MSG1
Date: February 2, 2007 8:36:03 PM MST
To: hunt.lambert

So, I wanted to explore the business goals a little more tonight. My assumption is that the value of the technology is hard to distinguish, may be expensive to provide, has price erosion (general problems of internet ~freeness~), and there are low switching costs. So, what are the possible upsides investors see? Is it the international market? Is it "scale may win"? Certainly if you frame this strictly in 5 Forces, you have lots of problems areas. What do you see as the upside? Does the (re)consolidation of the telephony networks mean that these companies could be potential acquisitions? Is it a pending consolidation of the vague security market and thus they are potential acquisitions? What is the liquidity event?

BTW, good to see you.

bek

MSG2
On Feb 3, 2007, at 5:14 PM, Lambert,Hunt wrote:

$ is the answer. 40,000 customers at a conservative $1000 each per year is $40 million revenue with 250 people. Pretty easy to make $. If you make enough, you consolidate everyone else with new investor money and the old investors cash out big. 10 years from now does not matter because you made 10x plus - that is what the VCs want. The new investors want solid growth and profits which they get from consolidation and moving the balance sheet into much more debt to get ROE. Then they cash out in an IPO or merger into MS or Oracle.

Thank you, Hunt

MSG3
Date: February 4, 2007 10:00:25 AM MST
To: hunt.lambert

I'm not sure of your early math. For the cloud providers (MXLogic, Message Labs, Postini, ...) most of their sales are indirect through ISPs who sign up SMB companies. These tend to be 30-150 seats at $1/mbox/month or ~$350 / year. For the on-premise solutions, maybe 10K for appliances and then $500 year in subscription service. I think these companies blend the SMB and on-premise numbers to get to 40,000 customers. I would guess that they make $10-$20 Million a year. So, would this 50% reduction matter?

Secondly, if my previous assumptions are true (low/no switching costs, no differentiation, high COGS), would a VC see this as wise? I have some understanding of the VC perspective (two companies, two different VC models). From that, I see them looking for a good (sales?) model and then trying to solve the scaling problems by adding money to see that model get bigger and return money. However, why wouldn't the negatives (low/no switching costs, no differentiation, high COGS) of the business, suggest that the risk is too high for someone to emerge as the largest provider? I am really curious about this risk analysis because it would seem to be one of two determinants of funding for a start-up. [1] Who you know [2] How the VCs see you.

I think I recommended this book before, but here it is again _Competition_Demystified_. Here's a link to chapter one (which as you know may be all you really need to read about most b-books).

http://www.competitiondemystified.com/competitiondemystified_chapter_1.pdf

The authors hand out this decision tree

The key to the tool is the definition of competitive advantage. The authors believe there are only three.

[1] Supply - a cost advantage to resources or proprietary technology
[2] Demand - unusual customer captivity
[3] Scale - large fixed cost models

So, if was putting these three companies to the proposed test, I would say this:

[1] Supply Advantages - none that I can see. Technologies overlap even if patently dissimilar. No one has unique access to the Spam production side, so I see mostly an even playing field.
[2] Demand Advantages - certainly mail protection is a "checkoff" item. This happened in 1997 - companies had to have a firewall. Checkpoint rose quickly (maybe a Tornado) and then six years later became a relative unknown as network engineers realized that differentiation didn't matter much and what they really wanted was simpler, integrated management in their network. I'm not even sure I could see any of these companies rising to Checkpoint's dominance. So, I would say there are no demand side advantages.
[3] Economies of Scale - Of the three, Postini is the only one that truly thinks of themselves as a cloud service (but they are not alone when you look at the larger market). They have a large fixed cost, but as Barracuda is showing, that isn't the only way to deliver the service. I'm not sure on this point.

So, working the decision tree, I would see using the bottom half - no competitive advantages, manage the company efficiently, enjoy the niche market.

From your perspective, what would a VC see that makes them think that any of the three companies could reverse this trend and move to the upper half of the decision tree and become a dominant player? If I was looking for a direct analogy, I would look at the 1998-1999 companies involved in "push technologies" - Marimba, Pointcast, Intermind, Backweb, others. This was _the_answer_ at the time. It was hard to believe the web would move forward without one of these dominating and becoming as big as Yahoo. I even found this quote from Mr Moore.

"""
Geoffrey Moore, Silicon Valley's resident marketing guru, believes that in the hands of companies such as BackWeb "push is now positioned to be a fundamental component of the e-business platform, providing not only timely but ensured delivery of information to customers, partners and employees around the globe."
"""
http://www.forbes.com/1999/11/08/feat.html

I don't think any of these companies are around today except for Marimba which got acquired out of bankruptcy by BMC Software.

So I guess it comes down to this. Are the VCs perpetuating and backing companies as investment strategies, or do they really evaluate the business model? To me the business model for the mail filter is a flat line of average returns. I guess if it got hyped up (like the push technology did, you could have more interest and the perceived interest and value rise, but the business model seems the same to me.

MSG4
From: hunt.lambert
Subject: RE: If you have time...

May be right, but they got VC money. Perhaps just eh factor of they already made VC's rich once so the VCs just believe them. My guess is they will make the VC's rich again during consolidation even if the profits are not that good. It will be driven by supply and demand for investment, not the quality of the investment. Sounds like 1999 al over again.

Thanks, Hunt

Hunt Lambert
Associate Vice President, Economic Development