San Francisco is Breaking My Heart

Homeless sf 1

I moved from the Bay Area about five years ago to live in Michigan. However, I am still back in the Bay Area routinely working with software companies and it's breaking my heart. When I was at Zendesk I lived near our first office (510 Townsend) near Caltrain. When Zendesk moved to Market and Sixth street, it was a kind of a sketchy area at night, but I got used to the chaos of being near the Tenderloin district. There were routinely fights in the alley behind our building. I saw a woman servicing a guy in a doorway as I left work. Another time a woman ran naked screaming running down the street. Someone got shot one time late at night outside our office in what we learned was a drug deal gone bad. An employee got mugged one evening and chased the mugger, which is not really best practice, but he was Ukrainian and he didn't take shit from anyone. My wife and I were on a muni going home one evening and a guy stole the entire role of bus transfer tickets and ran off the bus. The bus driver ran after the guy. When he returned ten minutes later, he said the guy had done the same thing a week earlier. 

My point of this, is there's been a homeless problem for a long time. Long time residents know that this goes back to the 1980s. Hell, maybe earlier than that. But you could walk down Market street during the day and it was okay.  Market and Sixth was crappy, and the Tenderloin was sketchy, but that was it.  The financial district was pretty good. Downtown was fine. North Beach was cool, Embarcadero was ok. I used to run along China Basin and that was fine too. If you squinted San Francisco was still a nice place.

I don't think that's true anymore.

This isn't Times Square in the 70s or Detroit in the 90s. It's far worse than that. It is epidemic. 

I've been helping out a company located and Fourth and Market, one block from Moscone Convention Center. It's a shit hole. Market and Fifth is worse. Market and Sixth looks like a third world country with people selling random stuff, iphone cords, CDs, mouthwash, razors set out on a piece of carpet on the street. You can't walk down Market more than a hundred paces any time of day without finding a body on the ground. Drunk, drugged, whatever. There are tents on sidewalks, people sleeping in doorways. Human feces on the street, needles, you name it.

Today I was meeting with a colleague at Peet's on Market. It's pouring rain and a young man comes in, thin, somewhat scruffy in appearance, likely homeless, bleeding from his ear and sits near us. I offered him some ibuprofen and gave him a wad of cash. He spoke broken English and didn't seem to want either, but I left the cash in front of him. Sometimes I give homeless people food, but rarely money.

I don't know what to think of SF anymore.


General Magic

General magic 400

I realize I'm late to the party on this, but I happened to catch the documentary "General Magic" recently and it's an amazing piece of work. It had been on my list of films to watch since earl 2019, but somehow never bubbled up to the top. So it was fortunate that it was available on a Delta flight I had recently. For anyone who wants to understand the ups and downs of what it's like to be in a high-tech startup, this is an in-the-trenches documentary that captures startup reality better than anything else I've seen.

The film documents the rise (and fall) of Apple spinoff General Magic, a company that embarked upon the audacious goal of producing the first connected, handheld personal digital assistant (PDA), predating such devices as the HP 95 LX, Psion 3, Palm Pilot. General Magic was founded in 1989 by Marc Porat, Andy Hertzfeld and Bill Atkinson, the latter two among Apple's most famous engineers for their work on the original Apple Macintosh. The company became a hotbed of innovation and secrecy. No one quite knew what they were up to, but given the pedigree, it was going to be big. The company attracted dozens of other prominent engineers and up and comers including Susan Kare who designed the UX, Tony Fadell who went on to help create the iPod, the iPhone and Nest, Andy Rubin who created Android, Pierre Omidyar who created eBay.

General magic prototypeThe documentary includes a large quantity of historic footage. The team at General Magic knew they were working on something important and they hired a team to film all of it. So there are team meetings (bean bags on the floor), demos, late night sessions, press conferences, nerf-gun fights and more. The historic footage is interspersed with contemporary interviews with key executives, press and analysts looking back on what they accomplished and why the company failed. 

It's a heartbreaking story. Here's a company with vision, financial backing, genius engineers, and a huge market opportunity and its obliterated to the point of obscurity. I doubt that today's startup engineers have even heard of General Magic, the Magic Cap operating system or any of the tools from that era. But the irony is that all of the technology became widespread within 20 years. That includes technology that later surfaced in the iPhone, Android, Twitter, Amazon. Ultimately, the people behind General Magic created multiple billion dollar technologies and arguably entirely new industries. It was the hard lessons of General Magic's failure that ultimately resulted in the triumph of its many brilliant engineers.

Having worked in the software industry since the late '80s, this film captures the essence of Silicon Valley better than anything else I've seen. It's a powerful tribute to what it takes to succeed in the valley and asks the question: is it worth it? 

Here's the trailer:

 


iWoz - Steve Wozniak

Iwoz

I must have read a dozen books about the founding of Apple Computer over the years, so when co-founder Steve Wozniak wrote his autobiography iWoz a few years back, I made a mental note of it, but never got around to reading it. Woz and I happened to be speaking at the same conference last week. They say you should never meet your heroes, but meeting Wozniak was a real honor. He is one of the most talented engineers and nicest guys I've met. His onstage interview was a bit scattered (imagine opening a faucet of Woz), but it was great to hear him speak about his experiences in designing the Apple II computer, how Basic and Visicalc helped turn the Apple II into a platform, the importance of privacy in social media, etc. 

iWoz is co-written with veteran PC Week reporter Gina Smith though told in Woz's unique style. Smith spent over a thousand hours interviewing Woz and then transcribing and reviewing the interviews and suffering through numerous Woz pranks. Woz's sense of humor and lightness come through in spades.

Zack wozAlthough Woz was less a part of Apple than Steve Jobs in later years, those who know the history know that Apple would not have existed without Woz. The Apple II computer effectively created the personal computer revolution. It was first all-in-one design, the first computer that you could plug in and use. The Apple II+ was the first computer I bought and I still have one in my closet. It works perfectly 40 years later.

With the average iPhone app today weighing in at 100mb or more, it's hard to appreciate how much work went into creating software that could run on a 48k machine running at 1Mhz. It was Woz and other early apple employees like Randy Wigginton, Chris Espinosa, Bill Fernandez, Daniel Kottke, who labored to make that Apple II a reality. Woz, gave some of these early employees shares of stock worth tens of millions of dollars out of his own pocket when Jobs refused. 

For those interested in the history of Apple, this book is a unique opportunity to hear it from the guy who built it. You get everything from selling blue boxes with Steve Jobs to how he built what became the Integrated Woz Machine (IWM) disk controller for the Apple II and Mac.

Here are a few excerpts from the Q&A with Woz:


More Tech IPOs

Pagerduty IPO

Looks like we're in another boom year for Tech IPOs! While everyone is obsessed with the mega IPOs like Uber, Airbnb and the like, I think we're seeing a very healthy number of B2B IPOs happening. Zoom and PagerDuty have gone out successfully and others like Fastly and Slack are on deck. I was an advisor to PagerDuty founder Alex Solomon in the early days, and it's great to see how the company has continued to grow. It's a company that had its share of growing pains in the early days as they built the management team. Ultimately Alex recognized he needed an outsider to scale the company to IPO level. He hired Jennifer Tejada who has done a fantastic job, while he's chosen to focus more on the technology. (Both of them are in the photo above.)

Here's to the many other B2B tech companies that have crossed $100m in revenue and are heading for their IPO.


Congrats to Duo Security!

Zack Duo Cisco 1
Congratulations to Duo Security, which announced that it is to be acquired by Cisco Systems for $2.35b. This is a great outcome for all involved, and I'm very proud of what the team has accomplished.

I worked with Duo for about three years, initially as an advisor and ultimately as Chief Operating Officer running Sales, Marketing, Products, Engineering and Services. I helped grow the company from around $7m in Annual Recurring Revenue (ARR) to about $100m. The company has continued to grow to 700 employees, 12,000 customers and revenues that I estimate could exceed $200m ARR by year end, based on prior published numbers.

Duo is the fastest growing company I've been a part of; faster even than Zendesk or MySQL. When a company grows this quickly, it becomes a different organization every year. The early sub-$10m revenue company is quite different from where Duo is today. I would always tell new employees to be prepared for change. What remained constant was an underlying set of midwestern values of hard work, customer care and innovation that made Duo special. (Also we had a really good fun band called "Louder Than Necessary.")

It's a testament to the founders' vision and the management skills of the leaders we recruited that the company scaled so well. I remain especially proud of the many people we hired, promoted and developed to become the future leaders in the company. As news of the acquisition came out, many people have asked me about the deal, so here are my thoughts...

First of all, this should be recognized as an absolute success for the management team. To grow a company to this size and value is very rare. Less than 1% of venture-backed companies get to a valuation of $1 billion. It's also one of the biggest software successes in the midwest and proves that you don't have to be in Silicon Valley to win big. (Duo has in fact expanded into San Mateo, Austin, London and Detroit. Part of Duo's success is due to these multiple locations, but that's a another story.) 

Secondly, this deal creates a larger force in the industry. There is no doubt that Duo could have proceeded towards an IPO in 2019; they had in fact hired several new executives to lead these efforts in recent months. But the combination of Cisco and Duo together is more significant than Duo on its own. There has been a large amount of consolidation in the security space in the last few years and I believe Cisco will emerge as a leader. They have the respect and attention of Global 2000 CISOs and CIOs, a strong worldwide sales machine and a large number of related products. In a few years time, it will be clear that Microsoft isn't the only company that is capable of reinvention. 

Duo-arr-growth-chartThirdly, this represents an opportunity for further growth for the team at Duo. Cisco plays on a larger global stage than Duo could on its own. But Duo's executives, managers, engineers, security experts, sales people, support engineers, product team and marketing organization have a lot of mojo to contribute. Duo has become one of the fastest growing SaaS companies on the planet and they know a thing or two about making security easy. The company has a Net Promoter Score (NPS) of 68, one of the highest in the industry!

And that is the key to why this deal makes sense to me. The combination gives Duo scale. But it also injects speed and innovation into an industry that needs it. The old approach to security, locking down your network with a VPN and using old-fogey security tokens doesn't work when your applications are in the cloud, employees are mobile and hackers are targeting everyone and every thing. I believe Duo is well positioned to lead with a modern new approach to security.

There's also a fourth point, which in the long term could become even more significant. Duo's success injects a large amount of capital in the Ann Arbor / Detroit area. The company has also developed tremendous expertise in building a SaaS company at scale. That combination of capital and talent will result in the creation of additional startups in coming years. Duo's investors (Benchmark, GV, Index, Redpoint,Rennaissance, True Ventures...) did very well and are likely to be open to investing in new startups in the region alongside other firms focused on the midwest such as Drive Capital, eLab Ventures, Steve Case's Revolution, RPM Ventures and others. This acquisition shines a spotlight on Michigan's growing tech scene and that will have all kinds of positive impact on investment, innovation and job creation.

To all my friends at Duo, this is a vote of confidence in all that you have created. I wish you congratulations on achieving this milestone. Now there's an even bigger opportunity to take this product line, security expertise and company culture to a bigger audience than we ever thought possible.

Go Duo!  

 


Bumper Crop for IPOs in 2018

Zuora ipo

It looks like 2018 will be the strongest year in tech IPOs in recent history. Although some of the largest companies (Airbnb, Uber) are still waiting on the sidelines, so far we've seen a large number of very successful IPOs including DropBox, Zuora, ZScaler, Spotify and others. This week there were three strong IPOs including Ceridian, Docusign and Smartsheet which popped 30-42% in their debut. These companies all have much stronger fundamentals than some of the troubled IPOs of 2017 (Blue Apron, SnapChat) which gave investors pause. 

Pivotal is the only IPO that had a very modest rise on it's debut, a day when the markets were down overall. But in the following week, Pivotal has risen about 20%. DocuSign is a good example of a cloud company that has pursued a massive market opportunity. DocuSign has a $2 billion dollar run rate ($518m revenue in Q1, doubling over the last two years) with a quarterly loss of $52m, compared to $115m a year ago. While the company certainly could have gone public earlier, at a $6 billion market cap, the wait seems to have been worth it.

One of the factors fueling demand for new IPOs are the strong Q1 results among public tech companies including Amazon, Facebook, Microsoft and even Twitter.  Microsoft's stock has recently hit a historic high, based on the growth of its cloud business. Considering that Microsoft was a laggard in this space, it speaks to not only the disciplined management that CEO Satya Nadella has put in place, but also the huge upside that still exists for tech companies with recurring revenue SaaS offerings. 

And that's precisely why we should expect to see even more IPOs in the second half of 2018.  It looks like Acquia, Anaplan, Avast, CarbonBlack, Domo are likely to go out in the next few months. I would expect to see quite a few IPOs between now and mid-August when bankers head out on vacation and then more in the fall.

While there has been a lot of volatility in the market earlier this year, it has still been a nine-year bull market and at least in the tech sector, it seems that there is still a lot of headroom for growth.

What companies do you think will IPO in the rest of 2018? Will the bull market keep running? Let me know your thoughts by posting a comment below.

 


Are Tech IPOs Back in Fashion?

2017 ipos

Much has been made of the slowdown in tech IPOs in recent years, but that trend appears to be changing in 2017. Of course, there are a few mega-companies that continue to sit on the sidelines (AirBnB, Uber, DropBox, I'm looking at you!) but I think we will continue to see improvements in 2017 and 2018. Perhaps not as strong as the record number of IPOs of 2014, but likely enough to reverse the declining trend from 2015 and 2016.

Early this year we saw IPOs from the likes of Snap, Mulesoft, Aleryx, Okta, Cloudera among others. Other than Snap, which was rather over-hyped, most of the others had very good returns for their investors and are continuing to trade above their IPO price. And overall multiples for tech companies on NASDAQ and NYSE are holding steady. I'm especially encouraged by the performance of B2B software companies Mulesoft, Okta and Cloudera. Mulesoft now has a market cap over $3b and Cloudera and Okta look likely to cross that threshold later this year based on their steady growth and increasing efficiency. It looks like B2B stocks are once again in fashion.

My expectation is we'll see a bit of an IPO slowdown during the summer and then a significant uptick in the fall. For B2B SaaS companies getting to $100m or beyond in annual recurring revenue (ARR), this will be an interesting time.


Duo Security More Than Doubles in 2016

Duo-arr-growth-chart

I'm very proud to see how much Duo Security has continue to grow. In 2016 we more than doubled Annual Recurring Revenue (ARR) year over year, finishing at $73m and becoming cash-flow positive for the year. I've been a part of several high growth companies including MySQL and Zendesk, but Duo is the fastest growing and most efficient.

We've also announced our new Duo Beyond offering, which adds even more capabilities to go beyond traditional two-factor authentication. Hopefully 2017 continues to be an excellent year for SaaS security companies.


Hark: The Software Paradox

Hark

Stephen O'Grady at RedMonk has launched a new Podcast called Hark. In his second episode, he and Agile programming guru Kent Beck have a thoughtful discussion around the ideas in O'Grady's book "The Software Paradox."  Even though software is "eating the world" and become more widespread and strategic, its economic value appears to be declining rapidly. Certainly, we've seen a shift in the industry from traditional on-premise software commercialization to distribution models like open source, and software-as-a-service, with vastly different business models.

Simply put, the software industry is undergoing a significant disruption that is reshaping the economics of the industry and rendering older "tried and true" business models obsolete. And at a level that strikes closer to home for many, it's also reshaping employment models and careers. Although the parallels are not perfect, the software industry is going through a transformation much like the publishing industry or the music industry. (And we all know how well that turned out for writers and musicians!)

I would argue this has transformation has been going on for at least ten years already since the emergence of successful open source companies. In the early days of MySQL, Marten Mickos regularly talked about how his goal was to disrupt the database industry taking it from $9 billion in revenue to $3 billion, and then capturing a third of that. While this was possibly more bravado than business plan, it was based on the fact that MySQL was 90% cheaper than Oracle. (And for many, MySQL was 100% cheaper --after all, it was under a GPL license and free for most users.)

While we built a solid business with MySQL, growing it to just short of $100m in revenue and selling it to Sun for $1 billion cash in 2008, the long term impact of MySQL was far higher outside the database industry. MySQL, Linux and other open source infrastructure software spawned thousands of businesses that simply would not have been economically possible under traditional commercial licensing fees. We routinely met founders of companies that said their business was enabled in part because of the dramatically lower cost of building an IT infrastructure. So at least some of the value that MySQL disrupted was captured not by traditional software companies, but by newer companies like Facebook, Google, Skype, Craigslist, Priceline and the like. And many of those businesses also happened to be disruptive, which is why software is eating the world. 

Not surprisingly, there have been very few home runs in the open source business, at least as measured by revenues or exits. Red Hat, JBoss, Pentaho have all been successful as businesses and have had good payouts for their investors. But many more open source projects have had widespread popularity with remarkably little economic value generated. And that is precisely the nature of the Paradox. 

And as Mickos has recently noted "The bad news is: it's almost impossible to make money on open source. The good news: it has happened many times."  But at this point it's hard to say what the future successful models for software commercialization might be, but it's certainly not going to be the traditional on-premise up-front license model. And I don't think open source, in all its various forms, is likely to generate a large number of economic home runs. There are definitely a handful of promising companies like Acquia, CloudEraDataStax, MuleSoftPuppetLabsSugarCRM and the like, but they may be more the exception than the rule. (If I missed other rapidly growing open source companies, let me know in the comments below.)

Likely we will see more divergence over time with more value realized in other forms, whether it's service-based models, cloud-based businesses, advertising, data aggregation or perhaps something as-of-yet to be invented.

It's a fascinating topic with more questions than answers at this point.  And I'm sure we'll see more discussion on this topic at the Monktoberfest conference in October. 

The Hark podcast is available on iTunes, SoundCloud or wherever you get your downloads.


2016: Down Rounds & Layoffs

Nasdaq - Box Twtr Etsy APIC

If you thought 2015 was a rough year for the financial markets, you ain't seen nothin' yet. So far, 2016 has every sign of being a full-on bear market, meaning a 20% or more decline in the major stock markets. 

And no surprise, we've seen a ton of bad news for so-called Unicorns --tech companies valued at over a billion dollars. Unfortunately, many of these companies have failed to build an efficient, profitable business to maintain their lofty valuations. No surprise, companies are seeing their public and private valuations dramatically reduced. Here are a stories that have surfaced in recent months:

The point of all this bad news is that it's not just about one or two companies that have missed the mark. It's a systemic problem. And likely, we are still just seeing the early signs of what may become more common in 2016.

To be sure, there are plenty of strong companies out there whose valuations are well justified. Companies like AtlassianHubspot, New Relic, Zendesk all have efficient business models and disciplined growth. 

But a lot of other wannabes have billion dollar private valuations that are much harder to justify. It could be that the market correction in tech is just an adjustment to valuations that were never warranted in the first place. There are lots of cool apps, devices and services out there, but it doesn't mean they are good businesses. If a company gets to $100 million in revenues and has no clear path to profitability, it's kind of a fool's errand. And many of these companies haven't even gotten that far. 

WSJ stock charts Jan 2016

So what does this mean for startups? Basically the lofty multiples of 2010-2012 are gone. The truly great companies will still command good multiples, but only if they are converging towards profitability. The "growth at all cost" land grab strategy that inspired young companies to burn millions or tens of millions of dollars per month isn't going to be viable in the current climate.

If you're in a company with less than 12 months cash burn, you better make sure management is reducing expenses. If you don't have an increasingly efficient growth story, this is going to be a tough time to raise money, so expect a down round. If you can weather the storm without having to raise additional capital and grow back into your valuation over time, that's not a bad way to operate.