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| Home - Venture Profile - Sep 03 Issue |
Venture Spotlight: Geoff Moore, Mohr-Davidow Ventures
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Angel Mehta: So what about 'team" and 'finance'?
Geoff Moore: Team just has to do with chemistry…so the question the venture person asks is, "Is this company going to be able to scale two orders of magnitude on my watch?" When people present to me, at minimum I have to think, "Can they do the first wave?" If I don't think they can do the first wave, we're kind of done.
In a lot of situations you see people who say, "I think we can do the first wave but I don't know quite how I can do the second wave" and as an objective observer you may see they just don't have the right talents for whatever reason. The thing is, when you diligence teams you're often diligencing them for the next wave…
Angel Mehta: As opposed to the wave they're currently surfing?
Geoff Moore: Yes. One of the most confusing things if you're on the other side of the table is 'how can anybody be turning us down if they're so excited about what you have in front of you?" The answer is often you're not getting turned down for what's right in front of you; you're getting turned down three moves ahead - like playing chess.
Angel Mehta: Got it. So what about the last variable – the finance piece? It would seem that this is pretty basic…use comparables for valuation, figure out what they need to get past the first few milestones, and cut a cheque….is finance really a big component to a decision?
Geoff Moore: Well, I'll tell you where it matters - it's when you have a capital-intensive model. If you have a very capital-efficient model then you can kind of deprioritize financial risk. But if you have a very capital-intensive model…for example, if you're going to build a disk-drive company or a systems company or something that requires a fair amount of inventory….You have to be very thoughtful about how you're going to get those other rounds of funding. In part, that's what made the bubble into a bubble…there was this period where it was 'whoopee!'. All you do is pass GO and collect another gazillion dollars. Now, I think there's a greater appreciation for the need for capital efficiency.
Angel Mehta: Let's talk about tornados. You probably won't want to do this but I'm going to put you on the spot anyway. What segments would you point to for tornado watching?
Geoff Moore: The first thing that's interesting about tornados is that in this decade they will have a more muted effect then they did in the past decade. There must be a weather equivalent to this…. where you have a season of highly violent tornados and then you have a season not as disruptive. Every season there are tornados, every season there are hurricanes, but it's not every season that you have a Hurricane Andrew or whichever one it was that caused all the trouble. We're in a decade where I think the hyper-growth that comes from the tornado effect is still real….but because the technology sector is in the doghouse, it's not going to be as marvelously uplifting as it was in the last decade. That said, I think certainly the whole mobile computing wireless space is going to enable a bunch of new infrastructure around it, particularly in the enterprise, I believe. There's also a bunch of things happening in the consumer market that are tornados… venture investors have never been very good at winning in that market space, so I am heavily biased towards the enterprise side of the equation.
Angel Mehta: Me too.
Geoff Moore: The other area is life sciences…it's weird because it's a tornado, but it's confined really to one vertical – albeit, a very influential and economically rich vertical. Not just drug discovery, but all the health-related stuff around the genome. We now have the alphabet when it comes to this stuff, but we're trying to write Hamlet. Between A-to-Z and Hamlet, there are more than a few intermediate layers that we need to fill in. So we're pretty excited about that opportunity.
Angel Mehta: Let's talk about the consolidation of the large application players in the enterprise software space. Do you think that makes it harder or easier for the best of breed players to compete?
Geoff Moore: It's interesting. At one level you're going to commoditize the function by saying, "It's just another module in the existing ecosystem of established players", kind of the way Microsoft made a browser kind of Windows. You can see SAP or Oracle or PeopleSoft saying, "Whatever that great start-up is doing it's really just another set of modules in our world". So the fact that you have the functionality is only differentiating at the very beginning of an enterprise software category because then pretty soon it's on everybody's roadmap. So they say, "How the hell are you going forward?" So if you look at all these things and if you remember what SAP was offering for a supply chain module when it first came out, or what Oracle was doing for CRM when they first came at it, it was very, very thin compared to somebody who said, "You don't understand, this is what we do for a living". So best of breed for a while can compete effectively on product. But at some point I believe the new entrant has to align with a vertical market in order to really have a sustainable competitive advantage against the incumbent gorilla. If you go deep enough into a vertical you will hit bedrock that has huge value for the customer but for the gorilla it is not economically productive to drill down that deep. But if you're a chimp, if you're not a gorilla, you get two advantages from doing it. One, is you can protect yourself from the gorilla by building up barriers to entry.
Angel Mehta: Right.
Geoff Moore: That gives you more room to evolve. Second, you tap into a source of a much higher margin business, albeit it's in a relatively restricted area. The companies that tend to get in trouble are the ones that didn't drill deep enough. I would submit to you that JD Edwards never drilled deep enough to really control its own destiny. On the other hand, when you start seeing these acquisitions coming later in the market evolution, when you see people getting acquired for a PREMIUM, I think it's because they have a genuinely powerful installed base. And we see discount acquisitions I think it's because basically they really can't defend their install base over time and if they don't…it's just a question of when they sell it.
Geoff Moore is a Venture Partner at Mohr Davidow, a founder of the Chasm Group, and co-founder of TCG Advisors. He is also the author of bestselling books, 'Crossing the Chasm', 'Inside the Tornado', 'The Gorilla Game', and 'Living on the Fault Line'. Send feedback to Geoff at: gmoore@tcg-advisors.com
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net
 
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