@chudson well, two diff q’s – overall feels undervalued at 1.1b, but “to yahoo” I don’t know – though it feels like a good deal for yahoo

— Semil (@semil) May 18, 2013

@semil naive question. How does Yahoo accelerate Tumblr or increase its value relative to what it is today? Cc @ifindkarma

— Charles Hudson (@chudson) May 18, 2013

So, we have two questions:

1. From Tumblr’s POV, is $1.1B too low, a great deal, or just right? and
2. Is Tumblr worth $1.1B to Yahoo! and, if so, why and how?

Question 1 - If I were an early shareholder or founder in Tumblr, I would think $1.1B undervalues Tumblr right now as an acquisition target. The instinct among many observers is to approximate revenue projections and model a revenue stream, which produces some multiple. The statistic batted around here involved the $13m revenues booked by Tumblr in 2012, and then suggests the company is aiming for $100m in 2013. There’s no way to verify this, let alone it’s just a distraction anyway and probably leaked to the press for future positioning — case in point, this week. So, back to the early shareholders in Tumblr…if I were in that position, I would perceive the acquisition market for Tumblr to assign a value greater than $1.1B given the basic stats of the product today: Tumblr is ranked in The Top 20 highest traffic web sites in the U.S. (Alexa), is ranked in The Top 100 of iOS apps and near the Top 10 for Social Networking (AppData) and probably has tens of millions of mobile downloads (and growing) across iOS and Android, of which I’d assume a good percentage of those are at least reliable weekly active users. For a “blogging” platform, Tumblr’s mobile product and footprint seem unrivaled with the competition no where in sight. Then, there are the intangibles, such as young people using Tumblr as a place to be themselves or assume pseudonyms and avoid the watching eyes of elders, parents, teachers, etc. Yahoo! or not, and despite revenues that would not (yet) impress an Excel junkie, I’d have to believe a company like Facebook, or Microsoft, would want our New York-based team of engineers and designers, our brand, our mobile footprint, the reliable web traffic (which includes data tentacles into Twitter and Facebook).

Question 2 - This is a harder question for me personally to answer. All I can do is infer from Yahoo!’s moves over the last year during the Mayer regime. Buying Tumblr gives Yahoo! a team of great mobile and web designers and engineers based in New York City, where so much of media is bought and traded. It continues with Mayer’s acquisition strategy to help re-infuse the company with fresh talent and slowly siphon out the old guard. It gives them a reliable property with reliable traffic on the web (and trending up on mobile) to serve its ads to, as Yahoo! is an ad-content business without any social or pseudo-social graph. Buying Tumblr immediately puts a Yahoo! mobile property on tens of millions of mobile devices, where its user base is already trained to share their Tumblr content into other social channels where even more millions of people will see it. Charles’ question is a good one from the Yahoo-POV, and I don’t know exactly how they take their core ad business and extend it to Tumblr, but that has to be the crux of the strategy.

Therefore, given all this, I stay away from the numbers and look at the narrative. For Yahoo, $1.1B is a lot relative to their annual profits (especially in an all-cash deal), but I respect this bold move. For Tumblr, it’s a great outcome because they haven’t really turned from a product into a business, and unless one of the other big players wants to play, this may be the best — and only good — chance to exit. I don’t believe Tumblr has the leadership or mettle to really turn their traffic into stable revenue, and this may be outside of their core interests as they seem to be focused on design and engineering. There’s nothing wrong with that, which means this is the time to make the move. Ultimately, the value in a property, whether physical real estate or a web site or mobile app, isn’t what projections say it is, but what a willing buyer is willing to pay for it.

One of the early writers I grew to worship is, of course, Paul Graham. His essays are legendary. Someone recently referenced one of his essays from 2005, The Submarine, which still rings true today, over eight years later. His insights on how startups are formed, how they compete, and how they win is pretty much incomparable. Many of these essays, of course, touch on the tense relationship between investors and founders. There’s no doubt that, in the past, the relationship was rife with tension. Fast-forward to today, and things do feel different — the founder is quite empowered. And, while investors now market themselves and either are or behave in a “founder friendly” manner, the sheer competitiveness doesn’t bring out the best in people. Everyone reading this will have encountered more than one investor who rubbed them the wrong way. There’s no doubt we could use a few more saints.

A few months ago, Graham shared a post mocking investor language, which struck me as too heavy-handed because I had actually seen the opposite behaviors from investors. You can read my response here. I realize it’s not kosher to write about Y Combinator in this manner, but at the same time, I have helped many YC founders through the fundraising process (without ever asking for anything), and I’ve observed how they and others who are pitching behave. The investing game is business, and I would agree it’s unnecessarily tedious. And, the entire process can boil anyone’s frustrations. Believe me, there are some interactions I’ve had myself that still bother me. Everyone knows part of the YC mantra is to help founders navigate once-treacherous waters and not get screwed, but in that training, new behaviors emerge on the part of founders that aren’t always in their best interest. I’ve seen investors back away from a deal they like because of the overt game mechanics. Yes, this is a taste of their own medicine, but I’d argue that in the end, it’s the founder who learns a bad habit and that it’s the investor who is rendered irrelevant.

Last night, this tweet from Graham was retweeted into my Twitter feed. It made me sad. I totally understand that Graham has his own view of the relationship between founders and capital. And, I don’t have enough context or history to draw from. But, I also think he’s made his point clearly. He has ground-rules for his Demo Days. Some people are invited, and others are not.

So, when I read this tweet below, it makes me sad for Graham, that despite all of his successes, and all the great founders he’s helped and will help, and all the investors that have helped YC founders (even when they didn’t invest) that he would use his great platform to throw another cheap dig at a group that’s actually quite diverse. Maybe the founder below isn’t talking to the right people. Maybe the pomp and circumstance of a staged, gated Demo Day attracts those prone to cynical behavior. Maybe he needs to, yet again, remind everyone of his disdain for and disappointment in “investors.”

I don’t know, because I’m not an insider in this specific world nor do I seek to be. I’m just lucky to work with a few YC companies and have seen many, many pitches by them, as well as many of their funding negotiations. So, given all that, when I read a tweet like this, it makes me sad because not only is it petty, and not only is it directionally wrong (based on my experience), and not only does it potentially influence a founder to learn bad behaviors themselves, but ultimately I think one could switch around the words “founder” and “investor” in his tweet below and, perhaps more often then anyone would like to admit, have the quote read quite similarly.

“I tried to be as cynical as I could but it still wasn’t cynical enough.” — a w2013 founder on investors

— Paul Graham (@paulg) May 15, 2013

The problem with this mode of thought — this science of venture, of markets, and of data — is that it doesn’t allow room for the art of venture. I have tried to write about this. Specifically, I’ve tried to come up with my own definition of what is venture capital to me — now, it may not be this to you — and this post generated a lot of comments disagreeing with my definition — but this is what venture capital means to me:

Venture Capital is the aggregation of external capital by an institution (including companies, or even family offices managing their own funds) or individual with the sole purpose of investing that capital (often as a lead investor) into (relatively) early-stage, privately-held companies based on scarce information (imperfect information) with the intent of funding and assisting in the growth of businesses, products, and services that mature alongside markets to the point where the investor can realize a larger return, either through an acquisition, secondary share sale, or going public and liquidating within a 7-10 year time horizon, if not sooner.

There are a few people in venture who currently operate this way. I’d love to find more. One of those people is my friend Bipul Sinha. He’s a partner at Lightspeed. He will find entrepreneurs before they even know they’re entrepreneurs. He will help them. He will guide them. And, when they’re ready, he will prepare them to meet his partners and write a pretty big check, right up front with just a few slide decks and a great team. This is what he did with Nutanix, which is now the fastest-growing enterprise IT appliance company, in terms of revenues. ever. Ever! And, this is what he did with Pernix, which just made a big breakthrough in server-side flash and raised a healthy Series A from some of the most experienced enterprise investors on Sand Hill. Sure, he may do his own type of diligence and market research, but he operates with conviction and courage before due diligence, he operates on intuition and is willing to take a big risk where his peers may not write a check. In an era where many investors are collecting fancy tiles in later-stage growth deals or waiting for momentum to kick-in or scientifically trying to make sense of disparate and oftentimes irrelevant data, it’s refreshing to see someone like Bipul put the art back in venture.

by Parth Shah and Semil Shah

INTRODUCTION

For people interested in technical entrepreneurship, the phrase “the enterprise” can feel foreign, especially for those more steeped in consumer products and services and/or those who do not possess technical backgrounds. Yet, we have found that many people have a desire to learn more about enterprise-level technologies, and to that effect, we have collected and organized this work to be a continually improving resource in lay terms for people to begin learning.

THE INFRASTRUCTURE LAYER

This section will cover datacenter storage; networking; and compute hardware and software. Traditional storage players like EMC and Netapp face two major threats to conventional storage models: Distributed storage; and flash.

Distributed Storage

Traditional enterprise storage is centralized, where multiple servers connect to one large storage device (usually a disk array) through a specialized network (usually the storage-area network, or SAN). This is a very reliable setup, providing features like backup, fault-tolerance, deduplication, snapshot, etc. built right into the storage device. The shift in this market, however, is toward a Google-style model where commodity (read: cheap) storage devices are directly attached to servers instead of being centralized. This shift is driven by the next generation of Internet-style enterprise apps that are “scale-out” in nature. The opportunity here is to make distributed storage as reliable and feature-rich as traditional, centralized enterprise-grade storage while offering the cost-savings afforded by using cheaper commodity hardware. [Reference: (1) see Nutanix’s article on evolution of datacenters; see Nutanix CEO Dheeraj Pandey with Semil on "In The Studio"; (3) see Nutanix investor and Lightspeed Partner Bipul Sinha with Semil on "In The Studio"; and (4) see Nebula CEO Chris Kemp with Semil on "In The Studio."]

Flash Storage

Traditional storage is also facing a threat from startups focused on pure flash storage, such as Nexenta, Pure Storage, etc. Flash-based storage devices are orders of magnitude faster when compared to spinning disks. Most of the current innovation in and around flash is in trying to overcome other constraints such as costs, life cycle, form factor, etc. Just like distributed storage, with flash there is an opportunity to provide enterprise-grade features like deduplication, snapshotting, backup, data recovery, etc. for pure flash-based storage devices. The shift to flash poses a challenge in that most of the technology to invent these features were written for devices with spinning disks. [PureStorage creates the software to manage flash storage, provides similar features as Netapp, and EMC-level enterprise features. Nutanix is poised well to combine the power of distributed storage and flash. Other flash device vendors like Fusion IO, Violin Memory, Samsung, and Hitachi are also in a good position.]

Networking

The networking industry is currently dominated by the likes of Cisco and Juniper, among others. The biggest shift shaking up this industry right now is software-defined networking, or SDN. The traditional datacenter networking provided by a company like Cisco, for instance, carries too much vendor lock-in with it, as well as expensive devices, proprietary networking protocols, and less flexibility in deploying applications. SDN is being pioneered by companies like Nicira (acquired by VMware) and Big Switch Networks. With SDN, companies can use commodity network switches manufactured by any vendor that supports an open protocol like OpenFlow. With SDN, one can virtualize the network, pool the resources and create virtual wires on-demand, based on the application’s needs. This yields flexibility, agility, and lower capital and operating expenses for deploying and managing applications. (For those using IaaS, they don’t have a network to manage, but rather configurations to adjust. However, once these folks move to a hybrid cloud model, a new challenge emerges with respect to managing balance load and deciding how traffic is split between private and public clouds.)

Compute

Intel rules the datacenter — 90% of the world’s workloads run on Intel processors. AMD completely lost the game in the server marketplace to Intel. Recently, there has been increasing interest around using ARM processors in the datacenter. ARM, the company, licenses CPU architecture to manufacturers. ARM processors are typically extremely low-power and, hence, suitable for mobile devices. The majority of modern mobile devices in world (smartphones, tablets, etc.) run on ARM. Apple’s A-series SPUs, Qualcomm’s Snapdragon, NVIDIA’s Tegra, etc. are all based on ARM architecture. [It helps to understand the fundamental difference between Intel’s x86 architecture versus ARM. Intel using CISC (complex instruction set computer) architecture: complex hardware that supports a rich set of complex mathematical operations and computes very quickly, all handled in the hardware and therefore consumes more power and dissipates more heat (requires cooling fans) as the hardware is complex. On the other hand, ARM uses RISC (reduced instruction set computer), a simple hardware solution that supports basic operations and software, which is slower than CISC, to perform more complex operations. RISC consumes less power and is therefore suitable for mobile devices.]

Memory

Memory is dominated by companies like Samsung and Hitachi. It is not a very interesting space because it is all based on pricing and density. All vendors are trying to make their chips smaller and smaller, and this drives all prices down. It is a race to the bottom.

THE CLOUD LAYER

The cloud layer abstracts away these infrastructure resources and delivers them on-demand.
Gartner defines “Cloud IaaS” as a standardized, highly automated offering, where compute resources, complemented by storage and networking capabilities, are owned by a service provider and offered to the customer on-demand. Cloud computing enables the delivery and consumption of computing as a utility. You pay as you go and move from CapEx to OpEx. Cloud services enable enterprise to compete better in changing markets, be more agile and optimize resource utilization.

Infrastructure as a Service (IaaS)

In IaaS, the infrastructure is available as a service. Current examples of IaaS companies are Amazon (with AWS), Google (Compute), Nebula, and Rackspace, among others. Currently, these players service small companies but can eventually grow to cover the enterprise market. As a result, the IaaS landscape will likely consolidate to a small handful of big players.

One of the interesting aspects of IaaS is that it doesn’t matter where the infrastructure is coming from. In the public cloud, a company like Amazon doesn’t own the hardware and provides cloud-based services; in a private cloud environment, companies like Nebula or VMware provide solutions; and in a hybrid cloud state, a company owns some hardware but outsources some as well. This hybrid state is where most innovation is happening today, as most enterprise runs private cloud most days but, for busy times, can burst to add more capacity when needed.

The growth of hybrid cloud models is potentially threatening to AWS. As servers shift from public to private, companies will adapt to a hybrid model. This will have initial investment costs to purchase hardware, storage, network setup (capital expenditures), plus operating expenditures to manage it, assuming things are architected correctly with stable traffic.

The “cloud” is about “how” one does compute plus storage (an operational model) rather than “where” it’s done — it’s not location-specific. Infrastructure can be anywhere, but the key is how it is managed. The cloud is getting less and less about technology, and more about process, policies, and orchestration. This trend provides opportunities for hybrid packaged solutions (like Nebula) and management policies for sensitive and/or regulated data (e.g. financial, health, security, etc.).

Platform as a Service (PaaS)

Companies also offer platform-as-a-service, or PaaS, such as Heroku, Appfog, Nitrous.IO, and others. This market will likely have many small players, and will be hard to run into Amazon as they expand AWS offerings from the infrastructure layer. The value in PaaS solutions take the pain of setting up and managing production environments, such as setting up software environments on top of infrastructure, finding the right plugins, managing security patches, and so forth.

A classic PaaS example is Heroku, a service which essentially takes care of all the busy work of setup and maintenance and frees up developers to write and deploy code. Developers can push using Git and make their apps live on Heroku, and this agility results in teams not needing systems- and/or database-experts. Heroku runs on AWS, so customers enjoy the goodness of IaaS already baked in and the developer never has to touch it. The problem is that if and when Amazon experiences an outage, startups who are addicted to these setups are stuck, perhaps rationalizing the need for Nebula-like client-side solutions once a company reaches a certain scale. [[ ex Dropbox, Netflix, Ngmoco, Zynga is doing “Hybrid Cloud Model” - ZCloud started early 2011 (considered innovative operating model]]

Software-as-a-Service (SaaS)

Everyone knows SaaS. Briefly, we’ll define it as the pure software and application layer, the place where real scale and innovation will occur. An example of SaaS could be software like Asana, which may (as it grows) provide tiers of service that would empower it to charge for the right to use it. Here’s a brief matrix of some of these companies, to share examples:

Big Data

“Big Data” is an overused, often misused term. We define “big data” as data one cannot process using traditional analytical techniques, but which require parallel algorithms designed specifically to operate on said data that is usually stored in a distributed fashion. The definition of what constitutes “big data” today will change as computing power increases and price of storage falls. Today, defined in terabytes and petabytes, but in future terabytes might not be considered big data. The reason this is such an exciting space is that the market for all the industries this can effect are huge. Applications of big data are enormous including but not limited to analytics, visualization, business intelligence, reporting, recommendation systems, information discovery, etc. Most think of consumer data, but consider the life sciences, oil and gas discovery, and so forth. For example, a Boeing 787 generates several terabytes of telemetry data on a typical transatlantic flight.

The rise of Big Data can be mainly attributed to two factors: a) denser & cheaper storage devices b) emergence of open-source Big Data processing frameworks (Hadoop, et.al)

MapReduce by Google is one of the most foundational programming models used to process large datasets. Yahoo extended the MapReduce paradigm and introduced the Hadoop open-source framework to perform parallel algorithms on large datasets. The rapid adoption and contribution to Hadoop by companies like Facebook, Twitter, Amazon, etc played a huge role in making big data processing popular.

Although Hadoop remains massively popular in consumer internet companies, the adoption in the enterprise has been relatively slower due to concerns like complexity, security, support and lack of talent to operate Hadoop infrastructure. Whole new category of startups have emerged which are making easier for enterprises to adopt Hadoop. For e.g Cloudera and Hortonworks are doing something very similar to what RedHat did for Linux. These companies offer “enterprise-ready” distributions of Hadoop software, help enterprises deploy them in their cloud and then provide ongoing customer support for the same. With enterprise distributions of Hadoop, enterprises are able to make the transition much faster. However they still have to own and operate the infrastructure to run Hadoop. Hadoop-as-a-Service startups aim to solve this problem by offering big data processing services on demand. Amazon has been a pioneer in this space with their Elastic MapReduce offering. Amazon Elastic MapReduce is a web service that enables businesses to easily and cost-effectively process vast amounts of data. It utilizes a hosted Hadoop framework running on the web-scale infrastructure of Amazon EC2 and Amazon S3. Cetas (acquired by VMware) provides advanced, real-time Hadoop analytics and can be deployed on-premise or in the cloud.

[Reference: See LinkedIn's Peter Skomoroch with Semil on "In The Studio," as well as Accel Partners' partner Ping Li with Semil on "In The Studio."]

Virtualization

In layman terms, virtualization is a way of creating abstract virtual resources from real physical resources. IBM technically invented virtualization decades ago however VMware is usually given the credit for creating an industry around it. The enabling technology behind virtualization is a smart mini-kernel like software, commonly referred to as the “Hypervisor”. The Hypervisor runs directly on top off bare metal hardware and provides abstractions like virtual CPU, virtual memory, virtual disks, virtual networks, etc to the upper layers. Hypervisor enables a single server in your datacenter run multiple virtual machines (VMs) on the server that run in their own container with virtual resources like CPU, memory and storage. Each of these VMs can be running a full-fledge operating system (OS) like Linux/Windows. The OS is usually unaware of the fact that its running on a virtual computer and not a real one.

In a typical datacenter, with tens to thousands of servers, resources are not often fully utilized. With virtualization a single server could be hosting tens, hundreds or even thousands of VMs which dramatically improves the utilization and thereby has a huge impact on the CapEx. When there is resource contention on a server due to high demand for resources from the VMs, the Hypervisor acts as an intermediary and allocates resources to each VM according to its fair share. Virtualization is the key enabler for Infrastructure-as-a-Service products. Key features like elasticity, auto-scaling, multi-tenancy and efficient resource utilization are impossible to deliver without virtualization.

[Reference: see Tintri CEO Kieran Harty with Semil on "In The Studio."]

Recommended blogs on enterprise IT:

• The Whole Stack (Battery Ventures)
• Bipul Sinha (Lightspeed Ventures)
  
• Emergence Capital (blog)
• Vinnie Mirchandani (Deal Architect)

Shout out 2 @techcrunch n @semil for tha great write up! This is only the beginning. We just getting started. #Snoopify 2.0 comn soon!!

— Snoop Dogg (@SnoopDogg) May 12, 2013

“What are the cool new apps you’ve seen lately?” To this oft heard question, lately, there have been lots of answers. So, mobile is indeed exciting and moving fast. And, just recently, a fun new app came out that instantly captured my attention — no, it’s not from a Stanford dropout or from the  ”innovation lab” of a large technology company. No. It’s from Snoop Dogg — excuse me — Snoop Lion. Yes, that’s right, the same artist so many of you grew up with. He’s diversified his musical career into the business of his own branded apparel, a television show, and now he invades the greatest consumer stage of our times — our mobile phones. And, what’s more impressive is just how he did it — the genius to observe and iterate, to pull out the nuggets of lessons we have learned and package it together with marketing that’s both fun, easy, and devilishly derivative yet simultaneously novel.

The app is called “Snoopify.” I think it’s both a noun (the app) and a verb (as in, to “Snoopify” a photo). Essentially, you can take a new or existing picture, and then open up a box of Snoop stickers (that’s right, stickers) and overlay them onto the picture before sharing it on every social platform . Most of the stickers, as you can imagine, have something to do with Snoop and his brand, which makes for a hilarious “Snoop filter” on these doctored photographs. The first time I downloaded the app, I  ”Snoopified” about five times in the span of 10 minutes and shared them everywhere. Snoop has essentially digitized himself and appified a scalable way to photobomb any picture with his signature brand. And, this is the best part — if you want to unlock the 2nd, 3rd, and 4th pages of stickers, pull out your credit card because they’re locked behind a paywall.

In-app purchases. Genius.

From a marketing and branding standpoint, this is all fascinating to me. Look at the intersections of trends here: (1) Photos remain the premium communication currency in our mobile world. Like SnapChat showed with their expiring images, there’s no end to the creative manipulation mobile software can offer to pictures. (2) Influencers with their own global, diverse audiences can leverage networks like Twitter and Instagram to breakthrough the noise and clutter of the iOS app storedistribution minefield. There’s the tactic  of growth hacking, yes — and then there’s the pure organic lift a celebrity can leverage to surpass everyone else. And (3) Stickers. Just a few months ago, everyone was hemming and hawing about Path’s latest 3.0 update which include new sets of free and paid stickers, perhaps influenced by the growth of mobile messaging apps in Asia (such as Line, an app which reportedly raked in US$50M+ in Q1 of 2013 by selling virtual goods in-app).

So, Snoop and his team watch all these trends converge, and steal a page out of the apps like Line and Path. Great artists steal, right? And, what do you know, it worked — I bought stickers, my first in-app purchase of a digital good. Brilliant.

I’ll be writing more about the overall trends I’m seeing at the app layer here in my column this summer, but an app like Snoopify, which rose quickly in the charts earlier this week, breaks convention with how much of the startup world views  how apps are supposed to be made and distributed. Distribution may, in the end, be just as, if not more, important than the actual app. Maybe. The creator of the app doesn’t actually have to do the hard-coding of the software — he or she can commission it, and it can be developed elsewhere. Of course, as I finalize this post, the app has already slipped in the charts. When I started drafting this post a few days ago, “Snoopify” was in the Top 25 trending free apps according to App Annie, but now as I finalize this early Sunday morning, it’s slipped to #36 (on AppData) and #58 (on App Annie) and is ranked #156 for grossing according to the official Apple App Store.

An app like Snoopify was destined to be faddish and not a business. Or, maybe this is just the first move by Snoop Lion to cut into the iPhone, on the app level. At scale, it’s an incredibly clever technique to extend his brand on top of other peoples’ pictures — the greatest photobomb at scale….ever! Perhaps he doesn’t see enough quality engagement on his work in popular music apps like Spotify or Rdio or other myriad music apps. Maybe he’s tired of Instagramming and receiving hearts in return, or maybe Twitter is just for distribution to his fan base. Maybe after stickers, he’s going to open private messaging inside his app, or broadcast scenes from his next concert to a select audience. (I’m having fun with this, naturally, though it’s not out of the realm of possibility.)

The opportunities on mobile are continuing to prove endless, and for someone as creative as Snoop, even a little mobile icon can represent the largest of sandboxes. Of course, not every artist can go to the lengths that Snoop went to in developing and promoting his mobile app, but of the ones who do have this luxury, Snoop’s foray into the  app store was a brilliant move, complete with a built-in revenue model, a platform for showcasing his brand, and artfully blending some of the biggest trends in consumer mobile behavior we have all collectively observed. Well played, Snoop — well played.