Milestone Group Quarterly: October 2003
Articles
Investment Viewpoint:
Sam Jadallah, General Partner, Mohr Davidow Ventures
How does a 12 year Microsoft sales and channel veteran currently view the tech market? We recently sat down with Sam Jadallah, General Partner at Mohr Davidow Ventures.
Milestone: Having gone from Microsoft to the VC world, what different perspectives do you have on technology companies and the market? Are there particular things you've become very sensitive to?
Jadallah: The Microsoft experience was all about really understanding if there was a high enough pain point, was there a clear customer need for what we were trying to do, when you introduce a new category or a new type of product, and that was at the largest software company in the world. With venture capital and with the start-ups it’s even more pronounced, because there is no brand to rely on, they don’t have channel to rely on, they don’t have a 50 billion dollar cash balance and all the benefits that Microsoft has. So it’s sort of taking the Microsoft model and applying it to an extreme, which is really making sure that what we are trying to do is going to make a difference. It either provides an order of magnitude or a better performance capability, or price capability or function capability that customers can‘t get without it.
Milestone: You spent 12 years at Microsoft, ending up Vice President, Worldwide Enterprise Sales. What sales advice are you providing the MDV portfolio?
Jadallah: It’s interesting because my learning on talking to the MDV portfolio and start-ups generally is that people get way too ahead of themselves. They go out and they try to scale before they are ready. They don’t have the customer value proposition really painfully clear. The customer value proposition tends to be cloudy and sort of change from customer presentation to customer presentation and most of them don’t know what they have and they don’t know what the customer needs. My advice is go slow; make sure you really understand what you are trying to sell. You learn nothing from the first customer, and you learn very little from the second customer and it’s not until you get up to the fifth or sixth customer that you actually see a pattern. It’s not until that point should you be ramping up. Scale and sales doesn’t work until you actually know what you are trying to sell, and frankly until you know that you have the right product for the problem.
Milestone: Speaking of Microsoft, what are your views on Linux? Will it give be a viable alternative to Windows in the foreseeable future? How does this pan out?
Jadallah: I think it’s already viable on the server side with approximately 26% share, and it’s growing as fast as Microsoft on the server side. There’s now starting to be some rumblings, and for me the first time ever that I am starting to think that desktop Linux is a viable possibility. I still think it’s a long way out, and there are a lot of roadblocks before it becomes real, but Linux is a very viable alternative. There is no denying that J2EE development platform, and I think that if you look at areas of growth, there is plenty of growth in the Linux platforms, so I’m spending time looking at that and I am equally as excited about Linux as I am about Microsoft.
Milestone: Last Microsoft question. They've been taking a lot of heat being a de facto monopoly based on a proprietary architecture and still shipping, on average, two patches to Windows per week. Will Microsoft ever be held accountable for product liability; much like Firestone was a few years ago?
Jadallah: Well, software is a very different beast. I ran Microsoft’s high end support for a number of years. You can have ten different customers all of whom have very different experiences with the same binary. So it’s the same piece of code running in ten different ways. It is very different than a tire, where tires, you put heat on it, it doesn’t matter what sort of car its driving, it doesn’t matter the type of driver, in this case everything matters, the environment in which they run, the user, the administrator, how its being run, there’s a whole set of things. It is a far more complex question than a straight consumer type product. I do think that Microsoft feels the heat, and that Microsoft takes very seriously trying to have better product quality. Every software vendor has the same challenge. Microsoft just happened to be most evident. I don’t see that a hammer is going to fix this problem. There is going to have to be some other creative solutions that are about how software development happens, how people run their environments. There are ten, perhaps twenty different pieces that have to come together to really get software reliability to a level that we all think it should be at.
Milestone: Where's the MDV portfolio headed? Where are the opportunities as you see them?
Jadallah: We have a very exciting portfolio. Our portfolio is very broad, we have semiconductors, software, systems and also life sciences meeting IT types of companies, so I have been very enthusiastic as I have gotten to learn about and work with these companies. We have a few companies that I think about as game changing types of companies; companies that can really change the industry in which they are involved in either storage or in life sciences, or in the semiconductor space, so I am very excited and I am spending quite a bit of time learning about those companies. Building meaningful companies takes time and we have to take things one customer at a time.
Milestone: Building a direct sales force is expensive for early stage startups. Any tricks you've learned with channels you can share?
Jadallah: Tricks and channels don’t go together! (laughs) The basic rule of channels is channels follow, they don’t lead. Betting on the channel to become your biggest evangelist is not going to result in what you’d like. Channels generally follow customer leads and it’s all about getting the customer excited and in the early sales, it’s all about hand to hand combat with those first customers. And then bringing in the channel so there’s a channel that can see an opportunity to make money, or to dramatically improve their competitive positioning. Those are the only two reasons that a channel would be engaged, and the channel is the ultimate test of the value because a channel doesn’t have time to do evaluations. They generally don’t spend a lot of time where the customer might spend a lot of time with you and not result in a sale - the channel generally doesn’t operate this way. My position is, have a few sets of really good relationships. Segment the channel very, very carefully and recognize that the channel is going to follow, and that you are going to have to do the lead at the beginning.
Milestone: What 2-3 key pieces of advice would you give to an entrepreneur starting a company today?
Jadallah: Primary is that they should absolutely be relentless about the people they hire and about the customer feedback that they get. Next, choose the VC based on the quality of the individual that’s going to sit on your board, that you are going to interact with every day and that you are going to have to rely on. It’s a long marriage with that person, and you’re signing up for it, and it’s not about the money. If you can get a better quality individual who may offer you less terms or less money, it often makes sense to do that. Just pick the person you are going to interact with very carefully. Finally, don’t over-engineer your product. Getting customers is, in fact, more important than the perfect solution, and don‘t let perfect be the enemy of good.
Milestone: Our last VC interviewee (Martin Gagen, 3i) said it was going to get worse before it got better for VCs. Do you see any turn in the investing climate?
Jadallah: I think it’s going to get worse from an external perspective of what’s happening in the VC marketplace, before it gets better. I don’t believe that it’s actually going to get much worse from an investing climate standpoint. Right now, from a VC perspective, it’s a great time, because we are actually seeing a lot of good entrepreneur’s acid-tested ideas. They are being very, very thrifty in how they use their money. They are being very, very crafty in how they get to their customers. There is a whole set of things that are coming together that say right now is actually a good time. Now it’s not an easy time for the entrepreneur. The entrepreneur is working a lot harder nowadays than they were a few years ago and things might start to loosen up next year for the entrepreneur, it’s still tough for them to get money and there are still a lot of things that have to happen, a lot of VCs still have shell shock. Certainly at MDV, and certainly from my perspective today, I joined MDV because I thought this is a very unique time for investing. VC is a contrarian investment cycle, so when things are bad, it’s actually good, and when things are good it’s time to sell. If you can keep that straight then you can do okay in this business.
Milestone: If you were an LP and had $10M to invest in a competitors fund, who would it be and why?
Jadallah: I’m long on venture already so I wouldn’t be doing that! (laughs). I bet on people, ultimately. So there are a few folks that I respect, that make money, and do it in a way that I admire, and so I’d consider that. But, the good news is I work with many of them, they are right here in my firm.
Milestone: If you weren't a VC, what would you be doing?
Jadallah: I’m really enjoying being VC. Its like, why does Steve Ballmer still go to work every day, or Bill Gates?. It’s because they enjoy what they do. I enjoy this. I took a year off in 2002. At the end of the year I looked at my calendar to tried and figure out where I spent all my time and it was working with entrepreneurs. I did not play golf nearly like I thought I would, and I just enjoyed working with entrepreneurs, so if I wasn’t a venture capitalist, I’d be doing some other form of private equity.
Sam Jadallah is a General Partner at Mohr Davidow Ventures (www.mdv.com), based in Menlo Park, CA.
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