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The Internet's Second Wave

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A L L E G I S

C A P I T A L

Q U A R T E R L Y

The Internet’s Second Wave
Now is when the real money will be made
By Robert R. Ackerman Jr., Managing Director
THE BUSINESS ENVIRONMENT created by a new technology as disruptive as the internet is like a newly discovered land–a new opportunity to explore and create markets. We have a tendency to talk about the pioneers who settled the New World, but in fact, the pioneers actually make up the second wave of newcomers. But before the pioneers can move in and survive, explorers and advance scouts must set out to map the terrain, to discover the resources, to find new passageways. The dot-com years were really the initial days of exploration and discovery on the internet. The first entrepreneurs were still scouting the new terrain when a rush of pioneers arrived to set up their homesteads, and most of them were eviscerated in the dot-com implosion. They had to make a lot of decisions in a vacuum without facts, without real maps of the territory. All of that contributed to a naïve optimism that we now know as irrational exuberance. But then, that usually happens in the early days of a new industry. Now the internet is on the cusp of the second wave of innovation. Despite widespread reports of the death of this new world, the internet is still booming—growing rapidly, generating new business models and opening up new markets. The first successful pioneers have established themselves, at least for a while. After the initial

“Typically, the second wave of innovation is where the real money is created. More resources are employed in more areas where there is a higher probability of success.”

C O M P E T I T I V E

A D V A N T A G E

T H R O U G H

A C T I V E

C O R P O R A T E

P A R T N E R I N G

“ The talk about ‘Push’ at the beginning of the internet was the right idea... It’s only that the timing was wrong.”

exaggerated expectations, disappointment, and massive consolidation, a Darwinian process has left us with a few players who had the right combination of insight and adeptness to steer around the carnage. Through trial and error, they began to understand a little of the ‘what’ and the ‘where’ in the new frontier. Out of that came some measure of success, despite the devastation wrought upon the initial forays into the new frontiers. After the crash, we saw an overreaction, an abject rejection of anything related to the first wave. Many investors still feel they are not ready to rush back out into that wild terra again. It takes time for the lessons to sink in, to develop the courage and conviction to take the next step. As always, however, the second wave is being built on the remains of the first. The infrastructure has been built, although some of the paths are still the equivalent of dirt roads. The new innovators will be able to take advantage of the successes–and learn from the mistakes–of their predecessors. Slowly, the true entrepreneurs are waking up with a clear head, and saying, once again, “Hold on—I have an idea.” Typically, the second wave of innovation is where the real money is created. More resources are employed in more areas where there is a higher probability of success. There tends to be a higher level of attraction, more success, and better returns in financial, social, and economic terms. The opportunities no longer lie in building out the infrastructure as much as in figuring out what to do with that infrastructure. We have to figure out how to leverage this infrastructure, how to do things better, how to truly make business more efficient. This is an even more exciting process than building the infrastructure in the first place. The most significant business impact from the invention of the automobile or the airplane was not the manufacturing and sale of those devices themselves, but the application of those innovations to change how people transport themselves, how business is done, how cultures evolve. It was the enormous range of businesses and even new industries made possible by cars

and planes—from shopping malls to the tourism industry to housing patterns—that really changed the social and economic landscape. We need a whole new spectrum of inventions for the second wave. Look back at the early days of the personal computer. What really launched the PC? In a very real sense, it wasn’t IBM, but rather VisiCorp, which created VisiCalc, the first spreadsheet. That’s when whole industries began to change. But today, does anybody think about spreadsheets as the killer app? We have moved up the software application value chain, creating new applications and broader market penetration. Today we consider internet search to be the killer application. But search has been commoditized. Online auctions have been commoditized. Just as we look back on spreadsheets as the killer app for the PC and chuckle, we will chuckle when we look back on search as the killer app for the internet. The nature of search will change. It started out as simply finding a particular item we’re looking for. With better and better tools, better levels of automation, we will see huge innovations in agents that will automatically bring us information relevant to our interests. That “Push” stuff at the beginning of the internet was the right idea. It’s only the timing that was wrong.
Who will prevail? The big trend is globalization in ways people have only begun to imagine. The internet represents the coming of age of the global economy that will go far beyond what people have both praised and criticized as “globalization” so far. The internet is the fabric of the global economy. Current internet businesses will pale in comparison to the internet’s effect on worldwide communications, personal interactions, the way we conduct business. Everything that came before is puny in comparison to what will arrive in the next 10 years. In an electronically connected, global environment, business processes will be turned on their heads. We will finally move to a paperless society. Paper can’t move fast enough in this environment; it’s too slow and too costly. Interaction with the information grid will be radically transformed. QWERTY keyboards are dead.

Legacy infrastructure means that companies are pulling along a mountain of old luggage.

“ We have to figure out how to leverage the new infrastructure, how to do things better with it in what will be a sweeping and revolutionary change. Everything that came before will seem puny.”

Voice recognition and other technologies will prevail. We’re on the threshold of accomplishing a lot of the things we’ve talked about for the past 50 years. This will all combine to create a greenfield economy for entrepreneurs and puts everybody else at risk. We are moving from a computercentric, a PC-centric, model to an open architecture, broadly distributed through the internet. It will be hard for the legacy companies to drag their enormous infrastructures with them onto this new terrain. They are climbing a huge mountain with an extraordinary amount of luggage. The assets of mass, of a huge infrastructure, of a large installed base, become liabilities in a time of rapid of innovation. And the pace of innovation is not remaining steady; it is in fact increasing. We have a new “Old Guard.’’ In the early days of the PC, the old guard was the companies that were the stalwarts of the computer industry, the mainframe and minicomputer makers. Now the database companies, the large software companies—even Microsoft, with a 20-year-old legacy infrastructure—are the vulnerable old guard. The new key to success is scale. Huge volumes and low prices are the formulae that lie at the core of every business model of a startup company. It’s the same formula that the PC industry used to gain domination of the computer industry, significantly redefining and reducing the role of the mainframe in IT, while creating an explosion in the market for small computers and their components. Even some of the early darlings of the inter-

net are vulnerable to a new wave of startups. After several years of sustained growth, eBay is now sputtering. Where is Cisco in this new world? AOL is probably in one of the worst positions. Once considered invincible, now people can’t kick it enough. It’s now integrated into an organization with a much more significant legacy, giving it a potentially bigger liability. The risk to the U.S. is that it has its own legacy to overcome. We have the most to lose and the developing economies have the most to gain. We’re not the only place with the entrepreneurial attributes of innovation and risktaking any more. The global environment in which we’re used to competing has changed. This is clearly the time for the transnational startup, the multinational startup. We need to invest in companies that can compete successfully by drawing on resources from wherever they can best be found, tapping the highly skilled resources in other parts of the world. The alternative is to jump directly into these markets and invest in foreign startups, but there are still problems with financial transparency and intellectual property rights. That means we need to understand these issues better than anyone. We tend to be too U.S.-centric. We need to have a deep-seated understanding of how the markets are developing. But with the right strategy and an eye toward the global marketplace, this is likely to be the beginning of the most exciting time we’ve had in 20 years. It is a time we’re looking forward to enormously.

The Big Bad Google?
Will “arrogance” really bring Google’s downfall? Is Google sucking the air out of Silicon Valley?
“ Unaccountably, Google lost it’s PR mind and actually started a campaign to punish CNET: We won’t talk to you, invite you, or respond to you for one year.”

By Jean-Louis Gassée, General Partner
SHIFT HAPPENS, AS WE SAY in our land of tectonic faults. Having started out as a company that seemed to preposterously put doing good before all else, Google has now emerged as the next technology villain. Gary Rivlin, in a NY Times story published August 24, purports to expose Google as the next high-tech ogre. The theme has been rolling about in certain tech circles for a year now in whispers, rumors, and blogs. Bill Gates can relax: It’s Google’s turn as The Villain. “Do No Evil,” say Sergey Brin and Larry Page, the founders, in their endlessly quoted mantra. ´ But critics insist Google isn’t so much Hippocratic as it is autocratic, or even hypocritical. A ´ recent incident between the formerly mellow Eric Schmidt and CNET does not help. CNET just used Google itself to dig up and publish supposedly private information about Google’s CEO. CNET’s point is “Do No Evil” is easier said than done. If privacy is a virtue—and most Americans say it is a Constitutionally protected one—how does one justify the enormous loss of privacy that has been wrought by the do-gooders’ invention. Private investigators regularly use Google as their first tool in snooping and so do those creatures who dig up the “muck“ on behalf of political campaigns. But Google's CEO didn‘t like being Googled. The company got irritated, that’s understandable, though perhaps hypocritical. But, unaccountably, they lost their PR mind and actually started a campaign to punish CNET: We won’t talk to you, invite you, or respond to you for one year. Google thought they could actually send CNET to their room without dinner. (Hearing this, Valley wags sug-

gest Steve Jobs—not Bill Gates—is the one who can relax. Our mercurial visionary’s latest fit of pique was against John Wiley & Sons: their sin was publishing the book iCon, an unauthorized Steve Jobs biography. The punishment? The publisher’s 47 titles relating to Apple were banned from Apple stores.) Back to Google. Gary Rivlin writes that venture capitalists and entrepreneurs are “grousing” because Google’s generous compensation policies have raised salaries for engineers everywhere else. Startups can’t get funding because good ideas face the “but Google will do it” objection. And there is the constant com-

plaint that Google is difficult to deal with, arrogant… To sum up the grumbling: Google is sucking the oxygen out of Silicon Valley, and success has gone to their heads. Allow me to disagree with the first point and —if true—welcome the second. Assume for a moment Google doesn’t exist. Would life be more or less rich? Would the future of high-tech look brighter? Would engineers’ pay be higher? Would venture firms be more optimistic, would they have an easier time raising money for future startups? Would Microsoft, instead of Google, be publishing anything similar to the sweet and powerful Picasa 2 instead of the 11th release of Picture It! —retreaded as Digital Image 2006 and still uninspiring? Google provides competition for Microsoft and we should shed tears? Google has no choice but to try and capture (that’s a problem word) more and more of our time in order to sell ads, just like (or against) TV and newspapers. But what the complainers forget is why businesses give money to Google of their own free will (“their own free will so far,” I can hear the cynics saying). Google prospers because they make other businesses more profitable and that is only because Google is a better, more cost effective and measurable advertising medium. They do all this while making my life more enjoyable: I reach more knowledge or more entertainment, which is precisely why Google is an advertising medium of choice. Yes, but what about the poor venture investors and the cowed entrepreneurs? I don’t hear much complaining about Google in the local VC watering holes, Il Fornaio in Palo Alto and Buck’s in Woodside. Google raises the Silicon Valley “union scale” for engineers? Not a problem. What kills a startup is not engineering wages but expensive Sales and Marketing (S&M for short) sins. Further, if higher wages help engineers break away from the (disappearing) comforts of an HP or the (cyclothimic) feelings of superiority of an Apple, more power to entrepreneurs and venture investors. Another alleged complaint: Google discourages all of us because they can do anything an entrepreneur can dream of, with more money

than we visionary capitalists can supposedly scare up. This complaint represents the Myth of the Eternal Return of a bad old fantasy “Creativity is futile… you will be assimilated.” Once upon a time, IBM could do everything. Then, for a brief moment, it was DEC, then Microsoft and Cisco. We know what happened. In spite of their efforts, the Goliaths couldn’t contain, outspend, outlawyer, outmarket, out-FUD the swarm of Davids. Instead, they made deals. Many a business plan ended with the words, “And then (name your giant, Microsoft, Cisco…) will buy us.” Just yesterday, seeing how Skype gained millions of users, Microsoft bought a San Francisco VoIP firm, Teleo. Google has been shopping, too: Pyra Labs for Blogger, Picasa, Keyhole, Déjà News, Kaltix, Outride, Applied Semantics, Zipdash, Where2, Urchin and Dodgeball come to mind—with Google’s help. Come to think of it, Google’s just announced they’ll tease another $4 billion from investors pockets, this on top of the more than $3 billion already in the company’s coffers and about $270 million net cash flow in the latest reported quarter. The intent? Acquisitions. Something to warm the cold hearts of venture investors. In our case, one of our investments, Rent.com, was sold to eBay for $435 million and another, Shopzilla, to Scripps for $525 million. But there is no moral outrage against acquisitions, certainly not among startups. Let’s conclude by giving hairy-shirt shrift to the sin of arrogance. In theory or, rather, in Euripides: “Whom the gods would destroy, they first make mad.” Google’s crazed arrogance will destroy it, so the logic goes. But when? The Greek sage didn’t actually provide a year number for the hubris time constant. Looking around the Valley, arrogance seems to take its time before destroying sinful individuals or companies. What if arrogance is one of the frequent byproducts of the mad entrepreneurial drive? If you Google the phrase “meek entrepreneur,” how many hits? Thirty-four to be precise. And, incidentally, and you get exactly zero hits for “philanthropic VC.” Let’s Google and forgive.

“ Another alleged complaint: Google discourages all of us because they can do anything an entrepreneur can dream of, with more money than we visionary capitalists can scare up.”

C A S E

S T U D Y

ActiveGrid: Develop like PowerBuilder, Run like Google, Serve like Starbucks
“ What we have now is exceedingly abstract programming. Objects are built upon objects, classes, inheritance, hiding methods, constructors, destructors, and overrides… What started as simplicity turned into occultism.”
I’M NOT SURE PETER YARED, the founder of ActiveGrid still likes the slogan, but we can use it as a starting point to describe the company’s business. ActiveGrid addresses three opportunities, one euphemistically so, in developing and deploying enterprise software. Let’s start with the euphemism part: it’s the problem with what uncharitable individuals call the “big fat midriff” of IT organizations. I’d rather just call them real-world programmers. There, the opportunity for ActiveGrid is raising the productivity of the “average” developer. Once upon a time, the new wave of ObjectOriented Programming (OOP) was touted as the end of headaches in applications programming. Curmudgeons objected that they had heard the story before: Pascal, Ada, algorithms + data structures = programs. But it is true, this time, said the faithful. Business Week dutifully published an “End of Programming As We Knew It” cover story and pictured a baby in front of a computer as a way to drive home the idea OOP was child’s play. The code coming out of the mouth of babes. To help simplify things, we had re-useable code, really, finally. Forget libraries and parameter passing, now we have objects and their methods. Forward to the 21st century. What we have now is exceedingly abstract programming. Objects are built upon objects, classes, inheritance, hiding methods, constructors, destructors, and overrides… What started as simplicity turned into occultism. OOP encouraged convoluted and highly individual programming styles. Reading someone else’s source code reawakened the headaches the new programming paradigm was supposed to cure once and for all. As a result, enterprise-quality OOP turned out

ActiveGrid serves it up steaming hot, simple, and fast. to be the preserve of a small corps of elite programmers, something out of the reach of most humans in IT shops. In parallel or in reaction perhaps, we saw the rise of scripting languages such as Perl, Python and PHP. Scripting initially implied a target of simpler tasks than a “real” application. For those simpler tasks these languages used a declarative style: do this, add one to this variable, do that. It was conceptually not

far removed from Business Basic. Over time, these languages became more powerful, to the point where PHP’s latest version 5 is now deemed to be ready for enterprise applications. That’s where ActiveGrid comes in with a visual, interactive Application Builder (www.activegrid. com/application_wht.php) using languages such as PHP, Perl and Python. Application Builder gives programmers a comfortable and structured environment in which they develop modern Web 2.0 applications that previously required software gurus. The emergence of the “P” languages coincided with the growing popularity and solidity of OpenSource software. The “Run Like Google” part of the title slogan refers to the fact many large Web sites are built on arrays of commodity x-86 hardware and run a software “stack” now christened LAMP (Linux, Apache, mySQL and the “P” of your choice). These giant sites are handcrafted and require a highly specialized core of techies to stay up and running. (An anecdote to the contrary, surely apocryphal, concerns a large Sunnyvale-based search engine company. Technicians push a shopping cart along equipment racks and place their hands on each of the servers as they go by. The cold ones are yanked out, to be thrown away and replaced with a new blade pulled from the cart.) ActiveGrid’s contribution is generating applications that are “grid-aware” and, unlike the noble and worthy trailblazers, scale from one to hundreds of servers without requiring specialized handcrafting and TLC. This led ActiveGrid to coin the phrase Enterprise Lamp to better describe the type of need the company serves best. Another trend is easing ActiveGrid’s way into the market: the acceptance of XML. For many, XML is HTML “done right.” The original Web page mark-up language didn’t envision the complexity, the media riches, and the interactivity of Web applications. As a result, HTML got extended, some say stretched in many directions. XML “does a sum” of HTML’s evolution and re-starts from a rationalized basis. In particular, XML documents are much better at telling applications what to expect from them and it does this in a standardized manner. XML is now adopted and a large majority of legacy

(read older) applications are or can be easily “wrapped” in XML. Back to ActiveGrid, the currency gained by XML enables Application Builder to create applications that coexist with and often augment the reach of legacy code. For example, access to a legacy database is now secure and interactive. That’s where the “Serve Like Starbucks” part comes in. Application Builder generates code that recognizes clients (devices or individual) and adapts to their features (think, for example, screen size for mobile devices) or permissions (for security inside an organization) while using the legacy database through its XML wrapper. Further, cache management increases throughput and user satisfaction by keeping heavily used page fragments in memory. Another caching example is specifying that a price list expires in five days and can stay cached until then. In summary: Web 2.0 applications are written by normal programmers in declarative languages such as PHP, Perl or Python. The applications are scalable, and are deployed on grids of inexpensive commodity hardware running the LAMP stack. Application services adapt to end-user devices and identity. Peter’s idea is now available for testing on version 1.0 of the ActiveGrid Lamp Application Server, with version 1.5 slated for December 2005. Peter Yared, a serial entrepreneur by now, founded ActiveGrid in 2003. In 1995, he founded Jrad, acquired by NetDynamics where he was CTO, acquired by Sun where Peter was the CTO of Network Identity (a.k.a. Liberty). The founding idea for ActiveGrid came to him as a result of seeing the cost of developing and deploying applications written in languages requiring crack programmers and running on expensive proprietary hardware. Hummer Winblad and Allegis Capital co-led a $3 million Series A round late Spring 2004 and a $10 million Series B round was led by Worldview Technology Partners and closed in July 2005. Mitchell Kertzman, Irwin Gross and Jean-Louis Gassée respectively represent Hummer Winblad, Worldview Technology Partners and Allegis Capital on ActiveGrid’s Board of Directors.

“ The founding idea for Active Grid came to him as a result of seeing the cost of developing and deploying applications written in languages requiring crack programmers and running on expensive proprietary hardware.”

A L L E G I S

P O R T F O L I O

U P D A T E

Shopzilla The E. W. Scripps Company, a diversified public media company, acquired Shopzilla in June for $560M in cash. With the acquisition of Shopzilla, Scripps gained a profitable and growing internet search business that helps shoppers instantly find virtually anything for sale on the Web at the best price. Shopzilla also operates BizRate, one of the most popular consumer feedback networks on the Web with about 1 million fresh consumer reviews of stores and products added each month. Shopzilla will be run as a stand-alone operating unit of Scripps. QueueCard, Inc. Allegis Capital and Worldview
Technology Partners co-led a $7M Series A investment in QueueCard, Inc., a technology and solution provider of a novel card-based authentication product for credit cards. Allegis’ limited partner, Societe Generale, also participated in the round after being introduced to the Company by Allegis General Partner, Jean-Louis Gassée. QueueCard, Inc. has assembled a world-class team of scientists, engineers and business executives, each of whom has successfully bridged the gap from basic research to applied technologies by founding or managing their own companies during their professional careers.

Vernier Networks Vernier Networks recently
announced that it was named best endpoint security solution by Network World magazine. The integrated Vernier and PatchLink solution received the Clear Choice award from the publication’s test and evaluation laboratory. Published in the June 27, 2005 issue, Network World reviewed seven products that were required to identify compliance of out-of-policy systems and take actions for remediation. The Vernier/PatchLink solution beat out similar endpoint security products from Check Point, Cisco, Citadel, InfoExpress, Senforce and Trend Micro. The Clear Choice test is highlighted in the Network World print issue and online at www.networkworld.com/reviews/2005/062705endpoint-test.html.

ActiveGrid Worldview Technology Partners led a
Series B investment in ActiveGrid in which prior investors, Allegis Capital and Hummer Winblad, participated.

Allegis Capital invests in early stage companies developing enabling technology and infrastructure to serve emerging information technology markets. Main Office 130 Lytton Avenue, Suite 210 Palo Alto, California 94301 (650) 687-0500 Fax: (650) 687-0234 Santa Monica, CA Office 100 Wilshire Boulevard, Suite 1770 Santa Monica, CA 90401 (310) 319-3880 Fax: (310) 319-3881

www.allegiscapital.com
all contents copyright © 2oo5 by Allegis Capital


								
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