MochaTalk

Since we started LiveMocha, I am often asked whether we are getting our software development done in India. People are generally surprised to find out that, in fact, all of our software development is done right here in Bellevue, WA. I guess given the fact that I am of Indian origin and outsourcing has become a very common strategy people expect that it would have been quite natural for me to have done the same with LiveMocha. However, it was a very conscious strategy, even while fairly expensive, to do all of the software development in the US. Starup companies like Like.com that established an office in India have recently shut down their office there and have moved their software development operations back to the US (see a recent WSJ article Some in Silicon Valley
Begin to Sour on India and the blog by Munjal Shah, CEO of Like.com Episode 26 - India grows up). As these articles point out, while the average cost of software development resources still remains significantly lower that experienced developers in India can now command 75% of the salary of a US developer. There are also many other issues in you face in working with an outsourced team that I will touch upon here.

There are several reasons why doing software development for a startup makes more sense in the US. Today time to market with a kick-ass product offering has become even more critical. If you have an interesting idea, you have to get your idea developed and launched into the market in no more than 6 months. Very likely, someone else has a similar idea and even a few months head start can give you perception of market leadership and allow you to quickly build network effects before someone else does. Also, there is no better way to prioritize features than to get your offering into the market and see how real users are using your product. Doing rapid software development in another country (India or otherwise) across a 12 hour time difference is just too difficult even if the costs are significantly lower. Anyone who has worked in a startup knows that development process is very fluid — you are not likely to find detailed specs and even if the specs are fairly detailed, things change very quickly as you exchange ideas with your team members or learn more about your market.

With an outsourced team in another country, it can be extremely challenging to get across the vision of your offering — the only communication medium you have are documents and phone calls. Besides the communication issues, there’s also the issue of market understanding/appreciation. Your team here is much more likely to understand the vision and direction that you are headed in vs a team in another country where people may not be exposed to the latest trends and offerings. More importantly, your team here will have lots of great ideas to make the original offering significantly better because they are living and breathing the vision and strategy everyday. The daily give and take of ideas that you experience with a close knit team is simply too difficult to achieve with a geographically dispersed one.

Working across a 12 hour time difference can also be extremely challenging and inefficient. As Munjal Shah points out in his blog, it means that your group over here has to work late into the night to be able to have live conversations with the outsourced development team which can be difficult to achieve on a sustained basis. Even with the live conversations, the outsourced team often times cannot quickly get their questions answered and have to wait until the next day which can significantly affect productivity and motivation. Over here, our developers simply have to look over their shoulders to talk to our Product Manager to get their questions answered about the feature they are building.

Perhaps the most important issue to consider is the quality and the cohesiveness of your startup team. The team that you hire initially sets the tone for how the company evolves. If you are lucky enough to hire a bright, highly motivated and hard working experienced team, as I have, it sets the tone for the culture of the company and who your team hires as the company grows. It just too difficult to establish an A+ team and create the right set of dynamics if you relying entirely (or even partly) on doing the development in another country.

Now, I will admit that our strategy of building a team in the US was possible primarily because we had sufficient funding to hire developers in the US. You may, however, be operating on a much more constrained budget so you may not have a choice but to seek out less expensive development resources. If you do decide to outsource development, make sure that you interview every developer who has been assigned to your team. Don’t make the assumption even if you retain an InfoSys or a Wipro that you necessarily getting the best resources since they are all desperately hiring developers (experienced or otherwise) at a furious pace to meet their growth objectives. They simply don’t have the depth of resources to staff your team with developers with the experience that you are used to in the US.

There will also be times where an outsourced team will have a specific expertise that you lack in which case it may make sense to retain their services. One of the companies that I had invested in had a need to port and test their mobile application to variety of handsets. I did encourage them to consider hiring a company in India that had done this for a number of mobile developers in India. I felt it would be much more cost effective and faster path for development to hire the services of this firm than to try to do this on their own. Of course, all of their core mobile development was still being done in the US.

I would be interested in hearing from others on the strategies that they have employed in getting their startup off the ground (or from those who have worked at startups) and how well an outsourced strategy has worked for them. Let me know.

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Last week the Wall Street Journal published an article called “Dropped Call - How Motorola Fell A Giant Step Behind” in which it talked about how Motorola “milked” the Razr while “rivals sneaked ahead on the next generation”. In my opinion, the writer got it totally wrong. The issue wasn’t that Motorola fell behind in developing phones for the next generation 3G networks rather that Motorola couldn’t build a sustainable value proposition with the Razr. In a previous article, I had written about the importance of getting the value proposition right RIM nailed its value proposition with BlackBerry. But it is not sufficient to get it right for a single go around - your strategy has to continue to deliver value to customers over successive generations of products.

In Motorola’s case, their unique value proposition was built on a passing consumer fad — the ultra slimness of the phone. No doubt, the company rode it to great success selling over a 100 million phones. I even had to buckle to pressure from my daughter and buy her a Razr when it was still fairly expensive. However, barely a year later, many of her friends have a Razr and she no longer cares to have one. Other vendors like Samsung have also come out with ultra slim phones so Motorola’s unique value proposition is no longer so unique.

The question to ask though is why buying a Razr is no longer cool but buying an iPod is still cool for my daughter since all her friends also have iPods. I believe there are 2 reasons for it - one is pricing and the other is tremendous value proposition that the iPod continues to provide over its competitors. With the Razr, Motorola continually drove its price down to the carriers and, in turn, the carriers kept heavily subsidizing the device to make it more affordable for the masses. The carriers didn’t really care much about maintaining a certain exclusive appeal for the Razr - their primary motivation was to drive customer acquisition. However, pricing plays a key role in driving customer perception of value and exclusivity. As the price came down, it no longer became cool for consumers to own the device and the Razr became just another flip phone on the market. In comparison, Apple has done a great job of sustaining the appeal of its device (from a pricing perspective) by maintaining its price points while continuing to add features to its devices. Of course, Apple has the advantage that it controls the pricing offered through its distribution channels. It will be interesting though to see what happens now that Apple has entered the wireless world where the carriers can dramatically affect device pricing.

The other reason that I believe sustained the iPod phenomena is that the iPod continued to be the only device on the market offering markedly better and easy to use music management and listening software vs its competition. This was the real value proposition to the customer not the hardware innovation and styling that Apple introduced. The Razr, on the other hand, was just an ordinary phone from a software perspective - its only appeal was the slimness of its design. Motorola would have been much better off buying RIM so that it could acquire the DNA that it lacks to deliver real value added applications on its devices. Now instead, Motorola is under siege from Carl Icahn and Ed Zander’s job is on the line.

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Very few companies nail their value proposition in their first try. Apple with the iPod, of course, a great example of product that was very successful in its first iteration. The BlackBerry today is also another successful device with its own iconic following – the so called “Crackberry” addicts. But few people know how even in the early days RIM did a great job of delivering a compelling value proposition despite facing many hurdles from an infrastructure point of view.

The first BlackBerry came out in 1999. The original hardware was a pager style device with a small screen and ran on a very slow Mobitex network. Despite some of these limitations, BlackBerry soon became a hit in the financial community. Hindsight is always 20/20 as they say. But here’s a little bit of history on why RIM became a standout in the wireless e-mail arena whereas many others including Palm (with Palm VII) failed.

Focus on E-mail
RIM focused on a single application with a compelling value proposition – email. They didn’t try to compete with Palm on their terms by building a full fledged PDA style device. They knew that they had a sizable target market of corporate users for whom e-mail access on the go was very important.

Keyboard vs Pen based Input
With the success of the Palm device, an obvious choice would have been to go with a stylus based input. In fact, RIM salespeople had to deal with this objection in the early days. But RIM made the right choice to go with the thumb style keyboard. A stylus is fine for small amounts of data entry but you really need a keyboard to write even a short piece of e-mail. Even the Palm founders eventually abandoned the stylus with the Treo.

Another key hardware innovation that RIM introduced was the trackwheel. It was conveniently located with respect to the keyboard and made navigation through the BlackBerry menu structure very quick and easy.

Push E-mail
Push e-mail was a key RIM innovation (despite the NTP lawsuit) that made the BlackBerry standout from its competitors for a very long time. It was key to its addictive quality since you could engage into an instant messaging style dialog with a colleague thousands of miles away. Push e-mail was also key to hiding the latency of the network and improving the BlackBerry’s battery life. Even though the original Mobitex network was very slow, RIM could deliver e-mail in the background (and that also the first 2K of the message) and then have the device notify the user giving the impression of instantaneous delivery. Also, by using a Push strategy RIM could minimize battery consumption because the device didn’t have to use precious battery checking for e-mail at regular intervals.

Bullet Proof Security
As we all know security is key issue for corporate IT. Without the support of the corporate IT organizations, it would have been very hard for RIM to make any real progress in the enterprise space. Unlike other solutions on the market that utilized simple POP or IMAP interfaces that lacked security, RIM focused on building an enterprise server that provide end-to-end security based on triple DES encryption. Over time, it also introduced many useful administration features that made it fairly easy for corporate IT to control and manage the large number of BlackBerry’s being deployed to throughout their workforce.

All you can eat pricing
While many of the other solutions were based on variable usage based models, RIM made a very smart move by introducing a $40 per month all you can eat model. There were many benefits to this approach. The pricing was simple to understand (you didn’t have to understand MBs), it encouraged high usage and created a very profitable model for RIM that eventually got the wireless carriers interested. The risk for RIM in implementing an all you can eat model was fairly low given that they utilized data bandwidth very efficiently (by downloading only portions of your e-mail or attachments).

Of course, early success is no guarantee of long-term success. Will BlackBerry continue to be leader in the future given all the new competition in the market? Let me know your thoughts.

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It is very interesting to look back to 1999 when I started TeamOn and compare how different things are today compared to the late 90s. The internet has evolved significantly in the last 7 to 8 years. According to Neilsen/NetRatings, overall Internet penetration in the US reached 74% at home in February 2006. Broadband penetration is now at 68% of active internet users making internet access much more compelling. A whole new generation of users (the “MySpace/Facebook” generation) has emerged that is much more actively engaged in the internet compared to the generation in the late 90s. As broadband penetration has increased, internet users are devoting much more time on the web. According to Neilsen, since February 2003, the average PC time per person among active Web users has increased approximately five hours from 25.5 hours a month to 30.5 hours a month. As this cuts into TV viewing time, it’s no wonder that advertisers are increasingly diverting a bigger chunk of the advertising budget to the web.

Lower Startup Costs
It is a lot cheaper now to start a company. There is a lot more open source software that that you can leverage to get a jump start on getting your service out. It allows you to focus more on building your core value proposition rather than spending time building the plumbing. Many startup companies are also reducing their costs by outsourcing their work to India or Eastern European countries. However, unless you are really constrained with respect to your funding, I would not recommend this option until you a more established development team. With a startup, team building, cohesion and rapid execution is very important and that is much harder to achieve if part of your team is half the globe away.

Hardware, hosting costs, bandwidth (thank god for the Telecom bust) are also much cheaper. I recall that for TeamOn that we were paying $5000+ per month for hosting costs and bandwidth. We had to purchase expensive Sun servers to host our database.

Lower startup costs mean that a lot more companies can get started with lower personal investment. A lot more angels can get involved since the commitment they have to make is much lower and it may even be possible to take a company all the way to a reasonable exit just on angel funding.

You can deliver a higher quality experience through the web
The original TeamOn service delivered a complete web based online e-mail/groupware experience. However, we were ahead of our time. Broadband penetration was much lower. DHTML was around but majority of users were still using older generation browsers and performance was a big concern. As a result, it was much more difficult for us to compete with the Outlook and Outlook Express experience that users were used to. Today, the combination of Ajax and broadband speeds is enabling web based applications to successfully compete with the desktop incumbents. For example, companies like Zimbra are now able to compete effectively with Outlook/Exchange.

Customers are looking for your services
In the old days, you had to invest tens of millions of dollars doing distribution deals. In fact, this was a major source of revenue for the major portals like Yahoo, AOL etc. before the Dot Com bust happened. These days customers come looking for your services using search engines. For example, whenever I personally have a need for services, I go straight to Google and type in my search knowing that there will be some service provider who will address my need. More importantly, I don’t pay as much attention to the natural search results as I used to before – I go directly to the paid search results. Why? – because I find them to be a lot more targeted and I figure that they probably have a real business model to support their ability to pay for the Google AdWords. Increasingly, more and more users are behaving in this fashion. This means that your marketing dollars are not being wasted as with traditional display advertising. You are only paying for customers who are actually looking for your services.

Customers are more engaged
Overall, as the internet community has become more mature and access has become much easier, users have become much more comfortable turning to the web to leverage a multitude of services that are becoming available. As I mentioned earlier, a whole new MySpace/Facebook generation has emerged for whom the internet has become an integral part of the social networking experience. Users are much more open to trying new services and, if they are successful, the ramp up rate is much faster as we have seen with MySpace, Facebook, YouTube etc. And users are actively contributing content to the community making the sites much more vibrant and relevant to user needs (not to mention reducing the content generation costs for the web site provider). The whole Web 2.0/Social networking phenomena is no longer an end feature by itself. Now even mainstream sites are starting to incorporate these capabilities to enhance their core value proposition.

Business models are more viable
Given shift of eyeballs from TV to the web, it is no surprise that TV advertisers are increasingly shifting their dollars to the web. The internet ad market is growing very rapidly. It is now projected to grow from $16.8 billion in 2006 to at least $20 billion in 2007. Advertisers also have a wider choice of ad inventory over what they had available. Ads are much more interactive and, with the success of YouTube, video advertising has now emerged as a new category providing TV advertisers a similar medium to what they were used to on TV (except with much better tracking). The larger size of the advertising market also means that the niche areas that various companies are targeting are also much bigger and can support healthy businesses.

Google has also made advertising market a lot bigger by making it a lot more accessible to small/medium size businesses to advertise on. They also made it much easier for smaller companies to leverage their ad network and generate a decent revenue stream from the get go. However, be forewarned that unless you achieve significant scale and targeted demographics, don’t expect that advertising (Google AdSense or otherwise) will be sufficient to make your business model work.

Overall, it is a great time to start a new company. The risk is a lot lower which makes it easier to experiment with new innovative ideas. And if your value proposition hits home with customers, the ramp up can be much faster and you have many more opportunities to monetize your customer base.

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Starting TeamOn was a great lesson in the school of entrepreneurship. While I had some great “entrepreneurial” learning experiences during my early days at Microsoft, there is no substitute to starting a new venture on your own. Especially, if there is no corporate parent to back you up if you make a mistake. Here are some key learnings that hopefully many of you will find helpful.

Be persistent but know when its time to change
This is a tough one pull off. Most entrepreneurs are successful because of their single minded focus and passion. For sure, you will hit many tough obstacles on the way so having the confidence and belief in your ideas is essential. At the same time, you need to have the discipline to step back every so often to evaluate whether your idea is working or not. And you need to get others involved (your co-founders, board, key employees) so you can truly get unbiased feedback.

It is very hard to acknowledge that the time just isn’t right for your original idea. But you have to be flexible and take what you have built and search for an alternative market. In our case, after a year and half of pursuing the small business market without significant success, we switched strategies and ended up ultimately making the right call in pursuing the wireless market.

Spend Money Wisely
Seems obvious – right? Especially after all the dot com excesses. But I still see many companies, after raising their VC round, hire hundreds of employees without having a firm handle on their business model. Not to mention hiring a bunch of expensive executives who are typically are not willing to get their hands dirty.

At TeamOn, we were lucky to have raised $15 million. But unlike many of our competitors, one of whom burned through over $20 million in a year and half, we were very careful in spending our money. We kept our burn rate low and whatever money we spent on marketing was focused on measurable customer acquisition programs. This gave us the time and flexibility to reshape our business plan and target a much better market opportunity.

Focus on building your value proposition before scaling it
BlackBerry is a perfect example here. RIM first focused on perfecting their offering on a single device, a single network and a single market. Their initial growth rate was relatively slow – it took RIM several years to get to the first half a million users. Once they had perfected their offering and model, however, the wireless carriers came knocking on their doors. The BlackBerry became the only proven wireless data solution that could deliver over $40 of ARPU (Average Revenue Per User) while consuming precious little data bandwidth. Once the model had been proven, it took RIM only 3 more years to go from 500K users to over 5 million users.

It is never too early to focus on your business model
A lot of people will tell you to focus only building on your user base and worry about making money later. That’s probably true for instant hits like YouTube or MySpace who achieved the scale to make an ad model work. But for the rest of us, just focusing on building a user base is a luxury one can’t afford. Giving away services for free is easy – it is much harder to figure out how to make money. It is going to take a lot of experimentation to get it right, so might as well start early. Figuring how to successfully charge for your services has many benefits – 1. You can figure out what you can afford in terms of cost of customer acquisition 2. You have greater ability to grow organically vs having to raise money from VCs 3. Even raising money or selling to another company becomes easier because you can point to a working business model

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The early 2000 years saw the emergence of the BlackBerry as the next generation connected PDA. Virtually every VC was carrying one. Even though the BlackBerry’s installed base was only in the hundreds of thousands, it was clear that e-mail would become the killer application on the new wireless platform (as it had on every other platform). While BlackBerry was the emerging leader in the enterprise space, the consumer market was wide open. The wireless carriers had also deployed GPRS – while it was slow, it provided the data network needed to enable wireless data applications like e-mail.

At TeamOn, we had developed a unique e-mail technology where we could access virtually every proprietary e-mail system out there – from AOL, Hotmail, Compuserve to even corporate e-mail systems such as Microsoft Exchange and Lotus Notes. Through a lot of hard work and some luck, our team had reverse engineered all of these e-mail systems – feat which was unique among all the wireless e-mail providers. We had also invested a considerable effort in making the provisioning of the user’s e-mail application incredibly easy. Most users only had to enter their e-mail address and password to provision their e-mail account. No more asking users for their POP mail server settings – something most users had no clue about. No user would have the patience to enter all this information on their handset so ease of provisioning was imperative to our success.

Our unique capabilities soon caught the eye of T-Mobile who we signed up to deploy our wireless e-mail solution across all their handsets. At around the same time, RIM was also looking to extend their reach into the “prosumer” (mobile professional) space. We began discussions with RIM initially to license our technology to enable RIM to provide a solution to the mobile professional user. However, as we started gaining traction, RIM soon approached us to acquire the company. The prosumer market was too strategic for RIM and without our technology RIM would not have a compelling solution. They could also take out a potential competitor and better yet make sure none of the other handset vendors gained access to our technology.

Being acquired by RIM was a good exit for TeamOn. BlackBerry was a clear leader in the emerging wireless e-mail market. Through RIM we had the opportunity to get our technology deployed with the largest wireless carriers throughout the world. In the end, the sale turned out to be a good decision for both TeamOn and RIM. The TeamOn e-mail technology, now offered by RIM as BlackBerry Internet E-mail has over 2 million users validating the technology we had built. And RIM was able to extend its market leadership position from the enterprise space to the prosumer market despite fierce competition from Windows Mobile and Palm.

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The original idea behind TeamOn was simple. Ever since the Hotmail acquisition, I had been enamored with the Hotmail value proposition and the tremendous success that it had achieved in the consumer space. So I asked myself why the same concept couldn’t be applied to the small business market. Essentially, add the group collaboration features offered by Microsoft Exchange but without the expense or hassles of managing your own Exchange server (this was before hosted Exchange became viable). Given the large size of the small business market, it seemed like a great business opportunity.

We raised a total of $15 million from Internet Capital Group and Madrona ventures and a number of prominent angels such as Sabeer Bhatia (Hotmail founder) and Pete Higgins (former Group VP at Microsoft). Fortunately for us, we were able to do so at the height of internet boom. Unfortunately, the internet economy collapsed soon, thereafter. Our strategy was to partner with leading broadband providers, ISPs and portals to deliver our service offering to the small business market. However, all of our potential partners were in a world of pain making it difficult to strike the partnerships we needed to build our user base. Despite the challenges we did manage to strike partnerships with leading companies such Earthlink and OfficeMax.com and build a reasonable user base.

It became clear, however, that our original idea was not going to be a viable business proposition – at least not in the business environment that we faced. Fortunately, we were very careful with how we spent our money. We didn’t go crazy hiring hundreds of employees or advertise in Superbowl (which one of our competitors actually did). We had built some great e-mail technology so we started looking at other markets where we could profitably apply our technology. The market that we identified was wireless – this is where we ultimately gained traction leading to a successful exit through an acquisition by Research in Motion.

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