Why european startups shouldn’t fundraise in the Silicon Valley

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JPMorgan, Credit Suisse Ramp Up Startup Push for Deals

When SurveyMonkey Inc. Chief Executive Officer Dave Goldberg wanted to buy out investors from his Internet company and attract new ones who wouldn’t balk at his aim to stay private, he steered clear of traditional startup financiers in the venture-capital community.

Instead, Goldberg turned to an entirely different adviser: JPMorgan Chase & Co. (JPM)

Jimmy Lee, vice chairman of the investment bank who normally works on multibillion dollar deals, traveled from New York to SurveyMonkey’s headquarters in Palo Alto, California, to brainstorm Goldberg’s options. Goldberg later hired JPMorgan to lead a $350 million syndicated loan for the online survey provider as part of an $800 million recapitalization the closely held company completed last year.

“Considering what a small company we are, SurveyMonkey isn’t something Jimmy would usually spend time on,” Goldberg, who is married to Facebook Inc. (FB) Chief Operating Officer Sheryl Sandberg, said in an interview. The recapitalization, which also involved selling $444 million in equity to Goldberg, Tiger Global Management LLC and Google Inc. (GOOG), valued SurveyMonkey at $1.35 billion.

Wall Street investment banks -- from JPMorgan to Bank of America Corp. and Credit Suisse Group AG (CS) -- are increasingly catering to closely held technology startups, especially in Silicon Valley. While firms led by Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) have long cultivated relationships with venture capitalists and entrepreneurs to later earn fees managing initial public offerings and advising on acquisitions, many banks have expanded the roster of services in recent years.

Photographer: David Paul Morris/Bloomberg

Dave Goldberg, chief executive officer of SurveyMonkey Inc.

Big Payoff

The push includes beefing up technology teams, organizing invitation-only conferences for entrepreneurs, starting coverage areas for venture capital and using balance sheets to finance startups or extend credit.

The efforts come as more startups stay private for longer and reach a bigger scale, raising the prospect of a larger payoff down the road for banks when the hottest companies ultimately go public or get sold.

“Technology is the fastest growing and most far reaching sector in the world,” Lee said in an interview. “It’s therefore a priority for any global investment banking business.”

More Firepower

In a sign of how seriously the banks are taking startups, JPMorgan in the past four years has relocated veteran bankers Mike Millman, Kurt Simon and Rod Reed to Silicon Valley. Jeremy Geller moved in February to head the firm’s private banking in Northern California, a business where headcount has since grown 30 percent.

Credit Suisse has since 2011 moved Anthony Armstrong, its co-head of Americas M&A, and David Wah, its global co-head of technology, media and telecom group, from New York to San Francisco. The bank also hired Chris Gaertner and Imran Khan after losing star George Boutros in 2010 to boutique adviser Qatalyst Group Ltd.

Goldman Sachs earlier this month named Dan Dees co-head of its global technology group alongside Anthony Noto, who had led Twitter Inc. (TWTR)’s IPO late last year. The securities firm moved current co-head George Lee to chairman of the group and made him chief information officer for the investment banking division.

Deals Pipeline

The potential rewards are vast. Heading into 2014, the pipeline of U.S. technology IPOs contained 590 venture capital and private equity-backed startups that have raised $55.35 billion, according to a Dec. 12 study from CB Insights. More than half of the companies are based in California and 25 were valued at more than $1 billion, the study found.

Last year, there were 131 deals in the U.S. in which a technology or Internet company sold equity on the public market or in a private placement for a total of $28.8 billion, compared with 80 equity deals worth $25.42 billion in 2012, according to data compiled by Bloomberg.

Silicon Valley entrepreneurs and venture capitalists say the increased attention from investment bankers is tangible. Goldberg said that it was far easier to recapitalize in 2013 than to line up a mere $37 million in debt financing from Bank of America in 2009.

Some of the challenge five years ago was that the recession made banks unwilling to lend. It also related to another, more fundamental obstacle: many banks didn’t get the way startups work, Goldberg said.

“After the financial crisis, the credit market was very tough,” Goldberg said. “Traditional banks also had a hard time understanding our subscribers-based business model.”

Wooing Wanelo

Wall Street firms have since made a bigger effort to woo technology entrepreneurs and serve their corporate and personal financial needs.

“Banks were quiet for a while in Silicon Valley,” Geoff Yang, general partner of Redpoint Ventures, a venture-capital firm based in Menlo Park, California, said in an interview. “They are now courting venture capitalists and entrepreneurs like in the old days.”

Investment banks are even reaching out to some of the youngest Internet startups. Deena Varshavskaya founded San Francisco-based social shopping startup Wanelo Inc. in 2010 and landed $14 million in venture funding over the last two years.

Even though her company was barely two years old, Varshavskaya said she was invited to speak at Goldman Sachs’s dotCommerce conference in New York last June. Goldman Sachs later named her one of the “100 most intriguing entrepreneurs” of 2013 at the firm’s Builders and Innovators Conference in Tucson, Arizona, where Hillary Clinton and Elon Musk were among the speakers.

Many Invitations

Varshavskaya, 33, also gave a presentation at Goldman Sachs’s Internet Private Company conference in Las Vegas in November and she will speak next month at its Technology and Internet conference in San Francisco.

“They bring together high-quality innovators and community building, which is an important foundation for our future growth,” said Varshavskaya, who adds that the relationship with Goldman Sachs’s bankers “will be useful in the future.”

Morgan Stanley and Goldman Sachs have long been the go-to investment banks in Silicon Valley. To be more competitive, Goldman Sachs started the private company conference in Las Vegas three years ago and its Builders and Innovators conference two years ago. It also ramped up direct investments in Web startups including Dropbox Inc. and Uber Technologies Inc.

Morgan, Goldman

Last year, Morgan Stanley topped the league table of underwriters of technology and Internet IPOs measured by dollar value, according to data compiled by Bloomberg. Goldman Sachs was first by number of technology and Internet IPOs underwritten and earned fees, according to the data.

Morgan Stanley’s technology team, led by Michael Grimes, Paul Chamberlain and Colin Stewart, the firm’s vice chairman of global capital markets, has had one of the longest-lasting footprints in Silicon Valley, opening an office in 1994 and staying through the aftermath of the dot-com bust last decade when numerous Internet startups flopped. To build relationships with startups, the firm has organized conferences, including a chief technology officer summit where it gathers hundreds of potential clients.

Other Wall Street firms have also beefed up their Silicon Valley presence. Bank of America organizes a Tech & OPS conference for venture capitalists in November and a Private Company conference in May. Last year, it hired Buz Walters from Goldman Sachs to head the bank’s venture-capital group.

“Many technology companies that go public tend to become well-known global brand names,” Walters said in an interview. “That’s why banks make an effort to work on their deals.”

Qatalyst, Allen

Smaller banks are also making a play for startups. Qatalyst, which former Credit Suisse bankerFrank Quattrone started in San Francisco in 2008, has become the go-to bank for technology companies seeking to sell themselves to large acquirers like Hewlett-Packard Co. It competes with Allen & Co., the New York-based boutique bank famous for its invitation-only Sun Valley, Idaho conference every July that attracts technology and media moguls including Goldberg and his wife.

At JPMorgan, the bank has gone beyond boosting its technology team by starting a digital growth fund in 2011 that invested in Twitter and wearable device maker Jawbone.

The efforts have resulted in deals, including JPMorgan leading Facebook’s secondary offering of $3.85 billion of shares last month. JPMorgan ranked third in the league table of technology IPO underwriters last year, according to data compiled by Bloomberg.

“We put leadership out here to connect the West Coast to the firm to serve clients’ corporate and personal financial needs,” said Noah Wintroub, head of JPMorgan’s Internet and digital media group in San Francisco. “The word spread.”

Source : Bloomberg

Death and startups: Most startups croak 20 months after their last funding round

Sam Howzit/Flickr

For most startups, death is not a question of if, but when.

While that conclusion may seem obvious, the data to support it is pretty hard to come by. Which makes sense: After all, no one — not founders, not venture capital firms — is going to go out of their way to tell the world when they’ve failed. But they will trumpet their victories. It’s the survivorship bias in full effect.

Still, research firm CBI Insights has managed to get some good data on startup death, which happens a lot more than all the funding news would lead you to believe. Here are some of the most interesting findings:

Most die young. Considering how vulnerable most early-stage companies are, it’s not surprising to learn that over half of them die before they raise $1 million, and 70 percent die before raising $5 million. Most dead companies raised $11.3 million on average, with a median of $1.3 million.

Cash doesn’t (always) buy longevity: But even raising cash won’t save most startups from death. CBI Insights says that, on average, startups will last 20 months after their last founding round (though many will keep lumbering on long after).

Most dead companies are Internet companies. By sector, most dead tech companies were focused on the Internet, which makes sense considering that that’s where all the money has been over the past few years. More Internet companies chasing VC cash means more dead Internet companies. That much is inevitable.

Social is bad news. If you’re trying to launch your own tech company, do yourself a favor and stay out of social, which most of the dead startups focused on. Same goes for marketplace companies (i.e., eBay wannabes) and those dabbling in advertising, sales, and marketing.

What’s especially funny about these numbers is that CB Insights is using them to sell its list of “dying tech companies,” which it’s selling for nearly $7,000. That list, the company says, would be valuable for anyone looking for potential employees or even just products or IP.

Maybe Yahoo will be interested?

Source : venturebeat.com

As Software Eats The World, Non-Tech Corporations Are Eating Startups

Netscape founder and VC titan Marc Andreessen famously wrote back in 2011 that software is steadily eating the world, disrupting industries like music, retail and more. Now large corporations in these industries are starting to eat startups.

Over the past year or two, non-tech corporations have begun to actually open their wallets to arm themselves with talent and technology that can help them enter the digital and data-focused world we now live and work in. It’s no longer Google, Facebook and Yahoo that are competing to acquire the best and the brightest startups in Silicon Valley. There are plenty of corporations in retail, health, agriculture, financial services and other industries that are sending their corp-dev talent to scout out possible acquisitions in the Bay Area and beyond.

Let’s take a look at some of the examples. Earlier this year, Monsanto, a multinational chemical, and agricultural biotechnology corporation, bought big data weather tech company Climate Corporation for $1.1 billion. Insurer UnitedHealth Group bought health data analytics company Humedica for hundreds of millions of dollars. A few weeks ago, fitness clothing retailer Under Armour bought fitness tracking app developer MapMyFitness for $150 million. Office supply retailer Staples bought e-commerce personalization company Runa. Payments processing giant First Data has acquired mobile loyalty startup Perka and mobile payments startup Clover in the past year. Retail giant Target has picked up a number of e-commerce companies. Ford Motors bought in-car music app startup Livio. The list goes on.

Their main motivation is realizing that software is eating the world.

Exitround, the website that launched earlier this year and lets startups anonymously seek acquirers, has been seeing a strong uptick in non-tech, corporate acquirers joining the marketplace to find potential talent and startups.

“Their main motivation is realizing that software is eating the world, and they have to add software talent and technologies to their products,” explained Exitround founderJacob Mullins. On the marketplace, Mullins says that 10 percent of buyers are Fortune 500 companies and 20 percent of acquirers are publicly traded, with a good percentage of the group being non-tech companies.

For many non-tech companies, Exitround is providing a compelling service by which to find startups early. Mullins says that there are increasingly more and more corp-dev execs joining the marketplace to scout for talent. But traditionally the mechanism by which acquirers found acquirees was done either through word of mouth and networking or through investment banks. But Silicon Valley is seeing more and more executives from corporations and non-tech companies visit the region and VC firms to potentially network with startups. Many Sand Hill VC firms are now holding regular events with representatives from some of these non-tech acquirers in the areas of health, retail, financial services and more.

“Walmart was the earliest traditional non-tech company to figure this out,” says Jon Sakoda, NEA Partner and VC. Walmart famously bought Kosmix in 2011 and set up a Labs group in Silicon Valley, far away from the retailer’s Arkansas headquarters. The retailer has steadily acquired more companies and technologies in its fight to compete with Amazon, including four startups this year alone.

Aileen Lee, founder of Cowboy Ventures and Partner at Kleiner Perkins, believes that retail will continue to be an industry where you are seeing large companies eat software.

“A lot of physical retailers saw soft foot traffic in their stores in Q3 and they are more nervous about how e-commerce is eating into their sales,” she explains. Companies like TJ Maxx, Urban Outfitters and others can easily make a $100 million to $400 million acquisition in the current market, she adds. In fact, earlier this year, Urban Outfittersreportedly did try to buy NastyGal, a fast-growing e-commerce site for young women.

“Lots of these retailers have no commerce strategy, but startups have the potential to expand consumer reach to a younger demographic,” says Lee.

David Blumenfeld, SVP of Westfield Labs, the innovation arm of shopping mall developer Westfield, tells us that the company is definitely evaluating potential acquisitions that they can bring into their Labs groups.

“While Westfield itself is not a tech company, we believe that there is not a delineation between online and offline shopping, and we have to be a part of that,” he says. “We believe tech is core to the future of how products are bought even in malls.”

He adds that with the company’s malls, they have the distribution (to potentially 1.1 billion people, he says), and they are actively looking for technologies they can integrate into their malls.

Hunter Walk, the co-founder of VC firm Homebrew, explains that developing a deeper relationship with the customer online is a strategy that more corporations realize they need to be working on. Part of this is actually being able to connect with a potential customer where they are interacting and spending time. “Movie theaters have no idea what their customers are watching at home, and there is no personalization,” he says. He adds that he sees many of these acquisitions being under $200 million.

It shouldn’t be surprising that a mattress company may buy a sleep app.

In Under Armour’s case, the company didn’t have much of a direct relationship with the customer beyond purchase. And as a wholesaler, the clothing manufacturer needed a better way to engage with their customers. MapMyFitness is now going to be the foundation on which it plans to build a new digital training experience and mobile fitness platform.

The other benefit to buying platforms where there is engagement is the data collected, which can help potentially boost sales and personalize experiences. “It shouldn’t be surprising that a mattress company may buy a sleep app,” Lee says.

Sakoda agrees that data, and the technologies behind mining this data, are big tipping points for acquisitions from non-tech companies. “These companies have fallen so far behind when it comes to data collection and analysis and seeing how customers think and what pricing should be,” he adds. In the case of Monsanto buying Climate Corporation, the large agricultural giant was accessing massive weather data processing and collecting technology that could help in optimizing farming globally.

“Big companies are finally waking up to fact that they needed to embrace big data yesterday,” says Zach Bogue, the founder of Data Collective, a fund devoted to backing startups in the big data space. “Now every single large company has massive amounts of data, and figuring out how to use that is complex.” This is why many non-tech companies are sniffing around big data startups.

Data is a key area for content owners and publishers as well. Barin Nahvi, who works with emerging tech and new product development at Hearst Corp., says the company is looking to make more acquisitions in core technologies around data. “We’re thinking about how do we resemble a technology company more, and part of this is building platform and core capabilities,” she explains. “How to use data as a driver of content is something we are evaluating.”

Big companies are finally waking up to fact that they needed to embrace big data yesterday.

Nahvi says that video technologies and mobile are other key areas for a potential strategic acquisition for Hearst. E.W. Scripps, the storied owner of 19 local television stations and daily newspapers in 13 markets across the U.S., just bought Newsy to give the media company access to an audience that consumes their news (and video) on devices like tablets.

Of course buying startups in Silicon Valley is just one part of the challenge for non-tech corporations. The next is actually being able to keep talent happy. The cultures of these companies are vastly different from Google, Facebook and the startup culture in Silicon Valley. The true test is being able to retain talent and ensure that they feel they are part of an innovative team.

To that point, many of these companies have created “Labs” groups to house these acquisitions. As mentioned above, Walmart founded its own Labs group,WalmartLabs – which has grown to over 1,200 engineers and staff – when it acquired Kosmix. Live music giant Live Nation, which just bought mobile startup Meexo and acquired two others in the past year, has also set up a Labs group for technology acquisitions.

Walk explains that these companies are not just buying technologies, but also talent, and they have to be mindful of how to manage and foster that talent. “Just adding small pieces of technology doesn’t commit an organization to a new path,” he says. Adding to that, Halle Tecco, founder of health-focused seed fund Rock Health, says that many challenges come from not being able to actually deploy the technologies successfully.

Just adding small pieces of technology doesn’t commit an organization to a new path.

Ethan Kaplan, the VP of product and technology for Live Nation Labs, explains that the labs group was created to house technical talent and acquisitions. He says that the labs group itself was structured to make it feel like less of a conglomerate and more of a startup. There isn’t a deep hierarchy, and Kaplan and others at the group have worked to make the engineers and other staff feel unencumbered, fast-paced and not beholden to a strict road map.

Mullins says that retaining talent is now at the top of mind for most non-tech acquirers. “Most of these companies want to make sure the transition is successful and are talking with potential acquirees early on where a startup will live and who will own the technology once it is placed in-house.”

At the end of the day, non-tech companies infiltrating Silicon Valley gives many startup founders additional exit options beyond a potential acq-hire from Google, Yahoo or Facebook. But the continued success of these acquisitions (and founder interest in being acquired by an outsider) will depend on how these companies pursue and view innovation and culture. And that’s easier said than done.

Source : Techcrunch

Why is Samsung throwing money at startups?

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In a swank office building, waiters handed out fried pickles and caviar-covered sushi. Shiny new LCD screens covered several walls. It was opening night for Samsung’s new startup accelerator in midtown Manhattan, and the company had spared no expense. "The future for us is about the thoughtful integration of hardware and software," said David Eun, the head of Samsung’s Open Innovation Center. "And that means startups."

The smartphone market is increasingly made up of vertically integrated companies that create both the hardware and software for their devices. Apple was the pioneer of this model in its modern form. Google got in the game when it purchased Motorola. And Microsoft completed the trifecta when it acquired Nokia. Samsung, which has risen to become the world’s biggest smartphone manufacturer, wants to follow suit.

Meet hot companies. Incubate. Acquire. 

"The market has shifted from one where you make phones to one where you control or piggyback off an ecosystem. Samsung controls the supply chain to a greater degree than anyone else, but it has realized that it lags the leaders in software, integration, and services," says Avi Greengart, a research director at Current Analysis. "Its thought process is simple: go where the innovation is happening, Silicon Valley and New York, and cozy up to these folks to get a better look at what it takes to build beautifully integrated apps."

Samsung recently announced a new $1 billion venture fund that it will use to back early-stage startups. But the purpose of the new accelerator space was clearly as much about buying talent as making investments. "We’re looking to meet the hottest companies, incubate, and acquire," said Eun. "It’s a different model from our VC arm." Apps that hang at the accelerator, in other words, may become "Sapps" in short order. Samsung has done this before: it acquired the streaming media service mSpot and made it into a featured app that came preloaded on Samsung devices. At the accelerator launch party a number of employees from Boxee, which was recently acquired and folded into the smart TV division, mingled with the crowd.

"The refrigirator is really well stocked"

"The accelerator space in New York features a series of well-appointed offices and conference rooms where a young startup can ply its trade. Samsung has opened a similar space in San Francisco. "I could definitely get used to working here," said Nate Gosselin, a senior manager at the mobile advertising startup Sharethrough. "The refrigerator is really well stocked."

"As we look to the future, our biggest opportunities to innovate are outside of hardware," said BK Yoon, CEO of Samsung's Consumer Electronics Business, who was in New York for the opening of the accelerator space. As for why young startups would choose this venue over the half dozen other accelerators and incubators in New York, Yoon said that "the companies who work here will get access to Samsung’s roadmap, distribution, and marketing support."

"We are in the unique position of being number one in both television and mobile," said Eun, gesturing around the space to the panoply of LCD screens hung on the walls. "Our goal is to have all these screens communicate with one another, so that we can create the largest platform for distributing apps and, potentially, advertising."

"Our biggest opportunities to innovate are outside of hardware."

 This ambitious plan is another catalyst for Samsung’s push into software. "Samsung envisions an internet of things where your phone talks to your tablet, which talks to your TV, which talks to your refrigerator," says Ross Rubin, a principal analyst at Reticle Research. "In that scenario, where customers are using devices that don’t have intuitive, native interfaces, software becomes increasingly crucial."

There has been a steady stream of speculation that Samsung will be tempted to pull away from Google and fork Android, much as Amazon has done, giving it the ability to sell devices preloaded with its own services and store, and more importantly, without Google’s. For the time being, the pair are still too closely tied, but it’s clear Samsung is hedging for this eventuality by trying to bolster its own software game. Whether acquiring startups is the smart way to accomplish that, though, remains to be seen.

Source : The Verge

Is the Middle East the next new market for tech startups?

[This is an excerpt from the forthcoming book, "Startup Rising" by Christopher M. Schroeder. Copyright © 2013 by the author and reprinted by permission of Palgrave Macmillan, a division of Macmillan Publishers Ltd.]

The West tends to look at the world through the prism of its own successes, and believes that it has a monopoly on innovative ideas and entrepreneurship. Nothing amuses the entrepreneurs I meet around the world more than when some US politician who refers to entrepreneurship as a “leading American export,” as if other, thousands-of-years-old entrepreneurial cultures have only recently discovered it.
And one of the most common questions I hear from American entrepreneurs, investors, and policy makers as they consider looking at new growth markets is, what will be the “next Silicon Valley” of a certain region or country?

“Interesting businesses are and will be created outside of the Valley, in the States and around the world,” Ben Horowitz, the former CEO of the tech juggernaut Opsware and co-founder of one of the most successful venture capital funds in the world, readily concedes.

“But think of the movie business. Great films are made in many locations, but there is a reason that the vast majority of successful films — certainly in aggregate dollars — come from Hollywood. That’s where talent wants to be. There is Bollywood in India but it pales in comparison. In fact, how many technology startups outside of Silicon Valley or the US have built multi-billion dollar businesses?”

When I pushed venture capital investors who have opened up offices in emerging markets about why they do so, two consistent themes arise. First, they look for large market opportunities — one may lose money in a place like China, but for all its challenges, it’s too big to ignore. Second, emerging markets offer outstanding engineering and call-center talent, invariably much cheaper than in the United States.

As for opportunities for regional or even global innovation from the emerging worlds?
“It happens all the time, especially for services aimed at local or even regional needs, which explains Alibaba, Tencent, and Baidu in China,” notes Mike Moritz, chairman of the legendary Sequoia Capital — a pioneering venture capital firm responsible for backing the likes of Apple, Google, Cisco, PayPal and LinkedIn which are among the other most successful technology companies in the world.

“But Silicon Valley has always been a magnet for immigrants. It’s the place where raw technical abilities will always be embraced by successful companies and worldly leaders.”
But what happens when the vast majority of talented people don’t want to move — when they not only want to stay home, but are driven by almost patriotic passion to make change where they come from?

The real question going forward won’t be whether Silicon Valley is the only game in town or where the next one will crop up. Rather, it will be how rapid and inexpensive access to its innovations in software and devices will create new, multiple “hubs” of innovation in every corner of the globe.

This will also challenge the West’s definition of “innovation” as only the next shiny, new thing. The word has different ramifications in emerging markets that are gaining access to software and devices for the first time. These markets create innovative solutions for their own challenges and opportunities. From their unique experiences and circumstances, in fact, their solutions may one day be adopted globally.

What if information technology could make geographic proximity and network effects of talent less important? We know this is already happening in our day-to-day lives. Skype, group chat, social networks, collaborative software, and other, ever-advancing video connections are already mainstream and improving daily. They have had clear impact on the social and political dialogue in every country where they are embraced. They create hubs of action in many walks of life  unimagined even five years ago, and tweaked by individuals to better attune them to local and regional cultural needs and norms. These experiences may not yet be as ideal as face-to-face proximity, but for a new generation raised on them, and by breaking down barriers of distance, might they be plenty good enough?

There is precedent for how local need-solving becomes globally competitive innovation in the hardware business. Certainly no one in the early 1980s would have expected Japan or Korea to become a dominant player in mobile devices and consumer gaming. Who would have imagined that Finland, a country known mostly for wood products, would create Nokia — a company that first used mobile communication to facilitate connections between forestry and milling locations hard to reach with traditional telephony?

Look at mobile. Basic cell-phone penetration in Egypt, a land of 80 million people with annual per capita GDP under $6,500, is over 115 percent. The penetration numbers hold true throughout the Middle East.  Yet currently only 8 to 12 percent of these users have access to smartphones.  Can we fathom what kind of innovation may come from countries — those that never even knew landlines — that attain mobile smartphone computing access of 50 percent and more of their citizens? Mobile experts told me we could see sub-$50 smartphones within three years to help drive this adoption.
Moritz concedes, upon further reflection:

I’ve found in my travels that if you put great entrepreneurs from any corner of the world in the same room with each other, they are quite similar even if their mother tongues, religions, and colors are different. They look at the world, problems, and opportunities the same way. Their minds, their energies, and their desires to succeed are a lingua franca. They talk to each other as if they’ve known each other their whole lives.

Is any of this, however, truly possible and scalable in the Middle East?
In the face of brutal oppression in some nations and political uncertainty throughout the region, it’s hardly an idle question. Added to political instability, the gap between the mega-wealthy and the desperately poor throughout the region remains shocking; education and literacy offer profound challenges. Corruption, high unemployment, heavy reliance on government largesse, archaic and often indecipherable rules of law, and cultural resistance to investing beyond fixed assets are all daily realities.

For all the enthusiasm that came with the Arab uprisings, Arabs are still debating vehemently the kinds of societies and governments they will create, what role religion and women will play, and how business practices will be proscribed. One need only spend a few days in Amman or Cairo, going through metal detectors in every restaurant, hotel, and tourist destination, to sense how the political and social realities can keep risk capital — and, indeed, business itself — sidelined.

But while we must take these concerns seriously, they can also mask the three-fold hurricane-force wind these entrepreneurs have at their backs.

First, technology offers an irreversible level of transparency, connectivity, and inexpensive access to capital and markets unprecedented only five years ago. A new generation in the Middle East, as elsewhere, has never known a world before information technology, and they have a keen understanding of how others like them live and create opportunity for themselves.

Second, this generation benefits from regional and global capital now more comfortable with political risk. Twenty years of experience in other emerging markets, all but dismissed as economic engines less than a generation ago, has laid important groundwork. Nearly all of these countries were, and remain, equally marred by political uncertainty, opaque governments, corruption, and weak infrastructures.

Third, changing market dynamics, growth, and opportunity in the Middle East were in motion well before the uprisings. The Arab world alone has over 350 million people, nearly twice the size of Brazil — a GDP larger than Russia and India, and per capita GDP nearly twice China’s. Disposable income has grown 50 percent over the past three years, to over $1 trillion in 2012.  It’s a young market, with over 100 million people under the age of 15, who love their connectivity, mobile phones and rapid adoption of smart devices.

And this new generation is hungry. If there was one universal sentiment that connected every young entrepreneur I met it was this: Their revolution was not merely about overthrowing longstanding dictatorships, but challenging a generational premise and complacency of their parents that things could not change. “Why should we accept mediocre jobs in lumbering large companies or the government — assuming we can even find those?” one Jordanian founder told me. “In fact, I don’t understand why my parents accepted it! We can be better!”

These entrepreneurs come from every walk of Arab life. They are women and men, devoutly religious and culturally Islamic, college educated and self-taught, young and old and from literally every country in the region. They are above all realistic about the odds against them, yet unfazed by the political and infrastructural barriers.

They view the recent political change as an unprecedented opportunity and, in some cases, confirmation of their efforts over many years. They are unleashing social and economic forces that will create the foundations of a new Middle East. These forces will build and evolve over years, but will be accompanied with a speed and transparency through technology that will hold any leadership, and themselves, to instant accountability.

These entrepreneurs are not naïve. They expect setbacks. But they believe they are on the right side of history.

So to me, the most interesting question of all is why wouldn’t the Middle East be ripe to unleash a new era of tech-based entrepreneurship and innovation of the sort that has driven growth and job creation around the world?

[Image courtesy Shahrokh Dabiri]

Microsoft's Three Options For Its Next CEO

With Friday's announcement that Microsoft CEO Steve Ballmer will retire within a year, the parlor game is on to guess who the next CEO might be.

I've covered the company for a while, and the news surprised me -- not the fact that Ballmer's stepping down, but the timing. Investors have been grumbling about Ballmer for years, and so have many employees. Over the last 15 years Microsoft has managed to miss the boat on important trends like smartphones, tablets and cloud -- despite the fact that it was standing on the dock the whole time.
So for me, the first part of the surprise came in June, when Microsoft announced a reorganization that consolidated power under Ballmer. The new structure stripped out the P&L independence of the business units, and centralized functions like marketing and finance under corporate. At the time of the reorg, Ballmer wrote about breaking down the silos that had stymied innovation. This was a reorg that depended on Ballmer himself to make it work, and apparently the board had signed off on it. It seemed to signal that Ballmer would be around for a few more years.

That's why the announcement of Ballmer's impending departure is a head scratcher. Why reorganize a company so that decisions flow through a CEO who's a short-timer? Any decision with implications that stretch beyond a single year will be inherently unstable because a new CEO could easily reverse it. And let's be honest: All of the important decisions Microsoft has to make have implications that stretch beyond a year. Strategically, Microsoft is going to be a mess until they get this CEO business sorted out.

Which brings us to the subject at hand: Whom should Microsoft pick?
A company of Microsoft's stature basically has three choices: Friend, foe or family. (Given Microsoft's unique dynamic, picking an unknown, the way Hewlett-Packard did with Mark Hurd nine years ago, is probably out of the question.) Here's how the options break down:


FRIEND: This would mean getting a former executive to return -- or picking an executive from a company in Microsoft's ecosystem -- think Nokia, Intel, HP. That's what Juniper did when it snagged Kevin Johnson from Microsoft several years back, and what Motorola did when it got Sanjay Jha from Qualcomm way back when.

The upside here? An exec from a partner company probably knows the executives within the hiring company, and knows the rivals and customers. A strong executive from a partner company may also have a decent sense of the strengths and weaknesses of the product portfolio. A former executive knows many of the players but might have benefitted from some distance.

The downside? You know how partners are. They sometimes have notions about what's wrong with the hiring company before they walk in the door. And their knowledge base might not match up well to the hiring company's needs. And a former executive might be too much of a relic to manage today's company.

FOE: Who better to run a company than an executive from a rival who beat you before? That's what Yahoo's board got when it hired Marissa Mayer from Google, where she led the development of products that turbocharged the search giant and left Yahoo in the dust. This is a tough hire to pull off -- because the best executives from a winning company can usually write their own ticket with their current employer, and are loath to leap to a loser.

Even if the hiring company manages to lure away a star, it's not always smooth sailing. Sometimes the new star CEO has a disdain for the hiring company and its customers, and break too much china in the name of remodeling. (Exhibit A: Ron Johnson at J.C. Penney.)

FAMILY: Companies prefer to elevate one of their own. That's what IBM did with Ginny Rometty, Apple with Tim Cook, Intel with Brian Krzanich, Xerox with Ursula Burns, Adobe with Shantanu Narayen, and so on. The advantages of hiring an insider? They already know the company, the executives and the board. They know and respect the culture. This works particularly well if the succession process has been well-organized and deliberate.

But you know when it doesn't work so well? When the CEO search begins by surprise, and the hiring company's best executive talent starts getting publicly compared in a high-end meat-market atmosphere. Chances are, some executives who get passed over for the CEO title will leave for other opportunities. The insider CEO is also less exciting when investors and partners think the hiring company needs some shaking up. Any insider who'd get considered for the CEO job, the thinking goes, is probably part of the problem.

Steve Ballmer with Nokia CEO Stephen Elop in 2012. (Spencer Platt/Getty Images)

So what should Microsoft do? Assuming Google Executive Chairman Eric Schmidt, former Apple executive Scott Forstall, and former IBM CEO Sam Palmisano are all otherwise occupied, Microsoft is unlikely to lure away a victorious rival.

There's a fantastic list of former Microsoft engineering minds who could be great visionaries -- Ray Ozzie and Steven Sinofsky come to mind. Do they want to run Microsoft? It's hard for me to imagine Ozzie wanting it at all. Sinofsky still sounds like he wants to have a big impact on the tech world, but if he were to return to Microsoft, something tells me the shakeup would be ... dramatic.
One option I mentioned on CNBC Friday sticks with me: Nokia CEO Stephen Elop. Why?
He's part friend, part family. As head of Microsoft's Business Division, he ran (and grew) the most profitable part of the company, and helped lay the groundwork for its transition to the cloud. He knows and respects Microsoft's culture.

Elop's tenure at Nokia is controversial, but face facts: He had the courage to abandon Symbian when many in Europe (wrongly) thought it could still have a bright future. He wisely ditched MeeGo when he saw that there wouldn't be enough of an ecosystem around it. He resisted the temptation to jump on the Android bandwagon when everyone else did, seeing that differentiation would be too difficult. (Today, no smartphone maker is managing to make decent profits in Android except Samsung.) Instead of all those, Elop hitched Nokia's future to Microsoft's Windows Phone software.
Today, Nokia's Lumia sales are small, but growing; it seems to stand a better chance than Research in Motion of getting a foothold in Europe and a few emerging markets and surviving long-term. And Elop has a very valuable perspective: He's Microsoft's biggest and most loyal partner in the mobile space. Nokia's engineers and product managers have been clamoring for Microsoft to ship more frequent updates to Windows Phone; Elop has felt that pain intimately.

But is Elop a good CEO?
For anyone who's been paying attention, it's clear that the bulk of Elop's thesis about Nokia has played out. Symbian didn't have much of a future. MeeGo phones? They would have depended on Intel chips, and those haven't make any significant headway differentiating themselves in the market. If Nokia had bet its future on either of those -- or worse, tried to ride many horses at once -- it might be dead already.
Bloggers wrote a year or two ago that Elop was the worst CEO out there, but based on what? The idea that Symbian would be taking over the world by now? More likely, it would be declining as fast as BlackBerry. True, he shouldn't have let the infamous "Burning Platform" memo leak out and send Symbian sales off the cliff so soon -- but it's better to make your biggest mistakes early in your tenure.
There are other reasons why Elop might not be the best choice. If his departure were to cause Nokia to stumble, that would kneecap Microsoft's mobile efforts, too. And Elop certainly wouldn't take the heat off of the Microsoft board -- critics would show a chart of Nokia's stock performance under Elop and declare him a failure right off the bat.

But whichever option Microsoft chooses, it hasn't got much time to lose. The organization needs to act faster and smarter in the cloud and mobile era -- and it's in the early stages of a reorg that consolidates power at the top. It won't be able to move at full speed until it has a permanent CEO.

See Jon Fortt's latest work on CNBC here.

Source : Jon Fortt on Linkedin

On why the biggest tech companies are built in Silicon Valley

On Friday, ContentDJ founder Jerry Tian published a blog post addressing the issue of “Why Canada Has No Big Tech Companies” – Nortel is dead and RIM is quite obviously dying, he points out. Tian, who was himself responding to an interview with Boris Wertz, founder of Vancouver’s Version One Ventures, offers a thought provoking theory and one that applies to a large degree to all up-and-coming startup ecosystems.

The founder questions the commitment and willingness of Canadian investors and entrepreneurs to devote the ten years or more that it may take to build an independent multi-billion dollar company with staying power, rather than flipping that company for an eight, nine, or even ten figure exit – typically to Silicon Valley acquirers – and exporting that future innovation and wealth building. It’s a charge that could be applied equally well to New York, Los Angeles, Chicago, Austin, Boulder, and dozens of would be international startup hubs.

“’Silicon Valley is not a place but a state of mind,” Tian writes, quoting KPCB General Partner John Doerr. “Some of these insights are collaboration, competition, openness to innovation, failures and experimentation. Probably the most important one is the long term commitment behind technology companies.”

Of course, Tian and Doerr are spot on. What emerging startup hubs often miss when trying to “become the next Silicon Valley” – a flawed mission in and of itself – is that the grandaddy startup ecosystem is more than its physical infrastructure of entrepreneurs, engineers, designers, investors, service providers, universities, and the like. Equally important are the systematic irrationality and a feedback loop around the willingness to turn down the quick buck and go for the massive once-in-a-generation success story.

This isn’t the case with every company, founder, or investor, but it exists in enough density in the San Francisco Bay Area, and based on results to a lesser extent in Seattle, that these are the only two areas areas in the country that have led to multiple ten billion dollar plus technology and internet companies – the true giants that transcend their local ecosystems and seep into the lives of average consumers.

It is these companies, with their ability to attract talent, make acquisitions, invest in long-term R&D, and create systemic wealth that make ecosystems. And with very rare exception, getting to this scale requires a decade or longer commitment and a willingness on the part of founders and investors to turn down near and mid-term paydays. Similarly, it requires a vision and an ambition  to build something that will be around forever.

Tian writes:

So, why is nobody talking about these acquisitions? I think it’s simply because investors are getting filthy rich off these deals.

And that’s exactly what not to do if you want to create the next Silicon Valley. You cannot sell the hen that lays the golden eggs for a few quick buck [sic]. Technology companies take 10 years to really manifest the value. To really build a billion dollar company, it takes tremendous multi-decade commitment. And that’s the biggest missing piece in Canada.

Like or hate Zynga founder and former CEO Mark Pincus, one has to respect him for saying that he wants to build a “digital skyscraper,” a company that would be around for 100 years. Pincus went further to say that he views serial entrepreneurship as failure and that he wants to run Zynga for the rest of his career. Ironically, he recently replaced himself as CEO, personally recruiting Don Mattrick for the role. But Pincus made the ego-busting move in an effort to return Zynga to its former glory and to get it back on that century-long track.

In his somewhat controversial on-the-ground reporting on the Chicago ecosystem last summer, Trevor Gilbert delved into “the Midwest Mentality” and the impact it has on the types of companies that are built there. Gilbert called Chicagoans “pragmatic.” Lightbank partner Paul Lee offered an example of this pragmatism, saying that Chicago startups typically focus on generating revenue from day one, rather than building a massive, but unprofitable user base, a la Facebook and Twitter pre-monetization. Profit is all well and good, and should be the ultimate goal of any business that wants to be around for the long term, but focus on it too intently early on and it can be impossible to invest in growth. It takes a special kind of vision and fortitude to look past the short term and make the big bets required to create massive companies.

This is not to pick on Chicago. A similar phenomenon seems to exist in LA where companies race out to a low nine-figure valuation and then either stall out in that vicinity or sell for sub-one billion dollars to a larger out of town acquirer. Call it the curse of the big-little deal – maybe everyone here just wants to see their name in lights. In a market that is desperate for success stories and validation, these medium-sized exits are hailed as “wins” – and they are, given the difficulty of building a hundred-million dollar company – but they often rob the ecosystem of potential multi-generational tentpole companies. This is a mentality that appears to have changed in recent years, but that change has not yet bore fruit in the form of LA’s answer to Google, Amazon, or Facebook.

New York has seen its own version of this phenomenon, with the ecosystem’s biggest success stories, DoubleClick and Tumblr, being exits to Google and Yahoo respectively. Local darling MakerBot followed suit, selling for $600 million in June. New York does have Fab, Gilt, and Foursquare all shooting for the moon but these companies and the ecosystem as a whole still must prove that they can sustain this ambition and parlay it into a giant company.

As Tian points out, part of the blame for these exits falls on investors. It’s not that investors aren’t interested in massive outcomes – they most certainly are. But not all non-Silicon Valley investors are equipped for the financial and time commitment it takes to create them. These investors, many of which operate out of first- or second-generation funds, often have smaller pools of capital to invest out of.

Write a $2 million check at a $10 million valuation out of a $100 million fund, and a 50x return looks pretty good, returning 98 percent of your fund. Make that same investment out of a $1 billion fund and the impact on fund economics is decidedly less interesting. This is one of the few arguments in favor of mega-VC funds. But it also benefits firms that are on their fourth, fifth or sixth fund and have less to gain reputation-wise with solid base hits.

Returning to Tian’s piece, he closes by writing, “If you are wondering why Canada doesn’t have the [sic] billion dollar company, it cannot be more obvious than this. Too many people are in it trying to get rich quickly off entrepreneurs. Not enough people have the gut [sic] and commitment to create or help create something truly meaningful.”

Tian paints with a broad brush, yes, which ignores many of the subtle nuances and external factors that contribute toward building massive technology companies. But there’s little arguing that people in Silicon Valley think differently. Armed by decades of case studies and social proof, the ecosystem has developed a healthy disregard for rationality.

Mark Zuckerberg famously did just that when Yahoo came calling. He was just 20 years old and Facebook, at less than two years old, was unprofitable with just $30 million in revenue. Yet Zuckerberg and Facebook’s board, which included Peter Thiel and Jim Breyer, turned down Yahoo’s $1 billion offer. When the elder advisors tried to convince the young founder that his 25 percent of that offer would be a big number he said, “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”

Israeli social mapping company Waze just made the opposite decision, selling to Google for slightly more than that mythical $1 billion. Sarah Lacy cautioned Israel-bulls to “reconsider too much high-fiving over Waze.” While legendary local angel investor Yossi Vardi likes to compare Israeli startups to tomato seeds which need more experienced farmers to grow properly, Lacy believes that the country has the potential to build and sustain globally dominant Web companies without selling, offering MyHeritage as an example.

None of this is to say Silicon Valley is immune from this syndrome. There are thousands of entrepreneurs in the Bay Area who would rather flip their company than do the long, hard work of building something sustainable. But the sheer density of the ecosystem means that a dozen or so each year choose the road less traveled. Also, given the scale of the Valley ecosystem, building a big company is the only way to move the needle and attract talent and capital. Everyone in line at Philz coffee is working on the next “billion dollar business.”

Finally, Silicon Valley is a magnet for those entrepreneurs around the globe who want to build great technology companies, and the ecosystem surely benefits from this imported talent. This was actually Wertz’s central point in the original interview and is one that Tian touches on briefly. It’s a difficult problem to solve, given the power of knowing someone (or several someones) who has summited the mountain before and who can show you that it can be done. In each of these other markets, someone will have to be the first.

In many cases, it is highly irrational to turn down a nine- or ten-figure acquisition offer. There are real benefits to gaining access to the financial and personnel resources of a larger acquirer, ones that can often make or break the success of a still fledgling company. But, if there’s anything in Silicon Valley that Canada, LA, New York, and other startup ecosystems should aspire to it’s this willingness to roll the dice. Sometimes the shooter rolls a “7.”

Source : Pandodaily, by Michael Carney

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