That's right, to escape small cap hell you need to have a market cap over $2 billion.

What Does It Feel Like To Be In Small Cap Hell?

Lonely. Nobody cares about your little venture. To the team that endured blood, sweat, toil and tears to get to $50 million in revenues, and then go through all the SEC gyrations to become a public company, that is tough to accept. Here is what you can do.

1. Hire a strong investors relations team and send out lots of press releases, be accessible to the press, go on road shows and speak at conferences for investors. Your IR team can take care of the mechanics, but this is also a big time-suck for the CEO and CFO. (And you cannot say, "Sorry we missed our numbers we were too busy schmoozing folks like you.") The result is a lot of work and you have to do it - but the payoff is small. Every other small cap is doing the same thing.
2. Buy back your own shares. That tells even the most dimwitted investor that you think the stock is undervalued, and as you run the company you probably know. This is fine if you personally are vastly wealthy or you have massive amounts of cash laying idle on the company balance sheet. In other words it is not an option for most companies

Social Media IR Rides To The Rescue?

Agoracom is a modern IR firm. They use online methods to tell your story. That may not sound like a big deal, but IR is a pretty conservative business, so just using a few tools like Twitter intelligently is a big step forward.

Agoracom's pitch is that they can "tell your story". For a while there will be an opportunity to use modern methods while your competitors are stuck with their buggy whips. But that advantage will erode really fast. So this is where the new Finance 2.0 sites like Seeking Alpha, Stocktwits, Kaching and Covestor may have the key.

I decided to test this on the 14 publicly traded SaaS companies.

Finance 2.0 For Small Cap: It is Too Early To Tell

Select a classic small cap stock in the SaaS Index. For example: RightNow Technologies (RNOW). At time of writing, they have a market cap of $525 million. It is a cool company that is growing fast and delivering good results for customers. So how much coverage do they get on these new sites? In my test I looked at RNOW for the period Jan. 1 to March 1.

StockTwits: There were nine tweets about RNOW, and many of them mentioned RNOW among a list of other stocks. Some are not very helpful, such as: "Does anyone know the future of $rnow ?"

SeekingAlpha: This has two posts that were specific to RNOW and they seemed high quality. That is better than nine tweets that don't say much.

Covestor: This is interesting to play around in. You can see the last 10 trades done by Covestor members in RNOW. But you cannot drill from that to any rationale into RNOW. The system is set up to do that, but there is just nothing there yet.

Kaching: This gave good news aggregation on RNOW. It looked better than YahooFinance (still the starting point for lots of investors) but seemed to lack depth. Nor did it have any fundamental new information.

So, from the limited perspective of one small cap, these sites are at this time not the answer.

What about "ye olde stock forum" on Yahoo Finance? Their message board for RNOW for the same period of time has 28 posts, not including the threaded replies. That puts them way ahead of the newcomers.What about quality you ask? What is the use of a lot of noise from anonymous posters pushing the stocks they own (or panning the ones they short)? That seems to be the problem with all these sources.

Wanted: Patient, Long-Term Investors

Found: Momentum-chasing day traders.

You want investors who will buy into the quality of your technology, understand your value proposition, like the market you are in and think you are doing a reasonable job managing the business. In other words, you want Warren Buffett.

That is not what these new sites are delivering. They do not seem to be the key to escape from small cap hell.

Let Your Story Surface

The evolution seems to be:

1.0 Tell Your Story. This is standard investor relations. The updated version of IR is to be present where investors hang out, which today means online. But it is still the old broadcast model.

2.0 Let The Crowd Tell Your Story. This is classic social media - and it suffers from classic social media problems. You might trust a user-generated review on Yelp before going to a diner, but you are likely to be a bit more nervous before investing your kid's college fund in a company.

What we need is something that reverses the flow, that lets investors discover you, that lets your story surface. This is where XBRL may help. (For a basic intro to XBRL read our earlier coverage.)

The Current XBRL Disconnect For Small Cap Is Temporary

XBRL was not any help when I was compiling the data for the 14 companies in the SaaS Index for the Saas Insights Report (a paid report for investors available from CapitalMarkets.com. Disclosure: The guest author wrote this report). The reason is simple. Only one out of 14 reported to the SEC in XBRL format. That company is Salesforce.com (CRM). The reason for that is also simple: The SEC currently mandates that companies with a market cap higher than $ billion report using XBRL. That is what creates the disconnect:

1. XBRL will enable the good investments from small cap companies to surface, but,

2. Only big cap companies report using XBRL (and they have no trouble reaching investors).

The good news is that disconnect is temporary. The second wave of new XBRL filers in 2010 is estimated to include 1,500 - 2,000 reporting companies, and the final wave in 2011 is for about 10,000 additional companies.

Imagine the Information Discovery Tools

When I go to my local wine store, the owner asks me what I want and we have fun with my standard reply that I want something "incredibly delicious and ridiculously cheap". Investors want the same. Warren Buffett got to be one of the richest men in the world by finding a few of those.

When all companies file in XBRL (and some geeks have created some neat tools to help sip more effectively from that firehose), ordinary investors will be able to create really powerful filters to find those "incredibly valuable and ridiculously cheap" companies.

They won't find them among the big cap companies. They will find them among the thousands of small cap, micro cap (and yes, even nano cap) companies. When the value surfaces, they can reach out to IR who can them tell their story.

Of course, when all this pans out, the opportunity to find the bargains will disappear. That is the price of an efficient market.

But the value to all the companies trapped in small cap hell will be immense. They can focus on building value knowing that the value they create will surface.

And that will have a great impact on the innovation economy.

Photo credit: Chris Whiteside

In the last few months I was hearing positive things from customers about Yammer. Then I saw Emergence Capital put in $10 million. There must be some serious traction for that to happen. So I spoke to David Sacks, CEO at Yammer, to find out the story behind this news. There are some interesting lessons in their success for other SaaS entrepreneurs.

Raising $10 million from VC that really understand SaaS is not traction, but it is evidence that traction is probably already there. I was keen to find out some numbers.

Sacks told me that Yammer has over 60,000 networks (a.k.a companies using Yammer) and that the average network has more than 10 employees. So that means that they have over 600,000 "seats".

But most of those are free. The Yammer story is about how well freemium can work if done right. Sacks told me that they have a conversion of about 10% to 15% from free to paid. So you can do the math. Actually you cannot really, this is normal in a private company that opens the kimono slightly but won't do the full disclosure that you get and expect from a public company.

But you get the basic picture. They are getting lots of free users and converting a reasonable number to paid. And they don't need Superbowl ads to do this. So the CAC/ACV ratio (customer acquisition cost divided by annual contract value) looks like it must be pretty good.

Simple Is Good

When Yammer won TC50 I saw many other ventures that had far more sophisticated technology and models. So it seemed like a joke that something as simple and derivative as Yammer should win.

But in the startup game, simple is good. There is a reason we often have to remind ourselves to KISS - keep it simple stupid. It is hard to get noticed and even harder if your proposition is not brain-dead simple.

One analyst who tracks Enterprise 2.0 told me that Yammer was like the "gateway drug for social media in the enterprise". It is so simple to get started. Then when you get some benefit you look around for additional features. Sacks was keen to point out the sophisticated features that Yammer has now built for enterprise customers. You can see them on their site, and the big companies using Yammer and singing its praises (such as Sungard) would demand these features.

But adding on features when you get market traction is not that hard. That is not the story. Getting traction is the story.

The 'Google Price'

Their base price is $3 per user, per month, and they have a Gold version at $5 per user, per month.

That is what some people call the "Google price" (how high they price their apps). Zoho is in the same range. In the non-digital world we call this the Walmart price, a.k.a the China price.

At scale, these prices lead to a great business. But you have to get to scale. Starting with these price points makes scale more achievable.

No SaaS startup can ignore this price point any more. A low entry price reduces friction. Remember the 10% to 15% conversion from free? Price is key to that.

Google Buzz Will Kill Them. So Will Twitter. Hmmm...

I spoke to Sacks on the day that Google Buzz was buzzing. Actually I had already switched off Buzz, deciding that it is a time suck, and no longer believe that Google wins at every game they enter just because they won the biggest game of all - search/PPC.

When Yammer first came out I thought that Twitter could replicate their "private mode" with a few lines of code. They could and it would have stopped Yammer dead in its tracks. But they did not. They still could, but now Yammer has some traction. If Twitter offers this capability now, Yammer can still make it. And Twitter has a priority list of mega-big opportunities as long as your arm - and this one is probably way down the list.

So Yammer may be able to carve a big enough role for itself between the gorillas.

The Great Unified Messaging In The Sky

Yammer is a replacement for email. That obviously does not mean people stop using email, they just stop using it for some messages. That is happening already. Messaging is getting fragmented and that creates its own problem. So lots of smart folk are going after unified messaging. Google is using millions of people as a consumer research panel by throwing Wave and Buzz out there and analyzing the reactions.

Somebody will get unified messaging right. But it will require some user interface magic. If Apple focused on this... ? In the meantime, we can expect fragmentation for a long time to come. Yammer's approach to this was simple and elegant.]]> Discuss]]> http://www.readwriteweb.com/start/2010/02/yammer-the-story-behind-their-saas-traction.php http://www.readwriteweb.com/start/2010/02/yammer-the-story-behind-their-saas-traction.php Startups Fri, 19 Feb 2010 12:00:00 -0800 Bernard Lunn

The short answer is "as much as you need". The more tactical answer is "as much as you can raise cheaply". The latter is a pragmatic view. Raise more than you need when times are good. Just because you raise it does not mean you need to spend it - capital efficiency is always good!

In this post I look at what VC are saying SaaS ventures need to raise to get to scale and profitability. But I'll also look at what VC are doing - what SaaS deals they are funding currently. I look at the capital efficiency drivers, what you can do to reduce your need for capital. And finally, I show you which VC are active in SaaS today.

The answer according to Bruce Cleveland of Interwest is about $40m.

Take that seriously. Cleveland is a SaaS specialist with serious operational experience who has done his research on this subject. But as he points out, the details matter. There are two points of caution:

1. This is looking in the rear view mirror at ventures funded some time ago that did an IPO in 2007 or earlier. It is a different world today - less capital available and less need for capital.
2. VC are happy with models that require a lot of capital. Capital is what they have to offer and if you need a lot they are in the driving seat.

Lets look at the operational details, the capital efficiency drivers, in a minute. First, lets see what VC are actually funding today.

What Are VC Doing?

• Clarizen
• Maxplore
• Loopfuse
• Jive Software
• SlideRocket
• Elastra
• Syncplicity
• SocialCast
• AriaSystems
• Lavante
• Lithium Technologies
• Maxplore
• PivotLink
• SmartTurn
• Zuberance
• InsideView
• Bill.com

These 17 ventures raised $90.25 million total, an average of $5.3 million. That sounds like the "old normal" $5 million Series A. You can see how you would get to $40 million for a venture that is getting traction and can do a series of larger rounds at higher valuations. Lets say, a) $5 million; b) $10 million; c) $25 million; and total: $40m.

If the C round is pre IPO, everybody does well. But that is the old normal. The new normal is different. First, those 17 deals had two outliers: Jive raised $15 million and Bill.com raised $17 million.

Now let's start with a later date. If we filter by Series A deals that were done after the market meltdown in Q4 2008, the average more than halves to $2.55 million. Those five deals are:

• Maxplore
• Loopfuse
• Syncplicity
• Zuberance
• SocialCast

Capital Efficiency Drivers

There are two numbers to obsess over.

1. How much does it cost to acquire customers? Cleveland defines this as CAC/ACV, or Customer Acquisition Cost divided by Annual Contract Value. If this is less than one you are in good shape. You can take this further. If you can get your customers to pre-pay for the year and your CAC/ACV is less than one, you can self-finance growth at least on the marketing side. Charging annually rather than monthly will slow down growth but that would be a small price to pay for controlling your own destiny. In some markets, customers will pre-pay in return for a discount and that is certainly the cheapest capital you will ever get.

2. How much do you need to spend per customer on infrastructure? The SaaS pioneers made a big play out of having their own data centers. When SaaS/Cloud was new, this was essential. Today you will be courted by lots of big, deep-pocketed, credible cloud vendors selling PaaS, IaaS and HaaS on a pay-as-you-go basis. The pay-as-you-go basis means you don't spend precious capex on infrastrucure.

But more important is the total ICC or Infrastructure Cost per Customer. If this is low enough you can afford to be more creative with your freemium strategies - which will reduce your CAC/ACV if done right. In other words, your R&D guys had better pay attention to performance engineering from the get go. The days of throwing sloppy code out there and covering your mistakes with huge dollops of cash later are probably over.

Who You Gonna Call? SaaS Funders!

You need capital to build a SaaS venture. You can self-finance using the cash flow from another business. (Typically a professional services business as this requires no capital.) This is what both 37 Signals and Zoho/Advent did. But that is still capital, it is just your own capital!

If you have a small niche, you might need very little capital as it is easy to reach your market. Which is a good thing as no VC will fund a small niche. If you are have a venture that is in that rare magic quadrant that is both viral and monetizable... well you are one lucky dude!

For SaaS ventures that are going after a big market and have normal marketing characteristics, VC (probably preceded by Angel) is the conventional route. If you do decide to raise VC for your SaaS venture, it is better to go to a SaaS specialist.

We know this is not an exhaustive list. It is not meant to be. We have seen many VCs do one or two SaaS deals. We want to highlight the VCs that have done more than that, and that have an active focus on SaaS (a section on their site, a partner focused on SaaS, some interesting research, etc.). These are the ones that made that cut:

• Bay Partners
• Benchmark
• Bessemer
• Emergence
• HummerWinblad
• Interwest
• Northbridge
• TrueVentures
• Venrock

What you really need to know is, who is funding SaaS ventures right now. Here is the much shorter list of VC that have done two or more SaaS A Series deals since the start of 2007:

• Emergence
• TrueVentures
• HummerWinblad
• Venrock

OK, let's make a really fine filter. Who has done SaaS A Series deals since the market meltdown in Q4 2008? That list is down to two firms:

• Emergence
• TrueVentures

In raising money, relationships matter - a lot. So if you know a VC that is not yet active in SaaS, call them. If your venture puts them on the SaaS map, they will love you. For most VC that like Internet or software like SaaS, the business model attractions are screamingly obvious.

If you are building a SaaS (Software as a Service) venture, you should be thinking hard about your pricing strategy. It may be the single most critical decision you make. Pricing impacts your marketing, financial and organizational strategy. Are you selling an expensive, complex enterprise solution? Or a simple impulse purchase that an individual can make with a credit card? Will you offer a free, a.k.a.freemium, option?

You cannot fudge these decisions, you have to tell customers how much it will cost before they can commit. To provide input into this decision, it is good to learn what your peers are doing. So I researched 103 SaaS vendors to see how they handled pricing.

The Sample Set: 103 SaaS Ventures

How many SaaS ventures are there today? Nobody knows. I can see all of the public ones, and most of the ones that get serious VC money, and those that break through to some level of success. I found 103 of them. But I know that for every one I find, there are probably 100 more. But I think that I found 103 pretty important SaaS ventures and that 103 is a reasonable sample size. You can find the full list here. Here is how I categorize them by funding stage:

1. VC (institutional round)= 62%
2. Bootstrapped (maybe angel, but no investors on the record)= 16%
3. Publicly traded= 22%

Only 30% Really Want You To Call Them

I looked at all 103 to see how many have an 800 number right there on the front page with a big invitation to "call us right now". That is a sign that they have invested in an inside sales team that can take an inquiry and convert it to an action.

The answer is only 30%. That was lower than I expected.

Note: Some companies have an 800 number on their Contact Us page. I did not count those. Most will go to a switchboard or voice mail. If the number goes to a sales team that is hungry for leads, you will want that number as prominent as possible.

I expected more to use inside sales to convert to action. There may be three reasons for this.

1. They are selling at such a low price point that it is not economical to have a human salesperson in the loop. I saw a few companies in this category. This is what might be called the Google strategy: The sales person only gets into the loop after a large company has already gone far down the adoption road.
2. They prefer to have prospects fill in a form so that a sales person can call them. As most do not show their pricing online (see next section) this seems a likely explanation. It is the traditional enterprise way. But I question if this way works in the SaaS model, and in an online world where site visitors want instant gratification and are nervous about getting spammed if they give out their information.
3. They don't have the money to build an inside sales team. This seems unlikely given that our sample set was larger SaaS ventures.

Only 24% Show Pricing Transparently

I looked on the front page for a link about pricing and I dug down a level to find it there. Only 24% display pricing in the transparent manner that I think as the norm for SaaS (usually with multiple tiers). That is being generous; in our interpretation of "transparent" I included some who have one price with a line saying "pricing starts at x-dollars" that is really a come-on to get somebody to call.

I notice that Salesforce, the bellwether of the SaaS industry, has both transparent pricing (and a big 800 number invitation to call them). Other leaders with pricing transparency include Zoho, 37 Signals, Constant Contact, Xero and Timebridge.

Only 6% Have a Freemium Plan

That was the big surprise. Freemium is being discussed almost as the de-facto pricing strategy for SaaS. Note: I did not include a free trial as freemium. Most vendors have a free trial. Freemium means free forever, albeit with limitations.

Some experts are questioning this freemium orthodoxy. In particular I like the work being done by Lincoln Murphy (right), an SaaS expert at Sixteen Ventures. You can find his paper entitled The Reality of freemium in SaaS here. It is a good primer on freemium but once he explains the basic rationale, he goes on to suggest caution. His best advice is that you need to really understand what value you are getting back from your free users. He makes it clear that a no-think freemium tactic ("put it out there for free and figure out conversion later") is often a disaster.

However, if freemium is the orthodoxy I expected more companies to offer a free option. The 6% freemium rate can be explained by either A: the vendors figured out what Murphy is saying and so don't offer freemium, or B: the vendors are locked into old enterprise styles of selling and marketing. They may be SaaS-modern on the delivery side, but they are legacy on the sales and marketing side.

It is probably a mix of the two. The lack of pricing transparency indicates that B is more likely in most cases.

CAC Ratio: Where This All Comes Together

CAC (customer acquisition cost) is one number you should obsess about if you run a SaaS venture. Bruce Cleveland, the SaaS-focused partner at InterWest Ventures (see the ReadWriteWeb interview here) has a good post that outlines his definition of CAC. There are different ways to look at CAC, but I think Cleveland's makes the most sense in the real world. Here is how he calculates the CAC Ratio: ($ Total Sales + $ Total Marketing)/$ First Year Contract Value.

He goes onto say, "The objective is to make the CAC ratio less than 1, which implies a customer acquisition payback of a year or less."

That is controversial. Some would allow ROI over the years of Lifetime Value (LTV). Read his post why that is a bad idea operationally. (Cleveland was one of the original members of the Siebel executive team, so he talks from operational experience not MBA textbooks).

However, whether you measure CAC over one year or multiple years, the CAC ratio is how your investors will measure you. It will determine your capital efficiency, which determines how many times you need to go back to investors for more money.

I believe that vendors that don't offer a clear path to revenue online (through transparent pricing and, for higher priced products, an inside sales) will struggle to have a best-of-breed CAC ratio.

What Is Your Experience?

Is a CAC Ratio below one feasible? What freemium strategies are working? Is it viable to hide pricing behind a lead generation form?

FAROO is wisely underplaying P2P in its marketing, preferring more fashionable terms such as "real-time search" and "social discovery." But the P2P technology drives it.

Kiril: Why .NET? Did you already have development resources or did you make this choice because you consider it a better option for networked desktop applications? Would you make this choice again? And if you're not satisfied with .NET, what would your platform of choice be, given all of your experience over the past few years?

Wolf: I come from Delphi (Object Pascal). So, the choice of C#/.NET was a dedicated decision for a new platform, not driven by legacy. When I started to work on the first prototype in 2004, Delphi moved towards .NET. I preferred to go with the original, especially because the development of C# was led by Anders Hejlsberg, the designer of Borland's Turbo Pascal (which Delphi derived from).

Of course, I also looked into Java, which I found quite similar, both from the language perspective (C# vs. Java) and the JIT Runtime environment (Java Virtual Machine vs. .NET Runtime). The decision for C# was based on the dominating desktop market share of Windows and the assumption that embedding the .NET framework into the OS would ensure fast penetration of .NET. This only partially came true, partly due to the limited success of Vista, which was the first Windows version with .NET pre-installed.

Kiril: Doesn't this choice hinder your ability to move to Mac and Linux platforms.

Wolf: We were betting on Mono for platform compatibility. Unfortunately, Mac OS X still has no Mono application launcher, other than starting with the terminal, which is not feasible for a mass market. With the increasing importance of the Mac OS X platform, I expect this to change. Silverlight today is already natively available for Mac.

For the ultimate platform independence, we are also continually observing the diverse RIA developments (AJAX, AIR, Silverlight, Mozilla Prism, HTML 5 persistent web storage, Mozilla's DOM storage, Google Gears and Flash persistent storage), which could one day allow us to remove the download and installation step for P2P. But so far, no solution meets all of the requirements: out-of-browser capability, permanent background operation, auto-start option, tray icon support, cross-domain connection support, persistent storage, accepting an incoming connection and receiving data and NAT traversal.

Kiril: If you become dissatisfied with .NET, what would be your next platform of choice.

Wolf: Although not everything went as expected, I still believe that .NET is a very powerful platform, and C# as a language is evolving at a much faster and broader pace than Java.

Today, we have a good .NET penetration rate in the US and Europe. With Windows 7, I expect that to increase in Asia as well.

Kiril: I see that you're using a pretty simple P2P communication technology instead of sophisticated Hamachi-like NAT traversal using UDP hole punching.

Wolf: I suppose you are referring to the transport layer, which is HTTP over TCP/IP. The real P2P overlay protocol on top of that is not that simple anymore.

Because our distributed search engine system architecture breaks with almost all legacy paradigms, we thought it would be a good idea that it be at least based on proven and widely used standards wherever possible. There are several reasons for this:

• It reduces complexity and development time.
• It improves compatibility (there is probably no protocol more widely used than HTTP over Port 80).
• It's unlikely that this connectivity will break anytime soon by changes in protocols, OS, drivers or hardware.
• Behaving like a standard browser from the protocol view makes the application less vulnerable to filtering, blocking or traffic shaping and ensures that it even works in most corporate environments.

NAT traversal is the most critical issue for every P2P application. It's really a shame that although the Internet is built on a distributed foundation, end-to-end connectivity between users in a decentralized way is completely broken. We are using several NAT traversal techniques: Manual Port Forwarding, Automatic Port Forwarding via UPnP and Teredo. Teredo is a IPv6 Tunneling technology, standardized according to RFC4380.

Teredo is part of Windows XP, Vista, and Windows 7; with Miredo, there is also an open-source implementation for Linux and Mac OS X available. Microsoft reports that with Teredo, the chance of a connection between two peers increases from 15% to 84% (PDF link). Our observations are somewhere between 60% and 70%.

Teredo is quite sophisticated technology and is a more universal approach. It provides connectivity at the OS level, in contrast to having several applications in use, where each uses its own proprietary traversal technology.

Kiril: Could you please elaborate on choosing network technology, having achieved a substantial number of users and collecting usage statistics. Do you know how many active and passive peers you have at any given time? What is the ratio?

Wolf: We have solid insight into the state of our P2P network. We know the number of active and passive peers on any given day (using the log from our update server). The active peer ratio is between 60 and 70%.

We are also currently working on an improved distributed intraday statistic. (The distributed statistic currently built into the P2P client is not valid anymore for the increased network size. For scalability, every peer has only a limited view of the whole network, which requires more advanced methods for calculating the actual network size.)

Kiril: Your search index essentially is a distributed storage system with DHT addressing, right?

Wolf: Yes.

Kiril: Have you thought about other uses of such technology, beyond search: back-up, private distributed storage, file-sharing, etc. (like Wuala)?

In a publication from 2001 (in German), in which I also outlined the idea of a peer-to-peer search engine, this was part of an integrated solution with a P2P Web server, P2P file-sharing and a P2P anonymizer. Due to various legal copyright issues, we are currently not looking into file-sharing.

But from a technological standpoint, a distributed storage system is quite universal, from storing a search engine index to attention data, Web pages, instant messages, social network profiles, micro-blogging messages, back-ups and files.

Kiril: Could you please share your vision of the mythical "P2P operating system," now that we already have P2P networking, P2P processing, P2P storage and P2P applications (like search).

Wolf: P2P and distributed architectures are a universal principle that the whole Internet is built upon. Unfortunately, distributed technologies like Mail, IRC, Usenet and even independent Web servers are being increasingly replaced by centralized solutions (the cloud, Google Wave, etc.). Despite the obvious short-term convenience, this leads to long-term monopolies and dependencies and makes the Internet infrastructure more vulnerable in terms of reliability and political influence.

1. I believe that a solid, standardized P2P stack integrated in the operating system can fix the broken end-to-end connectivity between users, enabling the use of an endless amount of latent storage, memory, processor cycles and bandwidth.
2. Distributed storage is certainly a core component, as is distributed processing to make more sense of all of the data.
3. On top of this, there should be a distributed programming framework, which enables the development of distributed applications and the distribution and aggregations of tasks in a standardized manner (e.g. the distributed version of MapReduce/Hadoop is part of this).
4. A distributed attention data repository, shared by all applications, but under full user control.
5. There should be resource management that puts the user in full control of the amount of resources she or he would like to dedicate to a particular distributed project—possibly combined with a ratio system and/or virtual currency to maintain a healthy usage to contribution ratio.
6. Distributed identity management and authentication, authorization and access control.
7. This could replace most of the centralized cloud solutions by delivering the same convenience and scalability in a decentralized way.

BOINC (the universal distributed processing platform where seti@home runs today) goes partially in that direction.

This is partially because the peers contribute, by taking tasks from a centralized server and providing results back to this server. But this system is not fully distributed, nor are the results intended to be used by the peers themselves.

Kiril: Do you encounter scalability issues? Do you have any single point of failure resources in your P2P network? How reliable is it—meaning, what percentage of the network could you lose without seriously degrading search quality and performance?

Wolf: We have scaled the P2P network in a controlled way. While we have made some scalability-related adjustments to our P2P protocol, the core algorithms proved that there are no inherent scalability limits. Due to our fully distributed architecture, we have no single point of failure.

We have twenty-fold redundancy of each item, which replicates automatically if peers leave the network. Only if all 20 copies of the item are removed at the same time would this piece of information be lost. This leads to a mean information lifetime of 120 years under realistic churn (i.e. the peers randomly joining and abandoning the network temporarily or permanently). This is more than sufficient for search, where 50% of the information changes during the year (and is therefore refreshed anyway at a much higher rate).

Kiril: Do you think that "mobile P2P" is feasible? What would you say about implementing P2P search (or any other application) on, say, the iPhone? Are mobile terminals ready for P2P? Are cell networks ready? Do they have enough CPU power, etc?

Wolf: Today, we distinguish between mobile connectivity and landlines. But I believe this separation will fade away. Device performance, bandwidth and flat-rate pricing structures will become close. While today, processor cycles, memory and bandwidth in mobile phones are too precious for wide use of P2P applications, this will change. Even "walling off" tendencies and restrictive App Store policies will be liberated by regulation or user demand.

But much more interesting than bringing file-sharing to the iPhone will be P2P applications that use mobility, possibly combined with GPS, distributed camera/augmented reality and RFID. This will bring P2P technology into completely new application fields. Think of distributed traffic control (peers could be users with iPhones in cars or the cars themselves) or applications to lead crowds of people at large public events or in disaster zones, as well as gaming, distributed weather and earthquake prognosis.

Bluetooth could even make this independent of cell networks. Global communication between peers would be asynchronous through moving people. Also, cell network and Bluetooth mashups would be possible.

In the near future, we will provide Web access to our P2P Web search for mobile users. They will just be passive users of the resources contributed by active PC users.

Kiril: What is your vision of the P2P road map? Apparently, the first "killer P2P application" was file-sharing, Kazaa, then BitTorrent. Given that the next one is search, what would be the next after that?

Wolf: As I mentioned, instead of another isolated P2P application, I would like to see P2P built into the OS and Internet stack in a standardized manner. So that an application can benefit from P2P without any specific effort, in the same easy and natural way that applications today use the Internet (HTTP, AJAX and JSON).

Then, P2P technology would become ubiquitous and part of almost every application. Every application that uses cloud services today could benefit from such P2P technology. An example would be a distributed platform for micro-blogging services and social networks, heralding the end of walled gardens.

But my personal vision is to combine P2P with the next thing after search. Twenty years ago, I wrote a small expert system on my C64 (today, a C64 emulator is on the iPhone!), using Predicate Logic and an Eliza-style natural-language interface. So, you could tell the system, "All cats have claws. All tigers are cats." And then you could ask the system, "Do tigers have claws?" And it would answer, "Yes!" You could retrieve information and relationships that were not explicitly stored (or that anyone was even aware existed).

At that time I had to enter every bit of information manually. Today, almost all information on earth is accessible on the Internet, together with comments and conversation streams.

Predicate logic would be supported by fuzzy logic, statistical machine learning and more. Today, known translations are used to translate untranslated text. But this could be much more universal: using known connections in one field to explain unknown correlations in another. Such a system could autonomously formulate queries, combine facts, fill in the missing link in a theory to prove or falsify it.

So, I think the next step after search will be reasoning; and in combination with P2P technology and distributed processing, this may bring us a kind of global brain. A brain that not only stores and retrieves information but that is capable of cognition and conclusion at a giant scale. It will discover hidden correlations and unknown facts and will answer questions with answers that cannot be found in any document.

You can see, this is much more HAL than the next Google.

Kiril: What technical feature of your technology are you most proud of? 100+ patents must something.

Wolf: Most crucial has been to ensure both a quick response time and complete results for queries with multiple terms and phrases (only 15% of searches are single keywords) in a completely distribute P2P architecture. For queries with multiple keywords, we eliminated the need for the intersection of huge posting lists across different peers.

While we had to invent a lot of things—just because they hadn't been done before in a way that was required for distributed search—they are not all patented (so, we don't own 100+ patents). Prior to funding, this would have been impossible financially.

Kiril: How is your real-time search related to the P2P search? Does it also run on a distributed network? If so, then how do peers communicate results to the front page of the FAROO website?

Wolf: Currently, we use a hybrid architecture. While we are building up our P2P network and use it for general Web search, in parallel we use a central index for the real-time data. The focus on the most recent and popular Web pages keeps the costs moderate. Attention data collected by FAROO peers serves also for real-time discovery and ranking (in addition to analyzing the Twitter stream).

But we believe in a holistic approach. Our real-time search will evolve into an integral part of Web search and be fully based on our P2P architecture. There will still be a gateway/proxy server that enables Web access to our P2P network for those users not able or ready to install a P2P client (e.g. for mobile).

For XBRL newbies, here are a few key facts and some links for further research:

• XBRL stands for eXtensible Business Reporting Language.
• It is an open standard based on XML, created by an accountant named Charlie Hoffman. Read some quick facts here.
• If you tag something consistently, software applications can more easily analyze the data and present more useful information. Yes, that sounds like the semantic Web, and we all know that has faced the chicken-and-egg problem (i.e. not enough content is semantically tagged yet). But imagine a semantic Web standard for which governments around the world tell companies that they have to tag data that way.
• XBRL gained attention in the US when the SEC mandated that public companies report their financial results in XBRL (starting with companies that have a market cap over $5 billion). That has been going on for two quarters now, so all parties are getting real-world experience with XBRL.
• But XBRL traction is greater in other countries, especially Japan, Australia and Holland, where it is being used to standardize and simplify reporting to government regulators. In the UK, companies report to the taxman using XBRL.

The Twitter hash tag is - you guessed it - #xbrl.

Why XBRL May Be Revolutionary

The best analogy for XBRL is the barcode in the retail world. The analogy works because it may take a while to happen... but when it does happen, everything will change. Imagine every number with a standardized tag telling a computer what it is.

Here are the revolutionary implications of XBRL:

• A year ago, the global financial system suffered a cardiac arrest.
  That scared a lot of people. The patient now walks around the hospital grounds and occasionally forces a healthy smile. But most close observers recognize that the patient is far from healthy and is still indulging in cigarettes and double cheeseburgers. This heart attack affects us all. Radical transparency, to shine a light on those toxic assets and murky financial pools, is the best long-term cure. And XBRL, along with political will, is key to that radical transparency.
• Ordinary investors don't trust the stock market.
  It feels like a casino where the roulette wheel is fixed. That is bad for all players in the economy. We need people to trust numbers again and to invest patiently in great companies that grow and pay for their kids' tuition and their own retirement. That patient investment will help great companies grow and help those companies create good jobs. That is the way the stock market is supposed to work, and a few idealists think it could work that way in the future. Jane Q. Public needs access to analytical tools that are currently reserved for Wall Street insiders, and she has to have confidence in the numbers. Private investors need to be served by truly independent analysts who charge transparently. XBRL can play an important role in that.
• The cost for a company to report to government regulators is ridiculously high.
  This is a hidden tax on jobs (except for accountants!). The time and money spent on this could be used more productively. What if government agencies agreed on a single way to file reports using XBRL? This is happening today in Australia and the Netherlands.
• There is a major disconnect between the three types of reporting (i.e. to investors, to regulators and to internal management).
  The third type is what really drives business. These are the "business intelligence" and MIS tools and dashboards that managers rely on to help them run the business. What if one set of numbers could drive all three types of reports auto-magically? We are a long way from this, but the vendors leading the XBRL charge are creating the platforms that will enable this in the future.

Today's Reality Check

The New York conference was about XBRL in the US, so we will keep the current analysis to what is happening here.

The basic reality is that large public companies are obeying the SEC's mandate by reporting in XBRL. No surprise there: they have to do it.

So, they are spending some money to prepare these XBRL-compliant reports, by purchasing vendor tools and outsourcing the work. Some are doing it enthusiastically, anticipating the many downstream benefits. Others are doing it just to check off the box. This is hardly the best year for a new cost with an uncertain ROI. The same bean counters who are asking everyone to cut costs are asking for bigger budgets... "To do what, exactly?"

That's the problem. The returns are very unclear, and they are certainly more than a couple of quarters away, and most managers are thinking pretty short-term these days.

The returns are unclear because investors are not using XBRL data in any meaningful way yet. It's a chicken-and-egg problem. Not enough XBRL data exists yet for serious analysis.

Many markets have chicken-and-egg problems. This particular one is easier to forecast because - without stretching the analogy too far - the government (via the SEC) is ordering the chickens to lay eggs.

What the Future Will Likely Bring

The future is always uncertain, but in this case we can predict a few things with some degree of certainty:

1. More companies will report their financial data using XBRL, because they have to. So, vendors will find ways to make this increasingly easy and low-cost.
2. XBRL will be used in the Mortgage-Backed Securities (MBS) market, because this is the market where we, via the government, own a lot of toxic assets. The technology to do this is available, and the politics indicate that it will happen.
3. XBRL will be used in the bonds market to enable new forms of credit rating, because the current credit rating agencies clearly failed at their job, and the government will want to do something about this.

What Is Still Very Unclear

1. What new mechanisms, vendors, tools and services will emerge to make this data useful for investors, both individual and institutional?
2. How will this impact the fast-growing $8.8 billion market for business intelligence systems.
3. What will happen when the US government makes a bigger push for transparency using XBRL as leverage? The SEC's mandate is a great start. But other countries are ahead of the US in XBRL adoption, and the Obama administration is making a big push for data transparency via data.gov and other initiatives. So, we are likely to see more in this area, but precisely what will happen is unclear.

First, what's hot? In short: mobile + social + real time. That sounds like it was created by a random buzzword generator. But the combination can be very powerful. This is what Fred Wilson calls the Web's golden triangle.

When Fred talks about this, Foursquare is probably at the front of his mind. He is an investor, and Foursquare is as hot as it gets.

This area is hot for a reason. Mobile devices reach more people and occupy more of their time than desktops or laptops could ever do. But to reach people effectively on mobile, you need mobile-native services, built for the limitations and advantages of the small screen. (Standard HTML apps retro-fitted to mobile are like the talking heads in early television.)

Mobile is inherently social: you use it to communicate with people. It has to be real time (or "just in time" if we want to be accurate), because the small screen demands a filter that shows only what is relevant right now. (Yes, that does pre-suppose great filtering capabilities.)

When Cédric talks about mobile + social + real time, he is thinking about Aka Aki, in which Creathor has invested.

The way Cedric puts it, Aka Aki "adds the dimension of time" to location-based services. This addresses the question, "Which of my friends is within shouting distance right now."

FourSquare is from New York, and Aka Aki is from Berlin. With location-based services, location matters. Specifically, density matters. People will use the service if it connects them to people they know locally. If I am in Rhinebeck, New York, discovering that I have friends in Manhattan, Zurich and San Francisco who are online right now does not help me. I am only interested in the friends in Rhinebeck.

This is an argument for a territory-based expansion model. You become dominant in one area, and then expand to neighboring areas. This is the way business worked for centuries before the Internet. Then the Internet heralded the death of distance. You could create a site and get readers from all over the world.

With mobile location-based services that connect you to people in the real world, the old territory-based expansion is returning - with a twist, of course.

German, Then French, Then English?

Aka Aki started in Berlin. As this blog from March 2007 shows, it was early to the game of mobile + social + real time. It got its first round of funding from Creathor in December 2007.

Then, in October of this year, it got a second round from INNOVACOM, the leading French VC (with Creathor joining in that round as well).

That is a natural expansion model. Aka Aki did well enough in Germany to raise a second round and then uses that to grow geographically. In this context, bringing on a French VC made a lot of sense.

Insta-Site: The No-Barrier-to-Copying World

Cédric gave us a good perspective on the early-stage investing scene in Europe. Like other European VCs, he pointed to the rash of copy-cat ventures in the Web 2.0 era. These have been referred to, more politely, as "concept arbitrage": someone sees a service doing well in one location and creates a version for their location.

While "copy cat" is a derogatory term, Cedric was keen to point out that it has been a valid strategy in the past. As he puts it, "If I have a successful pizza shop in one location, I could probably create a successful one in another location". In the Internet business, many successful exits have been based on this model.

But VCs around the world who we have spoken with tell us that this game is pretty well over. The reason? Well, it's all our fault. Bloggers and tweeters spread ideas so fast that the time needed to exploit a concept arbitrage has shrunk to nothing. The tools for building and deploying a website have also dramatically shrunk the time and cost to market. 1. Get idea on Monday, 2. Launch on Friday, 3. Move out of dorm room on Sunday.

In the world of close-to-$0 insta-sites, the copy-cat model is being challenged. This is just like the arbitrage strategies on Wall Street. When friction goes, profits eventually wither as well.

But Don't Underestimate Local Nuance

We can still see big wealthy countries where the US Internet giants have not become dominance for one reason or another. For example, Google does not dominate search in Korea or China.

What looks like a tiny bump from 30,000 foot can be a massive obstacle when you are in the war on the ground.

This is even more true in the world of social media. By definition, social involves cultural norms, and they differ around the world (thank goodness for that, homogeneity is terribly boring). When social + mobile + real time connects people in the real world, the differences can be even more striking. We are all humans with similar basic needs, but the cultural differences between, say, Germans, the French, Americans, Brits, Chinese, Indians and Koreans (to name just a few) are significant.

The Globalization Challenge for VCs

The top-tier VCs on Sand Hill Road know that innovation is going global and that the biggest markets and best ventures may no longer reside within a few miles of their office.

So, the big VC funds are setting up branch offices around the world. This is the traditional multi-national model. The problem is that it might not work as well in the VC world, where personal relationships matter so much and yet you have to make decisions very fast. The multi-national model does not easily square that circle. Venture capital is not a naturally scalable business.

VC funds have to decide between staying local (i.e. being a small firm of partners who can meet face to face every Monday in their office) and going global. The business does not scale well. If you bring in more partners, you won't be able to maintain the situation in which all partners agree on every deal. That would create way too much overhead and friction. Fast decision-making overrides the standard layers of corporate management approval.

On the other hand, if local partners are making the investment decisions, what value would they get from being part of a big global fund (one in which the folks way over at head office take a big chunk of their profit)? Is branding really that important? Smart entrepreneurs know that a fund's name (i.e. its brand) is much less important than the individual partner who they deal with.

This is a strategic dilemma for big funds.

Federated Best-of-Breed VC

Creathor, along with other smaller regional funds, is moving towards a federated model.

As Cedric puts it, "We are partnering more with other funds." In one sense, this is nothing new. VCs have always worked together on deals. But in the past, this usually meant two VCs on Sand Hill Road meeting at a Palo Alto coffee shop. Now, it means a Swiss fund working with a French fund (or a New York or Indian or Chinese fund).

European VCs have to innovate in this way. They cannot win on the multi-national model: their funds are not big enough for that.

As the markets move East - to China and India, for example - VCs have to "be there." Similarly, a VC in Asia needs to work with VCs in Europe and America.

It will be interesting to see how the globalization of innovation plays out and what new models emerge.

Of course, ad-serving itself is not really the cash cow, but it is a key part of it. The real prize is a viable alternative to AdSense. This is the background of today's news about OpenX and Microsoft announcing an advertising technology partnership.

Here is the news today from OpenX and Microsoft. In a nutshell:

• Microsoft will refer publishers for enterprise ad-serving solutions to OpenX.
  This makes OpenX a more viable alternative to expensive ad server solutions. (Hint to publishers looking to cut costs: why spend that money on Doubleclick when there is a free alternative?)
• OpenX will promote Microsoft's Content Ads monetization/advertising product.
  OpenX has 150,000 websites that serve more than 300 billion ads per month. Google Ad Manager, which is the free alternative to DoubleClick for smaller publishers, optimizes for AdSense. So Content Ads, an alternative to AdSense, is a natural ally for OpenX.

Click here for a comparison of OpenX and AdManager (the comparison is good, while also promoting Trafficspaces as an alternative to both).

Content Ads is Microsoft's entry to the contextual ad game. It "matches ads to relevant editorial content, allowing advertisers to increase campaign effectiveness and allowing publishers to achieve a higher yield on certain types of inventory."

Let's Get a Second Opinion on Content Ads

We spoke with Dr. Riza C. Berkan, CEO at Hakia, which makes a contextual advertising solution called Contexa that is not unlike Content Ads. (Disclosure: ReadWriteWeb uses Contexa, and Hakia is a sponsor.) Here is his view:

"Content detection is a specific challenge where Microsoft will be judged by its semantic capabilities. It could be a historic moment if it works. Otherwise, it will contribute to the ongoing "blinding" irrelevancy."

Riza is saying that relevancy and ranking are hard technical challenges. We know that relevancy is a bit weak on AdSense. Can Content Ads do better than AdSense? That is the bar.

AdSense's Weakness, the Hunt for Relevance and the Shift to "Direct"

We have written before about the possible weakness in AdSense, which is at the heart of the Google cash cow. Our theory is that we are moving to a place where publishers will sell more directly.

Draw a quadrant with "Large" to "Small" on one axis and "Publishers" to "Advertisers" on the other:

• "Large" to "Large"
  This is where we find the traditional internal sales force at big "Publishers" working with agencies at big "Advertisers." This world is not changing fast. Technology solutions and networks focus primarily on selling remnant.
• "Large" to "Small"
  There is always a role for ad networks to aggregate volume from large advertisers and bring that to small publishers. This is what Federated Media does for ReadWriteWeb. This works well, and we will likely see more niche ad networks serving this function in different markets (for example, FoodBuzz in the food market).
• "Small" to "Small"
  This is small advertisers reaching small publishers. This is the space in which AdSense and all of the automated ad networks operate. The genius of Google was to enable small advertisers to get results with small budgets: this has been the enabler for thousands of startups. But we're seeing a shift in this market. There is no reason why advertisers should not buy directly from publishers. Many of these advertisers will also be "the people formerly known as audience." As long as a simple self-service solution exists, there is no reason for an intermediary to take a big cut of the ad dollars at the toll booth.

OpenX and Content Ads are positioned to reduce the ad toll booth costs.

The winner will be decided by relevance. If the ads are relevant, then they will be useful to the audience and therefore have better ROI for advertisers.

These bruising battles between the big guys help the small guys. Google will bring down the cost of MS Office, and Microsoft will bring down the cost of online advertising.

A good carpenter with a power drill will beat a good carpenter using muscle alone. A bad carpenter with a power drill is, of course, just a dangerous maniac! But we don't really have the equivalent of a power drill yet. We can see bits of it, but it is like having a drill, motor and battery that no one has put together. The pieces that make up this hustler's power drill are: email + CRM + LinkedIn + Twitter.

Standards matter. In five years time, we may all be using Google Wave, but for now the Wave beta testers get voice mails, emails and other messages saying, "Hi, I just sent you a Wave. Can you check and respond?"

That does not help productivity (understatement alert).

Whatever is wrong with email, one thing about it is totally right. It is a standard that almost everyone uses.

So, email is the drill. It is the basic component. Don't even think about working without it. You can use email to close a deal and to get a phone and/or face-to-face meeting.

Keep a Good Record of Who Said What in Those Emails

My personal CRM system of choice is Relenta, precisely because it is so email-centric. Many other people prefer to unlink these and use Gmail (or Outlook for the late adopters) and then integrate a separate CRM system. I still use Gmail as my back-up service.

But CRM has lagged behind the social media wave. Most CRM systems do not record the conversations that take place outside of email, the ones that happen on LinkedIn, Twitter and Skype (or, for those who like it, Facebook: for what it's worth, I never caught the Facebook bug and see no reason to start using it now; I aim to be the last person on the planet not using Facebook).

The messaging fragmentation caused by these alternative proprietary messaging systems is a significant productivity drain. ("Heck, which system did I use to talk to Bill about the discount code?")

Add LinkedIn for "Who Do I Know Who Can Connect Me To...?"

LinkedIn serves two essential functions:

1. It is a self-updating Rolodex. Once I have added someone on LinkedIn, I know I will have their updated contact details whenever they move to another job.
2. It answers the age-old hustler's question, "Who do I know who can connect me to so-and-so?"

But I do not view LinkedIn as a destination site. I avoid communicating via its messaging system whenever possible and I don't check it. I simply want access to the data: my updated contacts and their relationships in my power drill. That is not LinkedIn's business model. It has been accused of being a roach motel. So, it may end up disappointing me, and I may have to find a service that does something clever with my Gmail contacts file.

What I want in my CRM system is something that shows:

1. For individuals, what recent status updates have they sent out?
   Note, this is "Just-in-time," not real time. I do not want to be pinged every time every one of my contacts does something. I might look at that stream occasionally when I am in flow mode; but when I am in hustle mode, I don't want the distraction. But when I am about to email or call someone, it would be great to be able to scan recent updates about them. ("Hi, Bill. Congrats on doing [whatever cool thing Bill just did]. How does this impact what we are working on?") And I want this stream from whatever service the person actually uses: LinkedIn, Twitter or Facebook. Services already exist that aggregate these, but that would be yet one more destination site. What I want is that stream integrated in my CRM.
2. For companies, who else do I know at a certain company, and who else do I know who knows important people there?
   If I am pitching the CIO about something that relates to marketing automation , who do I know who knows the CMO?
3. The strength of my relationship with second-degree contacts.
   LinkedIn is useful for second-degree contacts ("Who do I know who knows so-and-so?") Anything further out on the social graph is practically useless. But even second degree is useless if your LinkedIn contact database has been polluted by a lot of casual contacts. If I want connect to Fred, trying to do it via Bill is probably not worth it if I had only a 30-second email relationship with Bill 18 months ago. But my email and CRM systems know the strength of my relationships with contacts, or a reasonable estimation thereof, based on the frequency of my email interaction with them.

Add Twitter for Flow

Hustle and flow. You need both. Hustle is directed, focused activity (e.g. contact so-and-so and get them to commit to doing x, y or z). Flow is a relaxed state of ambient awareness that alerts you to new opportunities. (You could also add "Create," giving you: Hustle, flow, create. In create mode, you "switch off all electronic devices." But that, as they say, is another story.)

CRM and LinkedIn are about hustle. Twitter is about flow.

I avoid using Twitter DM. Twitter is great for flow, but lousy for hustle. Twitter DM only adds to messaging fragmentation and has been polluted by spam. For now, @bernardlunn mode is useful, but methinks spammers will ruin that soon, too. But the basic Twitter service is perfect. I follow until I decide to unfollow. No one can spam that.

It is a great research tool. Find someone who writes well on a subject, and then see who they follow. New services will take this basic idea to the next level. The one that might do this best is Aardvark.

The integration we need is not another Twitter client for people who live in the Twitter flow. It is integration of this flow with the traditional hustle tools of email and CRM.

Specifically, I want to see in my CRM system the Twitter flow of my contact, what they are writing about and who they are communicating with. If they have DM'ed me, I want to see that in my CRM.

What has held up adoption, in our opinion, is the lack of native mobile interfaces. This is a problem in other markets as well (as we cover here in relation to Basecamp). In the real world, many of the people who matter are out and about, meeting people face to face. Perhaps developers, who spend most of their day coding at a desk, miss the nuances of this use case. Many developers point out that there are too many mobile devices with different standards.

These sound like bad excuses. You could cover the lion's share of the market with native interfaces for iPhone, Android and Blackberry; the rest can follow later. As a developer, you need to test for usability on all three. Solicit beta users who are fans of each type. Don't rely on the one device that you use and that your fellow coders happen to love.

Timebridge caught our attention for using SMS intelligently, allowing us to ping a reminder just before a meeting. This is a smart use of the lowest common denominator that all mobile devices support.

The sync between Blackberry (my device) and calendars for Outlook, Google (my calendar) and iCal works just fine at a technical level, at least one way. One problem is that these calendars get "polluted" easily with a lot of team calendars. Google Calendar does not feel like my calendar. Third-party apps can access Google Calendar very easily. Google has done a great job there, but it makes the calendar so crowded that it becomes useless.

That is easily fixed by changing some settings. But even then, I never consult my schedule. I rely on the calendar in my BlackBerry, which is always with me, even when I am far from any desktop or Internet access.

The sync has to be two-way, then. When I change something in my BlackBerry calendar, it should reflect in my Google calendar, so that any scheduling app that accesses my Google calendar will see the updated real calendar. This does not appear to be available yet.

But my colleagues use iPhone and Android phones, and I have no idea what the people who I schedule external meetings with use. To earn serious adoption, a scheduling and calendaring system has to offer: (1) an effective lowest-common-denominator way to interface (SMS and/or email), and (2) a native interface for leading smartphones.

Two Modes: Sharing and Polling

People generally schedule two types of meetings. Gross simplification alert!

1. Sharing, when one individual, who is much in demand, sets the schedule.
   Our very own Marshall Kirkpatrick uses Tungle in this way. A lot of startups want to speak with him. If he wants to talk to them back, he simply says, "Here is my calendar, figure out what works for you." Yori created Timebridge when he was an Entrepreneur-in-Residence at the Mayfield Fund, and he has interviewed a lot of the assistants who schedule meetings for VCs (another species that many people want to get on their calendar). Yes, when you have 2% of funds under management, you can afford to have an assistant schedule your meetings! For less wealthy "influentials," the sharing mode of a calendaring service is ideal.
2. Poll, when many peers need to negotiate a time.
   Perhaps you are starting a new project and need input from several people. You control the scheduling but cannot simply say, "This is when we'll all meet." Herding cats is hard. I have used Doodle for this purpose, and it is effective (though like all of these services, it's missing native Blackberry support).

Timebridge claims to offer both modes. For company use, this is essential because both use cases are common.

Don't Just Schedule: Launch the Meeting

What really impressed me when I first saw Timebridge was that it automatically launched a screen-sharing service. This is a great way for the meeting controller to show presentations and demos or just the agenda and objectives. (It was interesting to learn that this was a re-skinned version of DimDim, a company we have covered before and put in our 2008 Best Of Enterprise list.)

Timebridge can also automatically connect to FreeConference.com, a service we use all the time.

So, if you are at a desktop, you would join using screen-sharing. If not, you would use the telephone bridge.

This is an important next step. It is not just about "When can we meet?" but also about the subsequent question, "Where and how do we meet."

Missing in action? Skype. It would be neat if the calendaring system would either automatically launch an existing Skype chat room or create one for all of the participants.

Make Meetings More Productive? Really?

Here is the nightmare scenario: third-party calendaring becomes so ubiquitous and effective that we spend a lot more time in unproductive meetings.

Timebridge has set for itself the noble mission of making meetings more productive. Its tagline is "Make meetings great!"

I remain skeptical. That is an art, a management art. It all depends on who is driving the meeting. Yori agrees but says that by instilling best practices, the average will improve. He may be right. The basics are well known. For each meeting you need:

• One objective,
• An agenda,
• Agreed actions.

But this moves us into new territory. This is the world of project management systems. In a heterogenous world, each participant may be using a different system. There is no point in having "objectives" and "actions" in Timebridge if participants monitor and manage that sort of thing in Basecamp or (getting back to the mobile issue) on their BlackBerry or iPhone.

One area where Yori convinced me that simple changes could mean a lot was in starting meetings on time. The time suck of waiting 15 minutes for Mr. Dilly and Ms. Dally to show up on a call causes a lot of teeth-grinding. Sending SMS reminders helps, but how else to change late arrival habits is unclear.

Why Microsoft Exchange Is Threatened by Third-Party Calendaring

In ye olden days, a company standardized on either Lotus Notes (IBM) or Microsoft Exchange. Notes is still very much around, despite its venerable age, but Yori told us that it rarely shows up. Most users are on Outlook and Exchange, with an increasing number on Gmail and Google Calendar.

With everyone on the same calendar system, scheduling meetings is easy. Why stick with Outlook and Exchange when Gmail is cheaper and more Web-native? The reason for many of the folks in enterprise IT who make these decisions is that calendaring is easy if everyone uses the same system.

Third-party calendaring vendors such as Timebridge, Doodle and Tungle live in a heterogeneous world where you do not know what calendar anyone is using. Increasingly, it comes down to three: Outlook, Google and iCal. Yes, these are from the big three: Microsoft, Google and Apple.

Calendaring is a side issue for Apple. But it is critical in the bruising battle between Microsoft and Google for dominance of the office market.

With Outlook email unlinked from calendaring, Google is in better shape to win over big accounts to Gmail. (And once on Gmail, other apps tend to follow.)

But it could be way, way better. Excel is still the best spreadsheet; it has just fallen behind on collaboration (and collaboration is a show-stopper). But Microsoft could catch up there, and a lot of really sharp startups are gunning for the same space.

Since about, oh, maybe the days of punch cards, ventures have proclaimed some variation on this pitch: no need for programmers; ordinary folk can create really useful apps!

Fourth generation, Fifth generation! Far too many acronyms and buzzwords and brilliance and capital have been sacrificed on this altar.

On the other hand, ordinary folk create real apps on spreadsheets all day long. Millions of people do it. Businesses run on them, to the horror of IT folk. Banks and VCs burn billions of dollars based on crazy assumptions in those spreadsheets. Mr. Assumption pleads guilty. Mr. Spreadsheet says, "I was only following orders!"

Real-Time Spreadsheets? That Is So 1980s, Dude!

Yes, traders were doing real-time spreadsheets using Excel in the late 1980s, and by the mid-1990s (as in, 15 years ago) they were totally mainstream in trading rooms. Sorry if that is news to folks who think "real time" is new.

But It Could Be a Lot More

Excel has one problem: version control. That's it. Collaboration is a fancy word, but the simple problem before we had online spreadsheets was version control. You either endured chaos and frazzled nerves or you put in the kind of IT process management rules that the ordinary GTD folks were fleeing from by using a spreadsheet rather than a custom system.

Online spreadsheets that anyone can edit concurrently solved the version control problem. Problem solved! Done, finished. Can we move on now?

I wish Google would focus on the things that would now make its Spreadsheet an awesome business tool. Here are the top four items on my wish list:

1. Offline sync that does not get in the way and is totally seamless.
I gave up on Gears because it seemed to do more harm than good. I know that it is a tough engineering challenge, but I know that Google has some pretty smart people (Wave alone has 60 engineers). Offline sync is essential for serious spreadsheet use. Please don't tell serious business users that they can get Wi-Fi anywhere. Or that they will be able to very soon. Or that waiting for the bandwidth to catch up with their actions is okay.

2. The same level of sophistication in features that Excel has.
I am not a power Excel user, but even I hit limits on Google Spreadsheet. The spreadsheet jockeys who create those powerful (and dangerous) models view Google's app as a toy.

#1 and 2 are linked. You cannot have that level of sophistication without using local CPU capacity.

3. Better hooks to real databases.
Spreadsheets are database-like, but don't try anything serious that a RBMS does with its eyes closed. Add in linked data and XML assets.

4. APIs and other tools to enable an eco-system of apps that do forms and process management.
In a business, something happens when someone signs off on something. That gets tracked somewhere, as in a spreadsheet. Enable that eco-system to grow.

If Google won't seize this challenge, Microsoft will. Excel may be Microsoft's best product ever, and it understands business needs.

Wave looks like the kind of over-engineered, overly complex, promise-the-moon-at-some-far-off-date project that has gotten Microsoft in such deep trouble so often. Sure, Wave will be evaluated by a lot of big companies. Meetings will be convened to discuss Wave. Wave Committees might even be formed. Ho and hum! This is not the Google we admire. This is the Google that dreams of being Microsoft and then wakes up and finds that it is Microsoft, and it is a nightmare.

Actually, it looks like Google cannot decide whether it is trying to be Twitter ("Look at me! I'm hip, young and hot") or Microsoft ("It may not be that exciting, son, but it works, and that's what matters"). Self-conscious attempts to be hip almost always fail.

Where Google has historically scored well is in providing tools that you can be productive with immediately and that gradually grow in competence, never requiring a big decision. Millions of folks have a business or non-profit to run and need Google to build on the early promise of Google Spreadsheet.

If it doesn't, Microsoft will make the online version of Excel work as easily as Google Spreadsheet.

Download the MP3.

Two Things to Know About Morpheus

How much equity do you take in each company?
"We take an equity stake of 4 to 8% in each of the companies we engage with as part of the business acceleration program."

Do you invest money in companies?
"No. Currently, we do not make any capital investment. We work alongside you as a co-founder, and we invest sweat capital and intellectual capital in the portfolio."

In other words, Morpheus is an incubator (the team calls it an "accelerator"), not a fund. If you need cash, find it elsewhere. Morpheus is okay with the label "Like Y Combinator, but without the cash." That makes sense, because cash is not what makes Y Combinator interesting. Also, as Indus explains, very few people in India are willing to work purely for equity, without cash. Morpheus is willing to do that. It invests time and experience for equity.

Our Questions and MP3 Guide

Question: How is early-stage financing doing during this downturn compared to the last one in 2001/2002?

Skip to 2:24 in MP3
Summary: Investment during the last six months is down 58% from a year ago. VCs have moved to later-stage, leaving a real gap in early-stage financing.

Question: How is the VC model changing, if at all, and how does the global financial crisis impact this change?

Skip to 5:30 in MP3
Summary: VCs in India are investing in profitable businesses, even in publicly traded companies, because they need to juice short-term returns, leaving early-stage financing in trouble.

Question: What percentage of your investments targets a local or regional market as opposed to a global market?

Skip to 11:00 in MP3
Summary: Morpheus does local plays in India. It had tried global plays from India, but unless management and marketing were in the US, you missed that critical local nuance.

Question: If costs are lower in India than in the US, how is this reflected in the amount of funding required?

Skip to 14:48 in MP3
Summary: Funding is not lower and may even be higher because people won't work for equity as they do in the Valley.

Question: What market segments excite you today?

Skip to 19:30 in MP3
Summary: Health care for the mass market in India.

Interesting Portfolio Companies

Vericar does used-car certification and appraisal, catering to the used-car market in India, which is at a million units every year.

Robots Alive is the second company in India to have manufactured a robotics arm from the ground up. Costs were around $15,000, compared to an imported version that cost around three times as much.

Listen to the Interview

Download the MP3.

The Facebook Rounds of Investment

Data courtesy of VC Experts Valuation and Terms database.

Our Theory on This Investment and Twitter's Game Plan

These high-profile deals have "optics" (i.e. the PR or headline story for public consumption) and fundamentals (i.e. how the investors actually make money). They are very different.

The key to the fundamentals is the Liquidation Preference. We touched on this in one of our "Startup 101" chapters: How to Scale Without Losing Your Shirt. Basically, upon exit, the investors get their money out before the entrepreneurs do. That's reasonable. For example, the Twitter team has not actually built a business worth $1 billion; it is only saying it can do so (with some credibility).

So, the investors putting in $100 million have their risk (or downside) covered. The only way they can lose money is if Twitter sells for less than $100 million, which is pretty unlikely... not impossible, but unlikely. But if it sells for $100 million, then all of the other investors lose everything. The exit valuation has to be higher than $157.97 million (total money invested) for the founders and management team to see a dime.

So, with their downside covered, investors can focus on the upside. This is where optics matter. With this deal, the entrepreneurs can say the following to any potential acquirers:

• "Negotiations have to start at $1 billion. It clearly cannot be lower than that," and
• "We have a long runway. If you don't do this deal now, the price will only be higher later."

In this case, the optics are critical. Although the investors in this latest round have protected their downside, they won't see any upside unless the exit valuation is greater than $1 billion. By putting in a large amount (which they cannot really lose), the investors help to ensure that the exit valuation is high.

Ideally, Twitter will exit before revenue, when revenue potential is unlimited. As soon as actual revenue comes in, three bad things happen:

1. Acquirers say, "Let's wait and see how this pans out."
2. Costs go up: you have paying customers who demand real service.
3. Revenue targets may go south. Exponential hockey-stick growth is hard enough for a free service (kudos to Twitter for doing that brilliantly) but way, way harder when money changes hands. Real money (not investment money) paid by someone to Twitter becomes friction. Twitter ceases to be a friction-less flywheel.

Twitter does have enough cash now to execute on a revenue plan and outlast acquirers who like to sit on the fence. So any way you look at it, this is a smart deal. It is not "evil": this is all business between consenting adults. Evil would be selling stock to "widows and orphans" in the public market who (A) don't have Preference and (B) don't have the means to evaluate the risk on a deal like this. That was Bubble 1.0, and it won't happen again. This is not Bubble 2.0. This is fundamentally different, even if the optics may look similar.

So What Do the Investment Facts Say?

Enough about theory, what do the facts tell us?

1. Yes, the Series E investors (the ones that just put in $100 million) get Liquidation Preference. Look at the line for the current round that says Liquidation Preference. If it says "Senior," then they get their money out first. If it says Pari Passu, then all investors get their money out equally (i.e. all investors get their money out before the founders and managers).
2. But they get only 1x Preference. They don't get money back plus interest. Nor do they get 2x or 3x. Hint to entrepreneurs: any time you see 2x or 3x, run a mile!

What Is the Difference With Facebook?

All of the Facebook rounds are Pari Passu. What that really means is that earlier investors in Facebook have more clout. They have bigger funds and can essentially say, "If you don't do this, we will." The small funds that invested in Twitter early on, such as Union Square Ventures (USV), cannot meaningfully invest in a $100 million round without Twitter becoming too big a percentage of their portfolio. But based on the valuation it invested in early on, USV will make out big time on any exit over $200 million.

The Great Facebook vs. Twitter Exit Game

This is high-stakes poker. Facebook has the potential to do an IPO. It has enough revenue and has at least neutral cash flow. With its actual finances not being in the public domain, we don't really know how good Facebook's finances are and therefore cannot know how ready it is to do an IPO. But that's not a problem; it has enough cash in the bank to wait until it's ready.

So, any company that really wants to buy Facebook and keep it from doing an IPO will have to pay big time. Only two acquirers are motivated enough and big enough to do this: Google and Microsoft.

Where does that leave Twitter? The $100 million round helps a lot. It is for show, not for spending. It has enough cash for negotiating clout. Facebook would cost Google or Microsoft way more than Twitter. If one of them bought Facebook, Twitter would be even more valuable to the other.

If Facebook does an IPO, Twitter's valuation would go up based on that public market comparable.

We cannot bet on this in the public markets, so we can only have fun watching the game.

How Does Perception of the Founders' Motivations Influence the Game?

In poker, perception matters. What you think the other person will do affects how you play your hand.

The exit valuation depends in part on how credible is the founder's drive to remain independent. Do acquirers really believe the founders are sincere in their stated desire to remain independent by going all the way to IPO? If the acquirer believes that the founder's desire to remain independent is very strong, then it will raise its bid. So, who does the market see as being more driven to remain independent: Mark Zuckerberg of Facebook or Ev Williams and Biz Stone of Twitter?

We asked Greg Boutin of Growthroute Ventures to comment on this part of the game. This is what he had to say:

"My perception of Ev Williams/Biz Stone is that they are not in it for the journey, but for the destination. Any way I look at it, those guys are not geek visionaries with a mission; they are money-driven. They'll flip Twitter to the highest bidder, if there is one. They know everyone is questioning Twitter's potential for revenue creation, and the hype effect will die out in a matter of months. Twitter has mostly unfolded during the crisis; being in SF has sure influenced their thinking. And unlike Facebook with its platform status, it really has only so many options to create revenue, none of which is likely to support the valuation."

Greg thinks that Mark Zuckerberg is a different story:

"Zuckerberg strikes me as someone who is driven less by the money - especially now that Facebook is turning a profit - than by the visceral "geek need" to prove he's smarter. He's demonstrated a strong desire to grow Facebook into the next big thing and I'd say even challenge Google for domination of the Internet."

Greg is willing to stick his neck out and make a prediction: "Twitter will sell next year for $2.5 billion to Google (or some other company that can come up with that kind of money). And Facebook will IPO."

He also thinks the high price will be based on non-rational factors: "They want to acquire it for the trophy factor, like top lawyers fighting to get the most expensive downtown offices. It's an ego and brand thing."

What Insights Do You Get from This Data?

We hope that people who are better qualified than us can describe what is significant in these deal terms, apart from the obviously high valuation.

What jumps out at you from this data? How do you think this will play out?

Today, the real-time Web is associated with social networking status updates via services such as Twitter and Facebook. But whether this will be the killer app for this generation is not clear. As we enter a period of "social update exhaustion" (as in, "I really do not care what you had for breakfast"), the real-time Web may evolve into things that we really need to make a living or to get essential stuff done. The killer app matters, because the winner at the platform layer will be the company that hosts it.

Other Killer App Contenders

We think the killer app is something we call "trading scarcity." Let's first look at three other contenders:

1. Data portability
   Because the real-time Web has grown out of social media status updates, the typical killer app that people have been working on is data portability: automated connections between different social networking sites. This is certainly how Gnip has positioned itself. Question: is this interesting to people other than the social media experts who write about it? Or is the mass market happy to choose one site and stick with it? Will we simply see bilateral negotiations between sites emerge, along with basic best practices?
2. News delivery
   Question: is this interesting to people other than journalists and bloggers? News is a fairly big business, but in the big picture, it is only one niche. How many journalists are there? If all of them used Twitter all day long, would it be a big business?
3. Customer service
   The ability to react to problems in real time, to nip problems in the bud, is important to companies of any size. This is big. Question: how practical will implementation be? The ability to respond quickly is only one aspect of good customer service; the other aspects (hiring, training, motivation, corporate policy) are both more critical and more complex.

The Law of Supply and Demand Has Not Been Repealed

The free, abundant digital domain is mirrored by an expensive, scarce physical domain.

Online, we tend to focus on the free, abundant digital domain. The debate on Freeconomics rages today, but the basics are simple. The Internet is an enormous, almost-free copying machine for anything digital, so price will tend towards $0. Air is the most precious commodity in the world (try going without it for a few minutes), but it is free (notwithstanding negative externalities).

But all that free stuff must be paid for by something that people would pay for. That is where the expensive, scarce physical domain comes in. People pay more for things when the demand is high and supply is low. So to make money, you need to sell products and services that are scarce... and in demand.

Or you could make money by connecting supply and demand using the real-time Web.

But it has to be real time. That is the whole point of scarcity. A hotel room may be available for $75 right now, but 10 minutes later it could be $125 (or $50). Acme's services are available right now for $150 per hour, but 10 minutes later it is charging $200 because it is more booked up. You see a hand-knit cashmere sweater available right now for $350; it's the only one, you want it, and it might be gone in a few minutes. Premium ad space is available right now for a CPM of $15... no, make that $17.

I could go on and on. This affects almost every market in the world. Plenty of untapped opportunity lies here for enterprises, startups, Main Street small businesses, and individual free agents.

Entrepreneurs have big technical challenges to work on. Message delivery (which we explored in our last post on the subject) is challenging enough but very minor compared to the devil-in-the-details issues at the application layer. These will have to be solved in domain-specific ways.

In this world, the status update tends to go from a socially driven message ("I just did this. Are you interested?") to a more commercially driven message ("This is what I have available right now at this price. Are you interested?" or "This is what I need right now. Do you have it?").

Like fresh fish? Are you willing to pay more for fresh, healthy, and delicious than stinky, old, and sickening? Then go here.

Trading Attention and Endorsement

For those of us who were steeped in the early days of social media, this all sounds a bit too commercial. Surely we are not just economic animals, are we? No, we are not. Maslow's hierarchy of needs stated that clearly.

But even if you take money out of the equation, we are still trading in scarcity - in this case, the scarcity of our attention.

You have only 24 hours in a day and 365 days in a year, and the average life span is around 80 years. You are a limited resource. Sorry if that is news to you. :-)

You are getting pinged from all around, forced to constantly make decisions about where to allocate one of your finite resources: time.

Your other limited resource is credibility. Social networks want you to endorse (that is, sell) their services to your friends. They may pay you in cash or 'Attaboys, but whichever you take, you are dipping into a limited pot of credibility. Shill too much, and your friends will abandon you. Ask any Amway or multi-level marketing sales agent, and they will tell you how that works.

Eliminating the Curse of "May You Have Much Inventory"

Inventory is the curse of any business in the expensive, scarce physical domain. Think of what Dell did in the PC business: it used real-time supply chains to eliminate inventory, building each PC to order. This is as close to magic as you can get in the expensive, scarce physical domain. You turn negative cash flow (working capital that you need to expand) into positive working capital cash flow: you get an order, get paid, and then you pay the supplier. Perhaps on the real-time Web this all happens close to simultaneously, so the very concept of working capital begins to disappear.

Explaining the business value of trading scarcity using the real-time Web is not difficult, then. Ask any company, "Do you want to eliminate inventory?" You will get its full attention. This is not technology looking for a problem to solve. This is the biggest problem that most business people in the expensive, scarce physical domain (i.e. the real world) face every day.

What This Means for Real-Time Web Players

Envision a future where this has played out. Most of the world's transactional opportunities flow through the real-time Web. You can tap into that flow to buy and sell. And you can be an intermediary, which is fundamentally the role of aggregating demand. What systems would you use in that future?

Those systems are the ones that the winners of the real-time Web have to build.

It won't be simple. Meeting the challenge in one domain is complex enough. Building the platforms that accommodate multiple domains will take a lot of work, and we are at a very early stage.

• Limited choice of mobile phones. I chose the BlackBerry, because I'm used to it. No, T-Mobile doesn't offer the iPhone!
• Wi-Fi phone and data on your mobile. This is the interesting bit. Basically, wherever you have Wi-Fi, you will have free minutes.
• GPRS, which is what you would use if you don't have access to Wi-Fi.
• Wi-Fi land line. This looks like an ordinary phone but connects to your high-speed line as a VoIP phone. Other companies offer this, but getting the whole bundle from your cell phone provider is pretty cool.

My Experience

First, no disclosure needed. I bought this at a regular T-Mobile store and paid the regular listed price. This was not a journalism assignment.

Here are the key points:

• I've reduced my cell phone minutes dramatically... as in, cut them in half.
• Most of my calls are from the office, home and other locations that I visit regularly. The phone picks those up regularly. For example, when I get home, the phone says "Home" (it says "T-Mobile" when I am in cell phone mode). That's it. Nothing else to do. Just make (free) calls.
• Call quality is mostly fine. If you see three Wi-Fi bars or fewer, it's a bit flaky. You'll hear voices in slow motion, like a tape winding doooown.
• Push email comes through fine. This matters for when you are out of the country. You will still get email without having to sign up for an expensive international plan. You are not 100% always on, as you are with GPRS, but for many people who travel, it's good enough. If not, just pay for the international plan.
• It's amazing how many places I found in my test across Switzerland, France, and America that have open Wi-Fi access. I just hit "Scan for networks" on my BlackBerry, and there they are. Note: I'm writing this in Herald Square, New York City, with three open Wi-Fi bars on my BlackBerry. Hm, who shall I call?

Industry Implications

• The implications are practical mainstream stuff and carry a very simple message for consumers: save money.
• It shows that big companies can innovate and are not always afraid to disrupt their own cash cows in their quest for more market share. Kudos to T-Mobile.
• This will make Apple even keener to dump AT&T as soon as possible.
• This puts pressure on Skype to deliver a practical, simple device for mobile phones.