Wednesday, July 24, 2024

A VC Talks About Tech in the Age of Gloom

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As venture capitalist Ed Sim takes my call, he glances quickly at the stock market. The Dow’s dizzying whipsaw motions and the accompanying deluge of dark headlines is unnerving investors small and large – including Sim.

“It’s frightening out there,” he says, observing only half-jokingly that the sky appears to be falling.

But Sim reassures himself with the thought that “we’ve seen this movie before.” Certainly Sim himself has. A VC since 1996, he participated in that horror flick known as the dotcom boom and bust. The New York-based Sim, a Harvard grad, is managing partner of Dawntreader Ventures, with $290 million under management. He sits on the board of a variety of Internet companies, and funds the likes of Greenplum, a database software firm. He blogs at BeyondVC.

As Sim sees it, the tech world learned a hard lesson from the dotcom crash, a lesson that may now help it survive today’s pessimistic gloom.

In the 90s, tech start-ups were built on what he calls the ‘Field of Dreams’ model. Yet as they learned after investing mountains of cash on sandcastle business plans, “build it and they will come” only works within the reality of a Hollywood script.

In contrast, today’s tech start-ups are being forged with something resembling clear-eyed pragmatism. The operative mode has been bootstrapping, as they’ve minimized costs by using open source and commodity clusters. “It’s more about building stuff, getting product ready and not spending a lot of money,” Sim says.

Ed Sim, Dawntreader Ventures
Ed Sim

Instead of Field of Dreams, the current model is “release early, release often,” he notes.

Not that he’s become a starry-eyed optimist. If the looming downturn squeezes Internet advertising budgets, he sees a negative impact on start-ups. (And yes, he’s still interested in ad-based start-ups, a Web model that some turned away from after the late ‘90s.) Nor is there safety in large enterprise budgets. “On the negative side you saw SAP come out with [bad] numbers, but look, they’re moving billions and billions of dollars of revenue – of course they’re impacted. Some of these deals are based on financing.”

His gloom, however, is tempered. “I’m not going to say that companies are going to survive better than they did last time, but people are doing it more judiciously, there are more proof points available.”

A key difference between the 90s and today: tech firms are now looking ahead, eager to make adjustments as needed. In the dotcom frenzy, ill-managed start-ups kept rushing toward the cliff like lemmings, heedless of burn rates, hungry to be first in their sector. And profit be dammed.

What a difference a decade makes. “If you talk to veterans in the space, whether they be entrepreneurs, venture capitalists or investors, having been through the movie before, when you say, ‘Hey, things are really bad this time and even worse than before, you need to course correct’, I think people really pay attention,” Sim says.

As an example of a start-up model that’s adept at course correction, he cites ad-supported online businesses that use Google AdSense (or other ad networks) instead of hiring sales reps to call big-bucks advertisers. He calls this a “frictionless” model, and notes that its low fixed costs allow an owner to rapidly shift strategy as business conditions require.

“The models that are going to be hurting a little bit more are the ones that are going to be reliant on heavy, large direct sales, going after the big elephants,” he says, referring to high profile advertisers. Naturally, he concedes that this big game offers the most lucrative ad revenue. However, “When you go after the bigger dollars, you better have a bigger/better/faster/cheaper kind of approach. It’s got to be much better than what else is out there.”

It’s the issue of burn rate – the rate at which firms devour dollars while waiting for profit – that concerns Sim highly. For today’s venture capitalist, a start-up with a rapid burn rate is as likely to get funded as the unwashed slob is to get a date with the prom queen.

“There are pockets of great things in every space, but one thing that people are very leery of is huge, huge burn rates.” (Don’t call us, we’ll call you…)

So amid the gathering gloom, what tech sector still excites venture investors?

A particularly hot sector is cloud computing. Cloud computing is very much the buzzword du jour, Sim says. It’s emerging so rapidly that the term ‘cloud’ now has a dazzling array of definitions, used in a blizzard of techno-speak. But in essence it refers to a company purchasing computing power from a remote provider over the Internet (or “cloud”) instead of relying on in-house servers.

The scores of companies springing up to cater to the various needs of cloud customers are like prospectors rushing to break ground in the 1849 gold rush. Now is the time to lay your stake – especially since cloud computing offers cost savings in an era when budgets are squeezed.

“[Cloud vendor] Amazon EC2 is growing very quickly and there are more and more ‘clouds’ coming out there,” Sim says. “And I’m seeing more companies providing infrastructure services and management layers to help you deploy on multiple clouds, to help you meter [usage] up and down. And I’m seeing open source cloud-type plays.”

A sweet spot of growth is the security of cloud computing, given that remote computing creates a buzzing locust plague of security nightmares. But the possibilities for new investment in cloud computing reach from wireless to enhancing data flow. “From the infrastructure layer all the way up to the app layer, it will be very interesting during the next five years,” Sim says.

The fact that the cloud leverages the Internet presents an irony of venture investing, circa 2008. In the mid ‘90s, investors opened their wallets for Web ventures because they knew the Internet was the Next Big Thing. But, Sim says, even years later the Internet is still the Next Big Thing.

The Web, though it has affected everything from dating to sports to shopping, has only just begun. “I still think we’re just in the second or third inning right now,” Sim says.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that space-spectrum as well.”

A conversation with Sim is enough to make even a curmudgeon believe the cliché about every dark day being followed by slivers of sunshine. Certainly he himself plans on looking for pots of gold at the end of the (rainy day-induced) rainbow.

“Some of the best opportunities were created during tough times,” he says. He recounts talking with a friend the other day and getting a doubting look after expressing optimism.

“I said, ‘Hey look, if you’re a product guy, it’s a great time to bang away and refine your product over the next 12 months. And be ready 12-18 months from now with a great product.’ Just keep the burn low, focus on the product, get great feedback. And 12 months from now you can start emerging if the economy picks back up.”

“It’s definitely scary and ugly out there, but if you have a smart approach and you believe in what you’re doing, then you can still plow ahead.”

James Maguire is the managing editor of Datamation.

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