20,000 hours at launch.) Will support flexible delivery models:

• on-demand
• scheduled time/date
• recurring
• queue & replenish (Netflix model)

Akimbo can host, or partner can.

Simple UI via remote controls, complete web interface. Light will come on on the box when the video is available. Can third-party enable any partner site (Amaze Films is one partner) to sell content.

Content strategy, in Phase 1 now. Phase 2 coming soon. Focused on high demand underserved markets (foreign language, education) and starting to talk to movie studios.

Partnered with Real, iFilm, CinemaNow, many others. 40 today, will have 50 by launch. Hardware platforms (they're not in the hardware business, will run their code inside these devices):

• DVRs
• Stand-alone/Telco
• Game consoles
• Media Center PCs
• Networked DVD Players
• Cable/Satellite receivers

No hardware employees on staff at all.

Launch in July, beta in a week. Distribution channels:

• Direct
• Retail (one online, one brick 'n mortar)
• set-top boxes mid-2005

Goal is to be the largest Video On Demand service for TV. 10,000 programs featuring high-quality video, 50 categories of content.

Saw a live demo, pretty slick. Supports 3 video quality settings, 700k is minimum setting, 1 MB, DVD quality.

Questions:

• Q: Do you handle HDTV?
• A: Eventually, not right now.
• Q: What about TiVo?
• A: They do MPEG2 content, would be hard to do with Akimbo (file sizes would be 3 times bigger). Potential partner, potential competitor.
• Q: How long to d/l a movie?
• A: 20 minutes to download an hour on a fast connection, longer for slower broadband. (They encode at 1mb/sec, so can do math from there.)

Rick Klau

This is the page where the notes for the Red Herring's The Now Blog will be posted throughout the conference. These are not verbatim notes, unless in quotes

^^^Keynotes
Wednesday, May 19

• Alex Vieux, Publisher, Red Herring

• The conference has attracted more than 300 people. "It is a pleasure to see that this industry is very lively." This is a tradition started by Tony Perkins. I owe to him to say that every time we do something we are continuing a tradition started by a great entrepreneur.

• The Red Herring 100 — companies with great management and depth. The world has changed significantly. This industry will never be what it was because of the trauma that we lived through since 2000. Overcoming those significant problems changed these companies. The value system is different—there are not 25-year-old MBAs who will be able to say they will make money in 30 days or do an IPO in 18 months. If you want to succeed, you have to pay your dues. There are only one or two Steve Jobs per generation, the rest of us have to pay our dues.

• We have changed the Red Herring 100 radically. These are very high quality companies. Some may go public and some may be acquired, but it is hard to say which ones will be. We went to 17 countries looking for great companies and considered about 600. There is always a choice to be made on available information, and because some companies haven't provided much information they are not on the list, though they should be.

• The companies on the list are all great, not in the order they appear. We were analytical. Three judges looked at each company and seven analysts working on all the data. Blind judging allowed us to be as scientific as possible. We were very careful, but we are not perfect—for the first time in Red Herring's history this was an anonymous process.

• The conference focuses on two sides: Mornings on issues and afternoons on companies. The first part is tell you about the environment that we are going to live in. To tell you that building a company is staying in the company. I always worry when people tell me they are focused on going public. An IPO is only one day in the life of a company. Great entrepreneurs stay with their companies for 10 or 20 years.

• Robert Greifeld, President, CEO & Director, The NASDAQ Stock Market

• I read the Google S-1 and they said "Don't be evil." I said that is easy, but what does it mean. Last night I think I turned into an evil person. I was in Washington meeting with the SEC and they wanted to go long. I missed one flight, was rerouted, and delayed again. So I was hoping that something bad would happen in Los Angeles to delay my connection. There was a security breach at LAX, so my wish was granted.

• What has changed since 2000?
• Governance
• Research
• Qualities of companies that go to market
• Sarbanes-Oxley. When I was 34, I developed an ASP-based trading system for NASDAQ market makers. At the time I was not a very good manager, since I knew and controlled every detail. In 1999, we sold the company to Sunguard Data System, a company that had done more than 100 acquisitions and that lets companies run themselves under the guise of "managerial entrepreneurialism." Going from small business owner to overseeing 3,000, I learned that there is no way you can run a 3,000-person division like a small entrepreneurial company. I was never sure the numbers were real. You look for trendlines and hotspots, and you knew that you had to choose the right people and trust them. The first phase of Sarbanes-Oxley required a signature attesting to the numbers and today there needs to be a process to verify the numbers.

• I say Sarbanes-Oxley is a good thing, though there are some companies that may not be happy with it. The increasing reliance on numbers—on objective management that may look like remote control to some entrepreneurs—is important.

• The thing I worry about more than Sarbanes-Oxley is Regulation FD. The NASDAQ'S new listing standards are the result of what happened at Enron and elsewhere. Directors have to be independent and must meet without management at least twice a year. The nomination of directors and mangement has to be reviewed by independent directors. The boards can hire consultants. If a director is paid more than $60,000, you are no longer indepedent and there is a three-year cooling off period before you can become independent again. This is what we think is needed to restore confidence in investments in the United States.

• The retail investors have not been back, except for the month of January.

• The research scandal, that research was used as a tool to win investment banking business, was a blow to confidence. We learned that emails are a megaphone to the world when analysts' private conversations were redistributed.

• The move from fractional to decimal pricing is a huge win, as spreads went from 25 cents and 12 cents down to one or two cents. The agency side of the market dominates today, as the intermediaries now have very little incentive to be involved in trades. Brokerage firms now see far lower trading profits and that, too, has reduced the research coverage business.

• Today, there are 1,900 NASDAQ companies with less than $200MM valuations. 1,149 companies have no coverage. 517 companies between $200MM and $500MM, half have no coverage. Even with $1B to $5B, five companies have no coverage. To me, this sounds like an opportunity. Anytime you have a basic change in two of the fundamental drivers of a business you will have a new model. We are encouraging people to think about actually paying for the research—it is done today, but there is no credibility, so there needs to be a clearinghouse with credibility based on long-term commitments by the companies to pay regardless of the outcome of the research.

• There is a strong relationship between coverage and analyst comment and trading volume and liquidity, though some companies do very well with no coverage.

• We see that 2004 is better than 2003, but that is not saying a lot. So far this year, we had done 47 IPOs on the NASDAQ, compared to four last year. 149 applications are in the pipeline, a high water mark we haven't seen in a number of years. Technology is about 30 percent, biotech is about 19 percent. Regulatory delistings are now down 80 percent compared to a year ago, so companies are clearly doing better.

Alex Vieux: Has NASDAQ abandoned its international aspirations?

I decided to focus on our market advantage here and then approach international companies. We're not in the business of building international markets, we're in the business of attracting international companies to make the NASDAQ the premiere market in the world.

I don't need to go traipsing around the world to find opportunities. In the medium term, the next three years, we won't be going international.

• Alan Mendelson, Partner, Latham & Watkins

• Disclosure: Mr. Mendelson is the Herring's counsel.

• Jonathan Thaw of the Herring is interviewing Mr. Mendelson.

• I predicted by 2004 there would be a public market again and, while there is a public market for young companies it is a very different one than in 2000. And I think that is a good thing. In particular, in Silicon Valley, we all lost our minds and there were a lot of things that were done that were not healthy. VCs did not do the work they should have. Law firms did not do the kind of work they should have and accounting firms were under intense pressure to do the things that changed the environment. It is a much more sober environment for public and private companies.

• The venture capital industry has tremendous amounts of cash on the sidelines that are waiting to be invested. There is plenty of cash to get funded, but you have to go through a much more traditional approach.

• Law firms are not taking equity anymore. Mr. Mendelson left his previous firm over that issue. "I would never ask for it equity." When management asks, he says he does not accept an amount that could dissuade him from giving good advice.

• I think you entrepreneurs can go to a firm and say "how about not billing us until we get funded" and the firms will do that.

• The excesses of Enron and Worldcom necessitated something like Sarbanes-Oxley. But my concern is that the cost for young companies is astronomical—a million or two dollars to comply—in some cases, we're pushing a lot of paper that is not contributing to shareholder value. The reforms at NASDAQ are very good ideas. A board of knowledgeable independent directors is something young companies should be looking for. The regulations require hiring more accountants and lawyers, but for the startup I don't sit and talk to clients about complying with Sarbanes-Oxley. A board can help prepare a company for its future reporting demands.

• A venture capitalist who knows how to build a company, they know that if they don't take care of the management and employees there ain't no company. If you become too obsessed with valuation it can prevent you from raising capital that the company needs.

• Alex Vieux: How would you structure mezzanine deals today? And how would you deal with stock option accounting?

• The recent lack of IPOs has made the mezzanine investors a very rare species. VCs are unable to price these deals and need someone to lead. I have some clients that have had to do down rounds at the mezzanine round in order to get financed. One biotech he represents had to take a down round and went public within six months at a significant premium that went largely to the mezzanine investor.

• On stock option expensing, the reality there will be option expensing in 2005. There's no doubt about it. The question now is what the methodology will be. Black-Schoales treats options as an expense at 30 percent, while other methodologies are placing them as low as 10 percent. Then if you price the options 10 percent above today's value the company can do so at no cost. That might be okay going down the road. Having worked with hundreds of companies I still beleive you grant stock options to everybody and it is what made the Silicon Valley what it is.

• Jonathan Thaw: What are the risks of outsourcing for startups?

• The venture funds driving portfolio companies to outsource anything that is not strategic. But it is not simple to go overseas. Trying to think globally and find ways to keep expenses down is not something you can just try without careful management. You don't have a lot of loose resources in a startup, so while you may get a dramatic savings with an engineer in India, but you have to management that engineer to get the returns you need. The cost differences are absolutely tremendous—one client is saving a multiple of five- or eight-to-one outsourcing to India and Vietnam.

• James Lau, Founder, EVP & CSO, Network Appliance

• When I was at HP, I spent too much time in meetings. I was frustrated. So, after leaving HP in 1983 to go to Bridge Communication, it was a culture shock. It was small and the founders were young. At this point, I was interrupted to talk about how to get video links to work

• At Network Appliance, we thought the good management team early was most important. Chasing money was the last thing on my mind. We focused on long-term viability, though as engineers we felt a little incompentent about how to do that and read a lot to learn. How to stay focused and energized was critical and we strive to maintain the small company culture that keeps people engaged.

• It has to do with how fast you can make decisions and whether people feel they can take risks. Culture is the behavior of every single person in the company—you have to take everybody into account not just the key people.

• We often hire from larger companies where change is rare and slow. Every individual is challenged by change. So, we try to help people realize that change is a requirement for us to be successful.

• Alex Vieux: Are there any days when you thought you should quit the company?

• No. That's the real answer. If If feel frustrated and that there is red tape, then I feel I am responsible. I am part of the team and created it. I should be able to break down the red tape. The employees create the situations in which they feel trapped. People come from bigger companies and hear about empowerment and still don't feel comfortable doing that, so they seek permission by asking a lot of questions. The training is to help them think about the questions they are asking and whether they are avoiding the responsibility of making the decisions personally. We push back and not make the decisions for them.

• The real threat to our company comes from the inside.

• Lee Bruno of Red Herring asks about the evolution of storage and data extraction.

• Storage was never thought of as a sexy industry, but now it is critical. There is still a lot of non-digitized information, so demand is growing. Every advancement in other fields increases the demand for storage. A chip company needs to add 500 Tbyte in storage for each chip. The cost of storage is falling dramatically. We don't see ourselves as a storage company as a company that sells disc drives. Our focus is how to help the customer organize the data. The company will invest in software IP in storage management.

• Russell Artzt, Co-Founder & CTO, Computer Associates

• (missed some of this while picking video segments)

• In 1991, we realized we had to reinvent ourselves as 90 percent of revenue was coming from mainframes. We needed to address client-server, even before the Net. We could have stayed put and done fine with existing customers, but we went ahead and tried to develop an enterprise management system for the client-server world. We didn't hire a lot of new programmers, we went back to the same teams that had built our existing products. First, we gave the opportunity to our own people because they got us here; we did hire some hotshots, but we went to our people first. Some developers stayed with the mainframe, but many decided to learn Unix. We bought them a bunch of books and spent on a little training, but with 15 people we built Unicenter for Unix.

• We need people willing to change and the people at the top need to be willing to change and then be good enough sales people to sell their people on the need for change. You will find out who your people are who you can count on and who you can't count on, and that is how you build a company.

• We never advertised on TV before Sanjay Kumar took over. We've never pursued the visibility you would want. We got overshadowed by all the acquisitions we did. We always had a strategy that we develop internally and acquire technology and integrate with partners. If you acquire and never integrate you waste your money. But with that strategy, acquisitions are more sexy and get all the attention.

• When you do an acquistion, the acquired company has to be integrated. Number one, we feel that to be fair with the people we acquire, we interview every person. We asks if they want to work for Computer Associates, we evaluate everyone then we make one decision—not two, not three—and we announce the decision. Once we make that decision, there is no more reevaluation, they are part of CA not someone who was acquired. Best proof of that is Sanjay Kumar, who was with an acquired company and became CEO of CA.

• Advice on mentoring: It is very important as executive management, you recognize you are a role model and you pick out people you are going to groom for the future. You have to have in mind who will take over if you leave, because you aren't going to do it forever. I have several people in my group I think can run the group. It takes a lot of grooming and you have to let them make some mistakes to learn. They have to be in critical meetings. They have to understand your philosophy about development and how you deal with people, because it is the people who make it for you.

• You have to know what you are good at and not good at so you can surround yourself with people who complement those strengths and weaknesses.

• Alex Vieux: How do you go through the kinds of transitions CA is experiencing now?

• The main thing you have to believe in what you are doing. I believe in my company and what I am doing. I believe in the vision and my people, and that is what keeps you going. We can overcome the accounting problems and other problems and challenges the company has had.

Thursday, May 20

• Yanki Margalit, President & CEO, Aladdin Knowledge Systems

• Life is at least okay for us. It is fun to sit here after three record quarters, but I must tell you that we had tough times. We are not a young company, we started in 1985 and did not raise money until 1993, when it raised $7 million through an IPO. The tough times started after the IPO, after we had the cash, we had the sales and we were profitable.

2003 was a turnaround year for the company. We reengineered the company and management.

I would suggest it maybe was a bit tougher to succeed during the tough times, in response to a question about the recovery accounting for Alladin's recent performance. The internal changes were as important or more so than the economic turnaround.

The company greatest challenge came in 1999, when the company realized it had one product line with a limited future. The tough decision point came when we had to deliver on its public success. We had 25,000 other public companies competing for mindshare (and capital). We had to sacrifice our EPS and quarterly performance to reengineer the company. We told investors we were going to do this and many dropped the shares.

As of now, we have broader product lines and gaining market share. The secret is to combine long term and quarterly perspective, not a fixation on one or the other.

The evolution of the security industry: Everyone expects consolidation, but on the technical level you see the opposite of consolidation. There are many more threats at many more levels of the networking/application stack. Security is by definition segmented, so for now you will see some consolidation, but there will be a business impetus to develop a broader range of solutions. It is hard to tell in the short term which force, consolidation or diversification, will take the lead.

Relying on one vendor or even five different vendors is a mistake for customers. Take for example, perimeter security. Today there are eight or 10 different devices in this area and they address many functions. This can't continue, but you will see several devices, one for network-level security and another delivering application/content-level security.

When we started, we used M&A to build the company. We acquired a larger company after the IPO. We built a really international German/Israeli/American company, and the recent phase of internal focus "is over" and the company is considering acquisitions, again. On top of organic growth we will add some M&A.

Alladin has been approached about M&A, as well. The company is in the 99th percentile in Investors' Business Daily's performance metrics and so it is attracting attention from potential acquirers. My preference is to continue to grow the company, but at the same time as a public company we have a responsibility and I will not be able to tell you that if the right value is presented a deal wouldn't happen. But I'd like to continue.

Statistics say that 80 percent of acquisitions fail, but I don't believe those numbers. This statistic drives bad decisions. The industry grows on M&A. I believe mergers and acquisitions do succeed.

I think you have to reinvent yourself as CEO before you can reinvent the company. Going public was a big reinvention of the company, since we'd never taken money before. The acquisition of a German company was another reinvention and we failed with a new product line a couple years later. The latest expansion of software was the last and just completed invention.

When asked about how important bootstrapping is to Alladin, he says, the largest price to pay is the lost time that money from VCs might provide. Israeli companies couldn't attract VC money then, they wouldn't pay attention until the Oslo Agreement in 1994. Israel became associated with peace and the VCs came. You can pay the same price in time; my salary was $800 a month at the outset and I would forego that if there wasn't money. I built my first product on my mother's sofa. If you are willing to do it and spend the time, you can do it. You need to finance your vision, and we did private software development work to subsidize our main product development effort.

I see a triangle in terms of visibility in the market. Customers, partners and Wall Street. Every time we enlarge our presence or visibility in any one of these areas we enlarge the whole triangle. Analyst coverage is very difficult to attract. Alladin has only one analyst covering it now, so it mostly focuses on customers and partners to build its visibility.

Asia is a very interesting market for us. We started in Asia four or five years ago. We had a distributor start a competing firm. It was a great lesson and it made me shy away from Asia for a while. Then we realized we have to be in China. You have to be careful and know what you are doing, finding the right partners and it looks like a great market right now. The company has opened an office in Hong Kong.

Taking a line from Bill Gates, he recommends not taking advice from old guys.

NASDAQ's performance has affected our stock, but we believe investors are responding to our fundamentals and performance. The bubble was a great lesson for everybody, but we should find another name for "the bubble," since it is part of a cycle. It wasn't a one-time thing and it is part off the business cycle, not necessarily a bad thing. Hopefully the next bubble will be more mellow, but bubbles will be with us forever.

An Israeli company from the very first have to consider international markets. You can build product there but you are forced to go out to other markets.

The key to entrepreneurial culture is to "replace old people with young people" though he seems to be saying "young-thinking" rather than speaking of chronological age. "I am almost out of the game" and he is trying to "make the company younger again." We just hired three senior VPs and hired younger people.

Eighteen months ago I almost reached the conclusion that I failed. The reinvention process we expected to take two years had taken almost four, so I wondered if I had the authority to lead the company. Fortunately, things picked up, and I had my bad moments.

• William Janeway, Vice Chairman, Warburg Pincus

• Presentation title is "The Fifth Way: A Status Report" which Mr. Janeway describes as being about the context in which companies are being built.

The millennium bubble only ended the first phase of the Fifth Wave of techno-transformation. Points to the book "Technological Revolutions and Financial Capital," by Carlota Perez.

Phase 1 is "installation."

Phase 2 is "deployment" and between the two phases is a turning point when the insights about how to use the new technology and infrastructure become common sense.

This is the fifth time the adoption wave has happened since the canal craze in 17th century Britain.

The killer apps of the Fifth Wave are customer self-service, realtime business intelligence and straight-through transactions (which means what Bill Gates calls "frictionless"). These applications are each harder than the previous, but combined these three apps will drive a productivity revolution that has only just begun.

Customers are doing the work that people used to be paid to do. Business intelligence is harder because it involves combining realtime transaction processing and batch processing and analytics that interpret the data—we can expect to see that generalized through the Extensible Markup Language (XML).

The very hard application is straight-through processing, which means driving the entire value-chain through heterogenous networks and business cultures. The acronym that Warburg Pincus developed to described this is L3CAT - Long-lived, loosely coupled asynchronous transactions—that have been impervious to computing until very recently. Innovation will be required in business processes and business politics, not just technology will be required.

The bubble was a Darwinian environment in which many ideas, some profoundly stupid, struggle to survive. The Net names are familiar, but the way Wal-Mart and Dell transformed logistics are also very important to understand. Banking and telecommunications are seeing an arms race where technology is being used to to drive productivity—he doesn't mention the politics and process question here, only technology.

Of course it is not about gaining competitive advantage by installing computers, the real transformation comes after the infrastructure is in place. He recommends Eric Keller's "Technology Paradise Lost."

There will be no sell-side research, it will all be by analysts making modest revenues as objective commentators.

There is a limit in cost-cutting. While there was a lot fo waste in the late 90s due to Y2K and the bubble, but cost-cutting has a limit. Cost-cutting as the strategic choice is extremely dangerous. Real cost-cutting and radical transformation requires as much control as possible of IT. Recommends Erik Brynyolfsson of MIT Sloan School as a key thinker in this area who says there is a five-year lag between IT investment and productivity.

Two requirements come before transformation: infrastructure is extended and then to make it disappear—it becomes invisible to the customer. In train shipping, before Railway Express was invented, customers had to know the whole route and choose handling for each package; same with the Bell Telephone system that made all phones work together. Removing incompatibilities is key and consolidation and innovation are enormous economic opportunities. Railway Express put Sears and JC Penny in business and wiped out local businesses that provided these services on a local basis prior to transnational shipping.

The merging of computing and communications infrastructures, down to the chip level, is a key market Warburg is investing in today around the world. Chinese manufacturing will play a huge role in driving this down the cost curve.

The speeding up of processors and pipes and standard ways to communicate are contributing to the disappearance of the infrastructure. At the application level, there are many more opportunities for investment. New business Warburg has invested in: Cobalt, an automobile parts and service infrastructure; Workscape in the employee benefits business built on ASP models.

The next real take-off point is in real-time business information. Suggests Mungistics will be a winner here, offering pricing and yield managment systems in dynamic markets like airlines and hotels, which are now moving to retail to optimize sales across large geographies rather than allowing local store managers to guess their way to better sales. Inventories disappear. Ford has used it to apply discounts to drive hundreds of millions of dollars in additional profit to fall to the bottom line each quarter.

We're talking full supply chain and lifecycle integration. Efficiency is not a virtue in the economic system, it is waste that creates innovation.

Will China be the leader in the deployment stage of this wave? The United States and the West are at risk from China and India and Southeast Asia.

We're interested in backing the relatively small group of experienced technology executives who can read markets to see where disruption creates opportunities. We like to commit capital upfront based on goals and let the entreperneurs work; it prevents us from having to negotiate with other funders and gets companies to work. Our model was completely irrelevant during the bubble, because everyone was focused on going public immediately. Today we find there is a reservior of real talent that has been educated. We try to build teams where every executive has been through the near-death of a major company and now there are lots of people who have been through the death of a startup who we can tap. People who have had to operate under stress are able to understand if they want to go through it again in a new company.

You have to build feedback loops into a company early. At any point in time there is more technology than anyone knows what to do with. Just adding to the technology inventory adds no economic value. But if you start with a market and an identified need you can be successful because you get earlier feedback from the market.

Huawei is the next Cisco. I go to China and India every 12 to 18 months and there a year is like a decade here. There are many more VCs there at this stage than in the United States. We're seeing second-generation Chinese entrepreneurs who have learned from the era of amateurishly funded companies. We are seeing a lot of support from what is not a monolithic state system in China. It is phenomenal. We're very bullish on Asia, just as we would have been about the U.S. 150 years ago and we will see abuses by companies as happened then when British money was borrowed and never paid back, but that happens.

From 1998 to 2001, something like 70 percent to 80 percent of all the venture ever raised was raised. The industry has returned less than 50 percent of the money it has raised and that is a chilling thought. The unwinding of the venture business will take another two or three years. Those of us old enough to remember the VC bubble of 1983, where most new firms vanished over the following five years, recognize what is going on. The process is ongoing now. I'm pleased that we have actually returned more money ($10.5 billion returned on $2.5 billion raised).

If you want to follow venture firms, follow exactly what their net drawdown compared to their returns to investors.

• Yogen Dalal, General Partner, Mayfield Fund

Some perspective on what was going on in VC's minds during the bubble: Most people forgot the fundamental advantage of time diversity. People lost their perspective on putting all their eggs in one basket. Why did that happen?

Mayfield in 35 years has made more money than it lost. But we had some bad years (during the bubble). But we were cautious when companies were being acquired for huge valuations and got in late and invested in companies that we thought were good but turned out to be poorly conceived. This is why time diversity is important, because you can't invest your money too fast and get good returns.

We made mistakes, but they were largely mistakes of timing.

It was an expensive learning curve, but in spite of that some great companies were created. If you can be in the business by learning from your mistakes and get back into good companies you will come out ahead.

He compares VC work to Simon Cowle on American Idol. But VCs put their eggs in more than one basket by identifying markets that "have a little bit of give to them" so that you have the opportunity to recover from your mistakes.

In every investment I've ever made the first meeting is most important. In most cases I know in my heart whether this is an investment I would make. You have to do due diligence but if you have done your homework on a variety of market segments you will know when you meet an entrepreneur if they qualify for an investment.

The classical venture formula: Big market, great talent and great products. You can never build a great company without all three. The entrepreneur needs to be someone you believe will be there for the long haul. They can be eccentric because they are people who want to make a change. They may not be the ultimate CEO, but are they a person you want to work with, who has the passion and the drive to make a success. Even then, you have to look at the market they are aiming at and if it large enough.

China and India are clearly huge markets, but you as an investor have to decide what market you in (in terms of company stage) and based on that you will address China and India in a different way. China is a huge market. India has 1.1 billion people with 250 million to 350 million middle class—larger than the United States and the largest English-speaking market in the world. We want to leverage the advantage there as we have America's advantage in Israel, where many NASDAQ traded companies are located (because they built an American market). The biggest danger in China and India is hooking up with the wrong partner. You need political connections.

The ethnic hook-up, identifying partners who understand both sides of the coin, how the game played in India or China and also here. We plan to approach that part of the world as we have investing in Boston or Austin, Texas. We would not make an investment without a local venture capitalist involved in the deal so they can look after the care and feeding of the company. Cross-border funds will play an important role in India and China, where domestic investors act as partners who handle the company's growth.

The legal structures in India and China are very different (both from the U.S. market and one another). So you have to look at the structure. Is it a company structured for Indian markets or Chinese markets or is it an American company with Indian and Chinese employees. Most early-stage Silicon Valley venture firms are not going to go full bore into these markets.

Even though the markets there are large, understanding how the technology can be best used by the customer is still largely done here in the United States. Figure out where you can play, because once you figure that out the markets are universal. Companies like Infosys, the engineers in those companies are the ones who will figure out what the next problem is and when they do they will be the next successful infrastructure market.

India, in particular, has an advantage because of its English language in software and services. Manufacturing and transportation are China's forte. We have to stop thinking of it as just labor arbitrage. It is a talent pool. The goal is to channel this pool to work. This notion of outsourcing will flow from place to place, such as to Singapore, another English-speaking region. This is unstoppable. We are beyond the tipping point. China and India will play a major role in the deployment of the Internet infrastructure.

The venture industry is going through change, a partner shuffle is going on and it will take several more years. There will clearly be new venture funds, but there is no doubt too much money and too many people in the venture community. The amount of money sitting on the sidelines despite everything that has happened is huge and there is more pouring in. The only way the change will happen is if entrepreneurs demand investors who can really help them. There are only 25 or so really exciting investments every year but the VC needs to be competitive and offer companies resources not available from other firms who offer just money.

In our firm we require experience at the operating level. Our limited partners will only invest in a team that can provide returns. If we have partners who don't do that, our limited partners will put pressure on us to have a team that can succeed. If you have a partner who hasn't been in a firm for five or six years and can't hold their own, they will have to go get a real job. The metrics are financial performance and the ability to get a deal.

The reasons we have had to shut down companies are that they cannot find customers or because there are other investors who will not take their loss early and force the company to go down later and at greater losses. The companies that have survived the crash are no different in their ability to succeed than our new investments because we have cleaned up our cap tables—so the criteria for those older companies are the same, whether they can attract customers.

You cannot give companies too much in advance so that you can shut a company down when the fail to make their milestones. Entrepreneurs are pretty realistic and know when they will not succeed. There is a dialogue rather than being a confrontation about shutting the company down.

The biggest mistake when being ruthless come when there is a very large amount of cash invested. So we are going back into the mode of the early 90s when you put smaller amounts of cash in based on companies meeting their milestones.

I am on eight company boards, down from 12. Over the years, we have come up with a workload formula that says you should be doing two investments a year. That way, you reach about eight after four years and companies are going through transitions, shutting down or growing so that they need less hand-holding. If you had eight incubations, you'd be dead.

The amazing thing and the biggest thing going for the United States and Silicon Valley is that innovation never ends. Great talent comes here. We're going to go through a little bit of a dry period where we are looking for that next big innovation and letting people come to the discoveries that drive new industries; as long as we'll take losses, which other countries in Europe and China and Asia are not as comfortable doing, we will be successful.

We're now deploying this incredible thing that was created over the last five to eight years.

^^^Roundtable Sessions
Wednesday, May 19

• Mastering the Global Deal
• The New Corporate Venture
• The Future of Silicon Valley
• Digital Content Showdown

Thursday, May 20

• From the Lab to the Street
• Global Security Threats
• In Search of an Exit Strategy
• The Restless Entrepreneur

Ramana Rao, Founder, CTO - bio

• Core value proposition - finding value in unstructured data
• Users spend 35% of their day looking for data
• "Information retrieval is evolving from search to disovery"
• "Discovery is about statistics over statements"

Very interesting: they have to "scale down" their implementations from their government users ("high heat" - i.e., war - zones) to commercial users (Global 2000). Customers are here.

Supports 28 languages, and support "specialized languages" - the nested lexicons of an organization - to help discover meaning within the content they crawl.

Value proposition:

"Inxight delivers the most complete, integrated and powerful solution for info discovery"

• search alone is not enough
• speed and simplify the flow and use of info
• make faster, better informed decisions

Gilles Raymond, co-CEO - bio

In-Fusio - leading mobile gaming service provider worldwide

• $15m revenue last year
• 176 employees, based in Bordeaux, offices in Chicago, Moscow and Shanghai
• Acquired Cybiko
• 25% market share in Europe, leader in China, US launch in Q2 2003
• profitable in 2003
• They develop platform, technology (middleware client), libraries that will improve management of the community.
• installed in client middleware: recommend a game to a friend, rank a game
• cookie in middleware tracks what player does offline so that they can profile players, what they do, what they play, etc.
• have close to 10m unique identified players
• 20m handsets with in-Fusio technology
• every month, 1m handsets arrive on the market with their in-Fusio's technology
• Players like the service
• 65% penetration (they pay to play)
• 95% are satisfied
• increase average revenue per user (ARPU) by 8%
• 70% users male, 30% users female
• When Sony launched PS1, 98% players were male
• 78% users are under 25 years old
• 75% play at home - despite owning a gaming console
• 1m downloads/month
• 8m SMS messages/month
• 99% of revenue is recurring

Personal comment: They have a South Park game. I have to get this.

This is going to make a lot of money.

Seems like In-Fusio is going to create a sustainable market for AATI, no? Without good battery management, I'd think the user experience would suffer...

Q&A

• Q: Where do you stand in US
• A: Launched with Verizon last year; did Terminator game along with T3 movie release.
• A: Business is to be carrier neutral, manage the community and work with carriers.

Jordan Greenhall, founder & CEO - bio

• 80 employees
• 2002: 38% monthly growth
• 2003: 250% annual growth
• $1.5m/month
• profitable, cash flow-positive
• Europe is single biggest market (42%), Asia fastest growing (20%)
• "Consider ourselves to be a market maker, secondarily consider ourselves a technology company."
• Created the product, pushed out to the consumers, in a rough, non-productized fashion
• Once the market was created, then licensed it to the service/content providers
• Company is focused on:
• Video compression
• Security and DRM
• Licensing technology
• Phase 1: Building a community:
• 120 million users worldwide
• 2 billion high quality video files
• 70% penetration of major players
• Phase 2: Consumer electronics
• consumers want DivX on the TV
• consumers went to retail, who went to OEMs, OEMs licensed technology
• Phase 3: Content
• have already done 10 million transactions to 1 million users, but all to PC
• now focused on bringing the content to consumer electronics (TV, DVD, gaming consoles?)

Competition: Microsoft

• Advantages:
• Desktop penetration
• Money
• Disadvantages:
• No real penetration in CE Market
• Monopolists don't like other monopolists
• Will never "own" the market - all parties want alternatives

Eyal Waldman, CEO - bio

Mellanox is the leading supplier of InfiniBand semiconductors, providing complete solutions including switches, host channel adapters, and target channel adapters to the server, communications, data storage, and embedded markets. Mellanox Technologies has delivered more than 200,000 InfiniBand ports over three generations of 10Gb/sec InfiniBand devices including InfiniBridge, InfiniScale and InfiniHost family devices.

• Target market - data centers, distributed environments (names Google, Bloomberg, etc.)
• in 3rd generation of products into 1st tier enterprise server and storage OEMs
• can offer to customers 10 GB/sec ports
• InfiniBand is only shipping tech delivering:
• Industry standard
• 10 Gb/sec performance
• Transport offload
• Remote direct memory access
• Their products allows providers to go after high margin business by lowering cost of entry for high performance servers
• IBM 32-way SMP server, 77 - 210 gigaflops, cost: $1.1m
• Infiniband 32-way server, 195 gigaflops, cost: $100k+

Q&A:

• Q: Who are your competitors?
• A: Agilent, Fujitsu, Sun & IBM
• A: Mellanox: large share of the market
• Q: How do you beat the competition?
• A: Execution, development schedule (first to market with performance increases), partners (4/5 major server manufacturers)

^^^Keynote Speaker

Robert Greifeld, President & CEO, The Nasdaq Stock Market

Robert Greifeld has a 15-year track record of successfully
running efficient, for-profit businesses and has
extensive experience in all areas of the markets. Most
notably, he is credited with creating BRUT, the trading
consortium whose members included Knight Trading,
Morgan Stanley, Goldman Sachs, and Merrill Lynch.
BRUT is one of the earliest Electronic Communications
Networks (ECN), having won approval from the SEC in
1998. While serving as president & COO of Automated
Securities Clearance (ASC), Mr. Greifeld led the team
that created BRASS and made it the industry standard
trade order management system for Nasdaq stocks.
Prior to joining Nasdaq, Mr. Greifeld was an executive
vice president with SunGard Data Systems, where he
was responsible for all of SunGard’s sell-side businesses
and its buy-side transaction routing businesses.
Mr. Greifeld earned a B.A. in English from Iona College
and a M.B.A. from New York University, Stern School
of Business. His graduate school thesis was on the
operation of The Nasdaq Stock Market. Mr. Greifeld
was also a member of the board of directors of Knight
Securities, the largest Nasdaq market maker, a position
he relinquished upon joining Nasdaq. Mr. Greifeld is
also an Honorary Trustee for the Museum of American
Financial History.

^^^Share your notes here:

Travel in the US does force us into evil thoughts

What's the difference, what has changed...

*Governance -- Sold a company to SunGaurd (leading risk management company) which had a culture of managed entreprenuership. Difference between managing a company enterprenuerially and a 3000 person company being managed through its financials. Numbers needed to be correct. Sarbanes forced his reports to certify. As a manager of a large organization Sarbanes is a good thing. Board independence, compensation of officers by independent.
*Research -- Research scandal, it was being used as a tool for selling investment banking business. Emails are a megaphone to the world. Intermediaries now have less incentive with decimalization. Some companies do well with very little research coverage
*How are we doing today? -- 47 IPOs this year, last year at this point we had done 4. The pipeline is 300% higher, 109 applications, a high water mark. Industrial and other is 35%, Tech is 30%, Biotech 17%, Finance is 7%. Delistings down 80%. Not a bubble, structured and sustainable growth.

Red Herring companies are the driver of the economy and the NASDAQ and is the future.

Push to make spreads narrow, average is 7/10th of one cent, about as good as you can get. NASDAQ Europe is medium term.

Alex: What is more important, people who are independent or who are directors?

• majority of independent is a proper balance

This is the first post of the 100 Blog -- where we will highlight the best conversations within the Socialtext Eventspace.

In the pull-down bar above, you will find a weblog for each of the Red Herring 100 companies. Browse to a weblog and then click New Blog Post to participate in the conversation.