Posts from September 2010

A lot of the discussion about last week’s MBA Mondays post on Outsourcing was about the differences between outsourcing locally and outsourcing outside your home country. A popular term for the latter approach is offshoring.

The advent of modern electronic communications has allowed companies to efficiently source and manage labor all around the globe. This is one of the megatrends, if not the megatrend, of the current economic period we are living in.

But just because you can use labor halfway around the world doesn’t mean you should. This post is about the pros and cons of offshoring from my perspective.

On the plus side, offshoring often offers considerable cost savings. Labor costs in emerging markets are often a fraction of the labor costs in the developed world. And you can often tap into highly educated and skilled labor pools. We have companies in our portfolio that have built world class engineering teams in places like Belarus, Solvenia, and India. These teams cost less and often produce amazing work. AVC community member Ken Berger has been involved in building a strong team of ruby engineers in Vietnam. I have no doubt that team can do excellent work at a fraction of the cost of a team of ruby engineers in San Francisco or New York.

On the negative side, there are significant communication and management issues that arise when you have a team working half way around the world for you. Yes, you can Skype, IRC, Twitter, and IM all day long with your remote team. But often they want to be asleep when you want to be awake. Israeli tech teams are well known for their participation in critical product/tech meetings with their US counterparts in the wee hours of the morning. They might be in the meetings, but you have to wonder if they are at their best.

But as problematic as the communications issues are, the management issues are even harder. You can outsource the management issues by hiring a firm to do your work for you. I am not a big fan of that approach, particularly for startups. As I outlined in my post last week, I believe startups need to directly employ the people doing the most critical tasks. And for a startup, that includes things that are commonly offshored like software engineering and customer support. And even if you outsource the management to an offshore firm, you will have to manage that firm. And managing vendors is often harder than managing employees.

I have observed that hiring a local manager for a remote team is often the hardest thing to do. And you need a strong manager in place in your remote location if you are going to be successful. A weak manager of a remote team is almost always a disaster for your company. It causes delays and management messes that you will have to clean up.

The most reliable technique I have observed is to ask a trusted and experienced team member to go overseas and launch/manage the remote team. That is a big ask and often is not possible. But if you can make that work, it has the highest probability of success.

The companies in our portfolio that have done the best job with teams located in other parts of the world have had founders who came from those places or founders who spent significant time in those locations. They are able to source high quality talent and manage them, sometimes even remotely due to their familiarity with the people, place, and culture.

Speaking of culture, you can’t overemphasize what a big deal it is having multiple cultures in your company. Some cultures take it easy in the summer and work hard in the winter. Some cultures have different approaches to gender in the workplace. Some cultures value respect more than money. Some cultures value money more than respect. Multiple cultures can often create tensions between offices and teams. Managing all of this is hard and I have not seen many do it exceptionally well. But I have also observed that as this kind of organization structure gets more common, entrepreneurs and managers are getting better at handling cultural complexity.

The single most important thing you can do is get everyone, at least all the senior team members of the company, across all geographies, together on a regular basis. And I think it is not a good idea to always have the remote offices come to the home office. The home office needs to travel to the remote offices too.

As I said at the start of this post, being able to source and manage talent all across the globe may be the signature megatrend of the current economic period. It has far reaching consequences for companies of all shapes and sizes. For startups, it offers lower costs and at times access to excellent skills and talent. But it comes with great challenges and you should not undertake an offshoring exercise lightly.

If you google the headline to this post, you are taken to this Google Voice support page which says:

Although you can't currently port your existing number to Google Voice, we hope to offer this option in the near future. Please tell us if this is a feature you'd like to see in Google Voice.

I am going to do a bit more than tell Google. I am going to tell the whole world.

I want to be able to port my cell phone number to Google Voice, just like I can port it to any wireless carrier.

I don't understand why this is not possible. I don't understand why the ability to port a number anywhere is not the law of the land. I don't understand why that number doesn't belong to me in every sense of the word.

Our portflio company Etsy has a person who is focused on the office, company culture, and making the work space as comfortable as possible. They have a chef come in and cook a healthy lunch for everyone three times a week. They called that program Eatsy.

Etsy launched in June 2005 and is over five years old. The company has well over 100 employees and is growing fast. They can afford to invest in things like the office and feeding their employees healthy lunches.

Every time I visit Etsy, I am reminded how important the "vibe of the office" matters. You walk in the door and you are hit with the company culture right in the face. You feel warm, cozy, happy, and comfortable at Etsy. And that feeling lasts well beyond the first steps inside the office.

When I was at Etsy earlier this week, I saw that they have been covering the air conditioning ducts with knitted covers. I took a photo and posted it to my tumblog.

You may laugh and say this stuff is frivilous and a waste of time. But I can assure you that is not true. Etsy is a recruiting machine. They are getting the best talent in NYC to come to their company now. It is not just the vibe for sure. They have big and interesting engineering challenges. They are doing cutting edge things in marketing and customer service. But little things like socks on the ducts and fresh and healthy food for lunch three times a week also makes a big difference.

When you are less than ten people, it is hard to invest in stuff like this. All you can do is focus on getting your product right and launching it. You will work out of any space that is warm and hopefully quiet.

But as your company grows, you need to pay attention to the office and the culture. It matters.

I read Mike Arrington's post on Google's social efforts just now. I have not seen any of Google's work. I have not been briefed. I really have no clue what they are building. But this quote got my attention:

Google Me is not a product, it’s a social layer across all products”. But there’s more – “Google Me will produce an activity stream generated by all Google products.

Q. Why did Twitter succeed and FriendFeed fail?

A. Because FriendFeed was largely a social aggregator whereas Twitter is a service with specific social intent.

I think this is an important distinction. I have not seen any breakout social layers. The social services that have broken out to date have been services where a user has a very specific intent.

Social engagements are weird out of context. Comments to this blog make perfect sense on this blog but less sense when they are tweeted out into a Twitter stream or show up in FriendFeed.

There is value in social aggregation but not huge value. Not "this is how we are going to compete with Facebook value". If you want to compete with Facebook, you have to build a service that offers users a specific social intent and the ability to engage directly around that intent.

Curious if you all agree with me.

I attended a breakfast meeting the other day where David Silverman of PWC presented the latest Money Tree data on the venture capital business to a room full of entrepreneurs and VCs.

As I sat there and listened and read the charts, it occurred to me that there are now two distinct and very different venture capital businesses.

The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business. I don't think I need to explain why this massive decrease in cost has happened to this audience. We've talked about that ad naseum here and on other tech blogs.

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.

I've asked David to help me put together some numbers that will show this breakup of the venture capital business. I hope to get the numbers in the next few days and will be posting them and some additional thoughts on this topic in the coming weeks.

I don't think you can make blanket statements about the VC business anymore. These two industries are very different from each other and will have very different business dynamics and risk and return characteristics going forward.

Yesterday, I saw an informal survey of our portfolio companies. One of the questions was "what can we help you with?"  One of the answers was "get Fred to blog more about us."

That gave me a good chuckle. Regular readers know that I do blog a fair bit about our portfolio companies but I also try to keep it balanced. Too much pimping of the portfolio doesn't make for a good VC blog.

All that said, this is a blog post about some happenings in our portfolio.

1) Yesterday Twitter announced a new version of their web client. They are rolling it out already. I got it sometime last night. It is a two pane interface. You click on a tweet and open up a second pane with a lot of additional data on that tweet, including embeds of videos and photos. If you have the iPad Twitter client, you'll immediately understand. One thing I wish they would have included from the iPad client is the full page behind the link. I love reading on the iPad client that way and I wish the they had included that feature in the new web client. I think this is a big improvement to the web client and congratulations to the engineering and product teams who designed and built it.

2) On Monday, Boxee put their Boxee Box up for pre-order on Amazon. It is currently #6 in electronics and was as high as #4 yesterday. The Boxee promise is "Watch What You Want":

We get it – you want to the freedom to watch whatever you want on your TV: Movies, TV Shows, Sports, but also any other video that is available online. You want to do it without having to connect a computer to your TV or use a keyboard and mouse. We’re all over it. The Boxee Box by D-Link: watch, organize, share – you are now in full command of your TV for the first time. No rules, no contracts.

If you want to watch everything you can watch on your laptop on your TV, check out the Boxee Box. It should ship soon.

3) Twilio lowered prices for inbound and outbound calls made on its telephony API. Here are the new prices:

I've gotten feedback on this blog in previous posts about Twilio that their prices seemed high. As Twilio generates more volume, they will drive prices down and pass them onto their developers. As it should be.

4) Get Glue launched an iPad client. I used it to check into several TV shows on Sunday and each time I did that, there were between 50 and 100 people checked into the same TV shows. It's a really cool app to have on the family room coffee table while watching TV, reading books, and listening to music and such. If you haven't tried it, check it out.

 

I am sure I've missed a bunch of other happenings in our portfolio in the past week. I might make this a regular feature here on AVC to alleviate that issue. I'm curious what all of you think about that.

I briefly got to inbox zero over the labor day holiday and have been managing to keep things more or less under control since. There are two services that I've started using that have made a big difference for me recently.

Unsubscribe.com – from the man who brought us phonetag (one of my all time favorite services) comes unsubscribe.com. This is as low tech as you can get. The service unsubscribes you from mailing lists, automatically if they can, manually if they have to. You get five unsubscribes per month for free and for $19 you can upgrade to unlimited unsubscribes (not per month, forever). I didn't even bother with the free offer. I paid $19 the minute I saw this service and to date I have unsubscribed to roughly 125 mailing lists with the click of a button.

You download their extension for outlook and gmail and just hit the unsubscribe button. That's it. One click unscubscribe. Extensions for Yahoo, Hotmail, and AOL are coming soon. Check it out. For someone like me who maintains many active email addresses, some of which have been active on the Internet for almost 20 years, this is an unbelievable service. And the thing I like most about it is that it doesn't filter the email away or send it to spam. It stops the mail from being sent. It works the way email is supposed to work.

 

Priority Inbox – from Google comes a new feature in Gmail, one that I have been blogging about and asking for for many years. Most of you probably saw this come out a few weeks ago so this is not news to you. However, Priority Inbox has made a big difference for me. It was pretty bad right out of the box, but I decided to stay quiet for a few weeks and see what happened. I have trained Priority Inbox by clicking the yellow + sign or the blank minus sign on hundreds of mail messages. I have a lot more training to do, but after a couple weeks, it works pretty well for me.

One of the terrible things about getting hundreds of emails per day in one inbox is the fear that you'll miss something important. And I do, all the time. Priority Inbox tries to solve that problem by creating a set of emails that I must get through every day. The rest can wait until the weekend when I generally try to clean out my inbox (and fail most of the time).

The other thing I like about Priority Inbox is the section for starred emails. This simple UI decision forced me to start starring important emails, something many of you have been suggesting to me in various "email hell" posts over the years. It is neat when a feature can change behavior towards best practices. Priority Inbox did that for me.

 

So these two new services have made my email life a lot better. One from a scrappy entrepreneur who has always focused on solving the problem instead of building technology for technology's sake. And one from one of the biggest tech companies in the world who always chooses technology over people to solve tricky problems. But interestingly, it took a person (me) to get Priority Inbox's technology working right.

If you are using Gmail, I highly recommend using both of these tools. They've made a big impact on my email experience in a short period of time. And I think they can do the same for you.

 

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This MBA Mondays topic was suggested by Aviah Laor, a regular member of this community.

I'll start this post by describing outsourcing and explain why companies do it. Then I'll talk about outsourcing in the context of startups.

Outsourcing is when a company hires another company to perform certain functions. Wikipedia defines it as "contracting to third parties." The term has become synonomous with the transfer of labor/work overseas, but outsourcing is not geographically defined. You can outsource work to the company across the hall.

The two primary reasons one company will outsource work to another company are cost and skill set. The third party outsourcing company can provide the required work at either lower cost or higher quality or possibly both. Sometimes time is also a factor. It is often the case than an outsourcing company can get the job done faster.

All kinds of business functions can be outsourced. I have seen almost every part of a business outsourced at one time or another. But the most common things that companies outsource are software engineering, data entry/data hygiene, customer service, tech support, and financial record keeping/reporting.

Startups are among the most active outsourcers. It makes sense. Typically the founding team has skills in one or two areas and doesn't have the entire set of skills to launch a business. So they outsource the tasks they don't have the expertise in. This can be a good thing but can also be a bad thing.

Specifically, I think it is always a bad thing for the founding team of a software company to outsource software development. We see this a lot. A team will come into our office and pitch us. When I ask how many people they have, they say "this is all of us". Then I say, "who is writing code?" And they say, "we've hired a company to do that for us." That is a very disappointing moment for me because it means we almost certainly won't invest in that team. We believe that software companies must own their most important capability themselves and that is the ability to produce their product in house.

The founding team of a software company should have a strong product manager on it (often that is the founder) and should have at least several strong software developers on it who can write most of the code. It does make sense to outsource some parts of software engineering from time to time. A common thing we've been seeing recently is outsourcing the development of a blackbbery app or some other kind of mobile app. Right now, that is still a fairly nascent skill set but we are also advising most of our portfolio companies to bring individuals in house to do that work because it appears that mobile app development will be a key skill set for our portfolio companies for some time to come.

It is tempting for startups to want to outsource customer service and tech support because these are labor intensive activities that can be fairly easily outsourced to a call center, either in the US or even outside the US. At some point, most companies will outsource some of all of this work. But we do not believe startups should outsource this work until they are "all grown up" (whatever that means). Customer service and tech support are the best way for startups to talk to their customers. Sometimes it is the only way startups get to talk to their customers. And customer feedback is so very important to startups so it is critical for them to do this work in house.

Data input and data hygiene is one area that we do think startups can and should outsource. This is not strategic for most startups and is often costly and time consuming work that can be easily outsourced.

The function that most startups outsource in the beginning is financial record keeping and reporting. And that makes sense. Accounting and bookkeeping is a specific skill that most founders don't have. By outsourcing it, you make sure your books and records are kept accurately and up to date.

I am a fan of outsourcing in general. I believe companies should develop those skills and functions that are their core competency and outsource the skills and functions that are not. I believe that the US should invest in outsourcing instead of demonizing it. I believe there is a lot of opportunity for economically weak regions of the US to use outsourcing to build their economies and grow.

But for startups, outsourcing is a tricky issue. You should not outsource those things that are core competencies or critical feedback points. If you don't have the skills on your founding team to do that work, go find people who do and either hire them or bring them onto the founding team.

I woke up this morning to this awesome blog post by Jeff Atwood of our portfolio company StackOverflow. Jeff says that this scene from Better Off Dead fully explains how they run the company.

Go read the post. It's a good one.

It reminds me of a conversation my partner Brad and I had when we were raising our first USV fund in 2003. We likened the VC business to skiing a mountain for the first time. You get to the top of the mountain and start heading down the cat track looking at one black diamond after another. You don't know the runs and can't see past the first steep. But eventually you pick a run and go for it. You really don't know what you are in for, but you just have to take the run as it comes to you. And when you finish, hopefully still standing, the feeling is awesome.

So I am pleased to see that entrpreneurs, particulary entrpreneurs we are skiing the same run with, see the world the same way we do. Nice post Jeff. I loved it.