Smart Money versus Start Ups

October 12, 2008

Matt Marshall’s “Expect to See Start Ups and VCs Hit Standoff over Valuations” is a very important article. The piece appeared in Venture Beat on October 10, 2008. The hook for the story is that a lousy market puts VCs at odds with the companies these firms funded. Mr. Marshall provides useful color about the different approaches some VC firms use when looking for the next Google. The examples are ones you will want to tuck in your notebook. Insider info like Mr. Marshall’s is hard to find.

For me, the most interest comment in the article was this passage:

It may be next year before we can give a serious assessment of the true fallout for start-ups. Expect to see more companies go out of business too, as VCs in some cases decide not to invest at all.

The impact on start ups will be immediate and continue for at least a year. I agree.

So, what’s the impact on search and content processing? I will be giving this subject considerable thought in the weeks and months ahead, but I have some preliminary thoughts. I want to capture these before they dissolve from this addled goose’s mind. Also, keep in mind that I may change my views as I obtain more data and do more critical thinking. Here goes:

  1. Backlash. I think there will be a backlash against consultants who promise quick, easy, and cheap fixes to problems with search, content processing, and content management systems. The notion that a dab of Neosporin and a bit of tape will make the pain of flawed information systems go away will be dismissed out of hand. Martin White and I have written 250 pages that explain the methodical approach needed to back out of a search system disaster. A big problem cannot be resolved overnight, so management expertise in budgeting and controlling work becomes more important than “recipes” or “silver bullets”. Tough times demand management resolve, not placebos and truisms.
  2. Push back. Companies offering platform solutions that are not will have a difficult time closing new deals. In fact, I think the economic climate will encourage organizations to seek point solutions that can, if warranted, be scaled to handle larger jobs.
  3. Protectionism. Vendors will escalate their efforts to create lock ins for their existing customers and whenever possible set up deals that lock out competitors. I learned about one large company that is solidly Microsoft and the procurement team is looking only to Microsoft for a solution. The goal is “one throat to choke” for the customer. For Microsoft, it is control of the account. The problem is that Microsoft does not have a solution that will work, so the loser in this deal with the naive licensee who will spend millions and end up with the same information problem. The goals of each party deliver a problem wrapped in what looks like an ideal solution. The fur will fly in 18 months. Today, customer and vendor are drinking to one another’s health.
  4. Attrition. I encounter too many entrepreneurs who believe their approach to search is the “next big thing.” In most cases, these companies will find that revenues will be tough to generate. I talked with one company three weeks ago and encountered paranoia about my call. The irony of this call is that it was prompted to put the company in a major consulting firm’s “watch” database. The call was, therefore, a “good news” call, but the business owner heard only the veiled threats his own mind whispered in his ear. The issue was resolved, but this “fear” will close off opportunities for some companies leading to less likelihood for revenue magnetism. Fear and paranoia are not as appealing in tough economic times; pragmatism and common sense are pretty charming in my opinion.
  5. Skepticism. Prospects won’t believe much of what some vendors say unless the vendor is already in the fox hole with the customer.
  6. Baloney. Lots of Buffy and Trent marketing and PR information will be generated. I wish I was 23, filled with energy, and able to invent new buzzwords to describe functions and operations that are 50 years old.

If you want to add or modify the items on this preliminary list, please, use the comments section for this Web log. Don’t write me directly. I am on the road, returning to the US in about nine or 10 days. My email systems perform miserably when out of the country, but the Web log system is pretty reliable.

Stephen Arnold, October 12, 2008


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