Milestone Group Quarterly: October 2005
Articles
Investment Viewpoint:
Brad Feld, Managing Partner, Mobius Venture Capital
Milestone: Brad, Google’s P/E is approaching 100. Are you long or short on Google today and why?
Feld: I have absolutely no idea whether to be long or short on Google as a public stock. I think what Google has done as a company is awesome and they continue to be a great part of the innovation cycle and the technology industry but like most venture capitalists, the reason that I am an early stage investor is because I haven’t a clue as to how the public market will respond to things.
Milestone: You have been quoted recently as saying 2006 is going to be the year of Microsoft. Can you elaborate on that?
Feld: Sure. It’s become very en vogue to bash Microsoft, as they become a more mature company; they just turned 30 years old. There is going to be a massive amount of activity around a major operating system release and with Vista coming out next year, as well as Office 12, and then the supporting cast of server products and other things that Microsoft has been pushing to get out coinciding with Vista. There is also going to be an enormous focus on Microsoft and Microsoft based technology especially in the enterprise, which is where a huge amount of the activity is. It is easy to forget is that Microsoft generates the equivalent of Google’s revenue in profit every quarter and, as a result, the engine that Microsoft has created as a business is phenomenal.
While the innovation dynamics may have changed some, there is by no means a lack of positive inertia that continues to keep moving forward. I think we are going to see an incredible amount of focus around Microsoft and multi-year Microsoft technology deployments around the release of Vista, resulting in great opportunity for them.
I don’t think that diminishes the opportunity for Google, Yahoo, eBay, Amazon, etc. I think the dynamics that are occurring with ecommerce and Internet activity are very substantial. If you sort of decompose Microsoft it's important to remember that there are two other parts of Microsoft that are really substantial; one is MSN and the other is the Xbox and games, consumer products. They have other major engines of growth that play directly into the home consumer and the always-on Internet.
Milestone: What is the future of the software industry as you see it? Will it become commoditized and where will value migrate to?
Feld: I think Larry Ellison has decided that he is the King of the software industry right? I think that the trendy thing that has occurred is that everybody recently has been talking about Software as a Service (SaaS) or on demand software. There is no question that the landscape around enterprise software and enterprise software deployments has changed. The consolidation being driven by Oracle is having a meaningful impact, Open source technologies have had a meaningful impact and frankly the spread of Microsoft and IBM in the enterprise in very entrenched ways have had impact. I think you are going to continue to see plenty of activity on the platform layer in terms of the technologies that are available to build out, deploy and manage complex IT infrastructure but I think you are going to see a lot more of the applications being delivered as software as a service, software on demand, or whatever cliché or other buzz words you want to use. As a result, there will be a big opportunity to build much more lightweight products that are easier to configure and deploy.
Milestone: You published a great article in your Blog entitled “The Internet at 35,000 Feet, Circa 2005,” in which your prediction was “you ain’t seen nothing yet.” What more can we expect to see the Internet deliver in the next five years?
Feld: Hopefully five years from now when you boot your computer, it won’t take you five minutes to get Outlook loaded. The biggest problem with personal computing infrastructure today is that the computer and computer infrastructure that you have is just plain stupid. It really only begins to anticipate the kinds of things you want to do. There is really no intelligence built into your own personal computer infrastructure in a meaningful and sustainable way so you are constantly telling the computer (and really your extended software and services that you use) what to do all the time. You are orchestrating what has to happen vs. the computer learning what you do and then starting to anticipate those things and changing the threshold of automated response based on the importance or the dynamics around things. This applies not only to computing but also to telecommunications infrastructure; the fact that I have to give out my cell phone to people and the footer's in people’s email include their Skype ID, their cell phone, their desk phone, their AIM number, their Yahoo address, stupid. All of that stuff should be automated in a way where the computer can find me. If you are important enough, if you are not important enough, if you are somebody who wants to get in touch with me for the first time, it gets slotted the right way.
Milestone: So how can a startup find space large enough to attract venture capital but not too large to attract strong competition early from the big players in any given space?
Feld: I don't think the best entrepreneurs worry about the big players. The big players are inevitably going to be attracted to opportunities that are meaningful and significant. The resulting challenge for the entrepreneur is to out-innovate and be more agile, effectively, in what they are creating in a larger player. When I started doing this 10 years ago, the question everybody asked is “Why can’t Microsoft do that?” The question now of course is “Why can’t Google or Yahoo do that?” It’s just an irrelevant question; of course they can do that. In software, specifically, the barrier to innovation is human creativity and software engineering skill. The ability to synthesize things and modify them and react to customer needs, service the customer better and build something that is compelling. Doing it faster is the competitive advantage for a start up, not identifying something that is just the right size to be big enough but not too big.
Milestone: Where is the Mobius portfolio headed and what are the opportunities as you see them?
Feld: We have a pretty large portfolio; we have about 70 active companies, spread across a bunch of different categories. Some software, some infrastructure, some consumer related stuff, some web based applications, a smattering of other things. We have done a number of investments in the last couple of years that are very much focused on the end point to the Internet with regard to consumer usage. So, for example, we invested in a company called Sling Media that makes a video time and play shifting device. You attach it to your home infrastructure around your TV and cable dish and then you can watch your TV, what is on your TiVo and whatever is coming through cable and control it on your laptop or anywhere that is connected to the Internet. We have been very active investing in companies doing things around RSS, which as a protocol in and of itself, is maybe not that interesting but what it enables in terms of the different use cases for consumers especially around content sharing, blogging, content consumption, we think is really significant. We have made investments there, we continue to be a very early stage investor so we like to do things young in the life of a company and shoot big.
Milestone: What two to three key pieces of advice would you give an entrepreneur starting a company today?
Feld: Every entrepreneur that I have ever worked with, including myself when I was starting companies as an entrepreneur, was doing something you are incredibly passionate about. If you are really excited about the domain and the thing that you are working on, your probability or chance of success is dramatically higher than “well I am just starting a company because it seemed interesting or important.” Look for something you are really passionate about because it is going to consume you and it should consume you. Secondly, surround yourself with awesome people. It sounds trite but that is the biggest, driver of success, especially early in the life of a company. If you are an experienced entrepreneur you have been through that cycle, you have a collection of people. If you are not experienced, if this is the first time you are doing it, go find people that are experienced. Check them out carefully because you are going to have to live with them for a while. Make sure that you get the best possible people on your team early on.
Milestone: Let’s say you are an LP and had $10 million to invest in a competitor’s fund. Who would it be and why?
Feld: I actually have no good idea about where I would specifically invest it for the same reason that I don’t play in public markets. I think that the outsized returns over the next 10 years probably come from the top tier firms that have had a very significant, consistent track record of positive returns. The finance theory that past performance does not predict future performance is kind of flawed in this context because of all of the other dynamics. I think more importantly the smaller funds, especially the first time ones with very experienced managers, so like $150-200 million fund, a couple of people who have been in the venture business for a long time and have sort of gotten together as a team. That’s sort of the perfect sized fund to get outsized returns because of how you are going to be thinking about the investments and that the team is incredibly motivated with their first fund to have a huge success. Their effort and focus is going to be greater than a fund that is on fund 12. They are still motivated to be successful but they may not be focused the same way.
Milestone: What is the funniest or most unique deal that you have been pitched in the last six months? Our readers would enjoy a good laugh.
Brad: I regularly get pitched; there is a recurring theme that ebbs and flows, which is the idea of an air taxi service for business people. It may not be the funniest thing that I have been pitched but it is the most consistent thing that you sort of look at and scratch your head. On the surface, it seems totally logical but when you start to look at the dynamics of the industry and the costs of building out the infrastructure and trying to actually operate the thing, it sort of always degenerates to “wow that would be a really neat idea.” I would be a customer of that in a heartbeat but I have no idea of how to get from here to there.
Bradley Feld, Co Founder and Managing Director, Mobius Venture Capital
Bradley Feld is a managing director of Mobius Venture Capital. He co-founded the firm in 1996. Previously, Mr. Feld served as chief technology officer of AmeriData Technologies following AmeriData’s acquisition of Feld Technologies, a firm founded by Mr. Feld in 1988, which he had developed into one of Boston’s leading software consulting firms. He also directed the diversification into software consulting at AmeriData, a $1.5 billion publicly-traded company acquired by GE Capital.
Mr. Feld serves as director of or advisor to a number of Internet-related and software companies. He holds B.S. and M.S. degrees from the Massachusetts Institute of Technology. |
