John Katsaros

The Value of Listening

Some of the smartest people we've met work in the infrastructure business. It's one of the things that makes working in this space interesting. But sometimes smart people can act really dumb. For a year we've been knocking on the door (through e-mail) of the CEO of an infrastructure startup that's working in an area that we're very familiar with. As you could imagine, we're big advocates of research as a key part of building a successful high tech company — we've been doing this for nearly 20 years, we've written a book about the role research plays in strategic planning — we really believe this. But each time we have reached out to this CEO to provide a little free advice based on some of the work we've been doing he tells us words to the effect — don't bother me now, come back when we're successful and we'll talk then. That's totally backwards. Research is something you do to help a business to succeed. It's not a veneer that you put on after the fact. We've found that there's no substitute for listening to the market — in today's world there are few "greenfields" — you've got to first fit in and then stand out. And only the market can tell you what that means.

It's All Good

Our corner of the world — "infrastructure" — has been beaten up over the past couple of years by financial types wondering how new companies in this space can ever make significant returns for venture investors. In the past few years acquisition has been the preferred exit strategy, often at a distressed price. "Home runs" have been few and far between. But 2009 looks like the beginning of a new chapter in that book. Four public infrastructure companies that we watch — ArcSight, Acme Packet, Riverbed and Sourcefire — went public between late 2006 and early 2008. For the most part they hovered around their offering price, in some cases spending many months below it. But that's changed. Despite the recession, 2009 has been a wonderful year for this group as the table below shows — with ArcSight leading the pack at 5x its share price at the beginning of the year. It's probably too soon to pontificate about these.

 Infrastructure Recent IPO's Growth in 2009

Drama Baby

Pardon my rant but I think we should dramatically cut back the dramatic way that infrastructure marketers, unable to find real product differentiation, revert to emotionally latent language and say things like "dramatically different" or it will have a "dramatic effect" on the market. Not to get melodramatic or anything, but it's discouraging to sit through so many vendor presentations and listen to these uninspired claims - so I figure we've got two choices - 1) Ban the word "dramatic" for an entire month or 2) Limit it's usage to once per hour and provide suitable penalties for breaking the ban. Maybe an outright ban is the only way to dramatically slow this thing down (or else I need to get back on my medicine).

Value Proposition

As many of you know, when we hear an infrastructure company promote ROI as its leading value proposition, we get impatient, to put it mildly. The way we figure it, organizations spending millions of dollars developing a new product need to start off their value proposition by saying something like: "customers have shown us that they have a problem which, when we solve it, will significantly improve their business to the point where their corporate valuation grows." Technology is a vehicle for corporate transformation -- infrastructure companies need to show how their products can increase their customers' stock prices. We're not saying "don't make the ROI case" -- of course you should. Showing economic justification is part of the marketing basics. What we're saying is that you can and should make a value proposition which includes, but goes beyond saving money. You need to show how your products are capable of making your customers bigger, faster, stronger, more competitive...

Infrastructure Renaissance

We often get asked by bleary eyed investors whether there is any "There There" in the infrastructure space as they wondered whether infrastructure companies had enough financial potential to justify a big enough part of their portfolios. During the good old days of the bubble in the late 90's, infrastructure companies were "hot hot hot" since they were the arms dealers enabling the Dot Com build-out, but today, there aren't as many venture folks specializing in infrastructure. We'd of course point out important financially successful infrastructure sectors like anti-spam companies (which so far have generated over $2.2B in liquidity transactions) and of course this year we've seen infrastructure companies like Riverbed and Sourcefire complete successful IPOs. Now with VMware's grand slam yesterday maybe we don't have to have these discussions about the financial viability of the infrastructure sector anymore.