Milestone Group Quarterly: April 2007

Articles

• Face to Face: Mike Stonebraker, Founder and CTO of StreamBase and Vertica
• Investment Viewpoint: Jean-Louis Gasee, General Partner, Allegis Capital
• By Invitation: Don Tapscott, Co-author of Wikinomics: How Mass Collaboration Changes Everything
• Milestone POV: Synchronizing Time Frequencies Between the Large Enterprise and the Innovative Firm by Philippe Bouissou, Milestone Group Managing Partner

Investment Viewpoint:

Jean-Louis Gasee, General Partner, Allegis Capital

Milestone: Tell us about Allegis Capital.

Gassee: Allegis Capital is a mid-sized venture firm, engaged in what I would call ‘classical high-tech venture investment'. We do early stage --- when the entrepreneur is barely debugging an idea --- through the late stages, where the financing rounds become quite serious. And by classical high tech, I mean we don’t follow every interesting area that comes along (such as Biotech) because we believe we should stay focused in the areas where we have relevant background.

Milestone: You went from being an entrepreneur to becoming a venture capitalist, what made you want to become more involved in the venture business?

Gassee: My mentor, and one of the co-founders of the firm, Barry Weinman (whom I call the gentleman capitalist), would often tell me to move from being an entrepreneur to a venture investor. I resisted, mostly because I thought that I would be bored spending my days reading business plans filled with four-lettered acronyms, and looking at PowerPoint presentations. After awhile, I was persuaded to try it out and to see if I liked it. I found that this is a very interesting business, mostly because of the people, their ideas and the opportunities they see. It is really a lovely part of Silicon Valley, and you get to see the good, the bad, and the ugly come through the door everyday.

Milestone: What do you think the news is in early stage investing today? What are the interesting sectors or businesses out there, and why so?

Gassee:Well, there are some fashionable areas, and I will probably apply some mild criticism here. For instance, social networking continues to be interesting for some firms. We are less interested in this because we believe most of the money has been siphoned off by a few big players, such as MySpace. Beneath all that is a world of sharing and distributing data files (media, music and videos) on various devices, and that’s where a lot of the money is made, and will continue to be made. Now, we are not going to invest in a network DVD player. But we might invest in a company making a silicon chip that will enable easy, reliable, and high-speed wireless networking inside the home through Ultra Wideband, or a wireless USB. Our interest is more in the enabling technology that can support digital entertainment and the digital home.

Milestone: What is the innovation story today, and who is driving it?

Gassee: I believe that the real innovation of the Internet has barely started. The Wireless Internet, is probably the most interesting area, because when you have something wireless you have something mobile, both in and out of the home. Mobility will drive innovation to a large degree. The other day, there was a segment on KQED about a Seattle company, called Mologogo that uses the data coming out of geo-positioning capabilities of a cell phone to track people down, supposedly only with their consent. It turns out a lot of people unknowingly had given consent. What makes the story interesting is that while there are applications for tracking people down (in commerce, security, and for less pleasant pursuits), there are applications being developed to protect against being tracked down, or at least in selecting the times when you want to be tracked down.

Another area, which I find fascinating, is Web2.0. To me, Web 2.0 is three things. Using programming techniques such as Dynamic HTML and AJAX, the content is cleaner, better organized than the original HTML. Add to that, composite applications (what people call “mashups”) where you can mix streams of information from independently available applications. And third, because applications are served centrally, we can now work with perpetual data (meaning the application can be updated twice a day, if needed). All you have to do is flip a switch and the new version of the application is immediately available, served from a central location or locations without having to download software, to print, to burn DVDs, and ship them.

So, it is a wonderful change of behavior that we call Web2.0. And you see applications today in mapping and in social networking that use these techniques very nicely. And we will see more of it moving into enterprise applications, because typically consumer applications are more sophisticated than enterprise applications. Often the laptops and the personal computers that people own at home are more sophisticated than what corporations have on their desktops. And the same can be said of software in a lot of cases.

Milestone:Let’s switch gears and talk about Clean Tech. Last month, the New York Times said that, “investment in energy startups is a kind of renewable Gold Rush.” What are your thoughts on the sector from a VC standpoint?

Gassee: I think it is going to be more and more important. There is a saying, that the best way to clean the environment is to make people richer, because when people have money, they won’t tolerate garbage in their backyards, on their streets, or in the air. Hopefully, a powerful country such as China will get rich quickly, so that they will stop polluting.

Taking the bio-mass that is wasted or burned, and converting it into clean energy, is yet another opportunity. So, Clean Tech covers a lot of things, from recycling batteries to a better utilization of bio-mass for more genetic engineering of bacteria, or in electrochemistry. So, it is a huge range of opportunities, and every year we become more willing to spend money to protect ourselves from our garbage.

Milestone: What does Clean Tech mean for more classical technology investments? Will we see less money, flowing to IT– as the Times story predicted? What will be the impact to a firm like Allegis?

Gassee: That’s a very good question. I don’t think there is a clear, impermeable membrane between Clean Tech and High Tech. Take the power adapter for a laptop. In it, there are diodes that rectify current and synthesize the DC that is fed to the laptop. One way to create a cleaner environment is to have power adapters that consume a lot less energy as they adapt the 110 AC into the twelve, or sixteen, or nineteen volts DC, for instance. So when you see the number of diodes (called rectifiers and used in dimmer switches, etc.) you can also see new semiconductor processes or inventions that improve the efficiency of diodes. That’s going to be both a High Tech and a Clean Tech investment in IT.

Milestone: What is your current view on the state of the enterprise software market? How do you see the evolution of enterprise software over the next five to ten years?

Gassee: I think the state of enterprise software is not very flattering. Too many programs run independently of one another or don’t find each other in order to communicate. There are plenty of opportunities to make enterprise software more interconnected. More than that, there need to be new ways for people to easily access information, or even become aware that it exists. That’s not going to happen by magic. Some of it will come from the evolution of Web2.0. I believe that most enterprise software will go the Web2.0/ SaaS (Software as a Service) route, where it is served by one location to a larger range of departments inside a company. An application may use some modules owned by the company and other modules served by a vendor, and combined with what an individual, or application composition needs.

I think there is a terrific future for enterprise software, because of the pressures of competition, of globalization, and of conserving resources. If the software can be run in a much more efficient way by a large vendor, it means more savings across the board. So, I am very optimistic about the category in general.

Milestone: What are your views on Europe? Does it still make sense for a European entrepreneur to build a business in Europe or, given all the variables, does it make more sense to pack up and build a business in the US?

Gassee: Well, we can be a little provincial in Silicon Valley. And we can be a little provincial in Paris as well. Investing is definitely not the same in Europe as it is in the US. But, there is venture investing all across Europe. And these days, it has become easier for a young company to go to the public markets in Europe.

Silicon Valley is still the place for Hi-Tech entrepreneurs, because the vendors, consultants, suppliers, attorneys and venture investors are in one place; all of the skill sets are available in a fairly small geography. So I would still be inclined to recommend the European entrepreneur to come here, but certainly my recommendation would have less strength than it would have, say ten years ago.

Milestone: One of the things we are focusing on in this issue of the Milestone Group Quarterly is enterprise collaboration. Where do you see this going, particularly in the mobile area?

Gassee: We’ve come down from the exaggerations of the telecommunications industry, which is a way for me to say that mobility isn’t everything. People need to connect physically, emotionally; and to a certain extent the classical office is a very durable construct. That said, when you look at Smart Phones or Black Berrys and you extrapolate what they will be able to do, let’s say in terms of video conferencing with a camera and a faster broadband wireless link, a number of activities such as a conference call will become more prevalent and more pleasant.

So, I think this is an area of great opportunity; wireless broadband will continue to develop very nicely all over the world. And in some places, it could be fueled by the fact that there is no landline, or a very poor landline infrastructure. I think it’s going to be a boom to productivity, to entertainment, and to making life at work and in our private lives somewhat easier and more pleasant. And of course, we will spend money for that, meaning there will be great demand for such improvements. We know there is no market for search itself, so we need a third party called advertising to finance the search. But in this case, I think the improvements in productivity, in flexibility, and in pleasantness will be financed directly by companies and individuals.

Milestone: You’ve said in the past that your role as a venture capitalist is to help entrepreneurs learn from your mistakes and help them avoid the minefields that they can’t see. Is there one type of mine that most entrepreneurs will step on and how come they can’t see it?

Gassee: I’ll give you an example, drawing from my own experience. When I would raise money, I would tell investors: “Look, I am serious about this, I put my own money in it.” What I didn’t see is how irrelevant that is to investors and that it was potentially harmful to me. Putting my own money in only confirmed to investors that I was a believer in my own business proposition, in my own dream. We tend to be taken by our dreams, and they can often blind us.

That’s one of the things that entrepreneurs should keep in mind --- it’s better to do business with a cynic than a true believer. The commitment from cynical money is much more important than the commitment from friendly money. That’s one of the things by definition an entrepreneur doesn’t see. We are all taken in by our own stories; or we believe something will work because it will be cool if it did. And everything goes to playing out that infatuation. But it means that you’ve lost connection with reality, which is why you need a friendly cynic to help you come back to reality.

Milestone:One of the things we are focusing on in this issue of the Milestone Group Quarterly is enterprise collaboration. Where do you see this going, particularly in the mobile area?

Gassee: Well, it’s not so much the substance of the advice that I found useful; it is the form in which the advice was offered. If one has to give advice, they must never get mad when the advice is not followed, and never say I told you so, because then the heart and mind of the person receiving advice will stay open.

It is inhuman to demand to be never offended or upset. On the other hand, if I upset people too often they won’t listen to me. So there is a balance. As venture guys, we have to allow people to make mistakes, to acquire good judgment. We have to let entrepreneurs follow their own advice to a point. And, if it goes too far then, we know what to do. But they have to drive the business themselves.

Jean-Louis Gassée has been associated with Allegis Capital since 1994. He joined the firm full-time in October 2002 and was named a General Partner in April 2003.

In late 1990, Mr. Gassée founded Be, Inc., a multi-media system software company, took it to the NASDAQ in 1999 and sold it to Palm in 2001. Mr. Gassée started Apple France in 1991, moved to Cupertino, California in 1985 and became president of the Apple Products Division, covering worldwide product development, manufacturing and product marketing. From 1974 to 1981, Mr. Gassée served as CEO of the French affiliates of Data General and Exxon Office Systems and, from 1968 to 1974 worked for Hewlett-Packard in sales management positions in France and at the European HQ in Geneva, Switzerland.

Mr. Gassée has served as a director of publicly traded companies such as Cray Computer Corporation, 3Com and Logitech. He currently sits on the Board of Directors' of Electronics for Imaging and was until late 2005 Chairman of PalmSource. He is a Board Director of Allegis Capital portfolio companies ActiveGrid and QueueSecure. He is a Mathematics and Physics graduate of Paris (Orsay) University in France.