Lenny For Your Thoughts

What I’m Excited About for 2012 (and Beyond)

In keeping with compulsory end-of-year traditions, I wanted to share what I’m most excited about as an early-stage technology investor heading into 2012 and beyond. If 2011 was all about VCs losing their heads in the consumer Internet craze, I think 2012 will be about the re-emergence of enterprise investing which has been a black sheep for many venture capitalists since around 2008. (Perhaps nothing makes it clearer that enterprise investing is on its way back than this Pulitzer-worthy piece of journalism from TechCrunch: http://tcrn.ch/tx0S6b).

So, with no further ado, here are several themes that I’ll be spending my time exploring in the coming weeks, months and years:

Democratization of Big Data
I view the democratization of Big Data as two things: 1) giving any organization – from enterprise to startup – a cost-effective way to harness the power of the data it generates and 2) to empower any user within the organization with tools that make it easier for him or her to glean insights from that data.

The first statement reflects the point that startups today generate petabytes of both structured and unstructured data but do not have the financial and/or technical wherewithal to deploy multi-million dollar Netezza, Vertica, Greenplum, Teradata, etc. appliances and data warehouses. Hadoop offers some benefits (e.g. runs on commodity hardware) but it’s still costly and complex to deploy and manage. Amazon Elastic MapReduce offers access to Hadoop clusters as-a-Serivce, but outside of that, smaller companies today don’t have affordable, out-of-the-box or on-demand solutions to process, analyze and then gain insights from the data they generate. In 2012 this will start to change.

The second point reflects that for an organization to make sense of their data they often are forced to make at least two or three specialized, expensive hires: a Java Engineer to set up the Hadoop infrastructure, a Data Engineer to write the data processing algorithms and then a Data Scientist to generate insights from the processed data. This is too much overhead. That’s why I’m excited about products like Platfora that unlock Hadoop and enable Business Analysts with little or no technical expertise to derive insight from massive sets of data.

Cloud (Security of)
“Cloud” has been a buzzword for more than five years now, but really only in the last two have organizations started to realize the immense potential from this paradigmatic shift in how compute resources are structured and utilized. What’s slowed adoption, however, has been concern over security, compliance and governance of data in the cloud. Incumbent network security and security software vendors have not innovated adequately to meet the demands of this new architecture, but in the last year or two there seems to have been meaningful startup formation around this pain point. I’m looking to new encryption and encryption key management solutions purpose-built for the cloud, new products around authentication and identity management and wholly new methods for securing highly distributed, public/private/hybrid cloud networks. Additionally, cloud management platforms that go beyond commodity automation and provisioning of servers to tackle bigger issues around compliance and governance are going to get my attention.

Consumer Hardware Hacking
The dream of machine-to-machine (M2M) technology has been around for decades, but I think we’re finally starting to see its emergence in broader consumer markets and applications. At RRE this past year we invested in MakertBot, a manufacturer of 3D printers for the mass market. More broadly I’m excited about what companies/products like Sphero and Twine will enable down the road. Today, their use cases just show a sliver of what the underlying technology will be able to do (see here), but imagine being able to control your washing machine, television, fridge, car or any other appliance from your mobile device. That’s pretty cool stuff.

Next-gen Networking Technologies
As an enterprise investor, a good way to uncover “what’s next?” is to follow the bottleneck in the datacenter. In the last few years, that bottleneck has resided in storage (at RRE we saw this and placed a bet in WhipTail Technologies, a developer of fully SSD-based storage arrays)  but as SSDs and new storage systems emerge with a renewed focus on performance (IOPS and throughput) the bottleneck, I believe, will begin shifting back to the network. Like storage, networking technologies need a facelift badly. Cisco network switch technology based on point-endpoint telephony models needs a refresh. I’m excited about the promise of virtualized networks where the software is de-coupled from the routers and switches enabling networks to become programmable and thus more flexible. Companies like Arista Networks, Embrane and Big Switch Networks (based on the OpenFlow communications protocol) are leading the charge, but we’re only in the first inning or two of this game.  

Looking to the future, my one concern as a young VC heading into the next year(s) is that we, as an industry, aren’t funding big enough risk. Too often in recent years money has flowed into companies that solve only incremental problems associated with business model innovation or interface-level improvements. The result, at least for VCs, has been plateauing returns.

In 2012 I’ll be on the lookout for companies that are dreaming big and solving real, technical problems, and I’ll be hoping that the new year brings with it a renewed sense of risk-taking both from entrepreneurs and the people who fund them.

Forget Social, Mobile and Gaming. The Next Frontier? Storage.

Fusion-IO priced its Initial Public Offering last week at $19 per share and immediately traded up to $25 per share, reflecting nearly a $2B market capitalization. The outcome was terrific, both for the company and its investors (who happened to pour in well over $100M into the company), but more importantly the transaction had deeper consequences in the context of its implications for the storage industry.

Fusion-IO’s IPO was the first pureplay storage new issue since 2007 when Compellent, Data Domain, Netezza, 3Par, Isilon and CommVault all went public (and in the years since have all, less CommVault, been acquired for an average of nearly 10X trailing revenues). What is particular and special about Fusion-IO is that it is the bellwether company (even if only in perception) for a new class of storage based on Solid State Disk (SSD) technology, and in my mind marks a significant shift in how new storage technologies will be validated and ultimately valued.

While in the last several decades we have seen tremendous gains in chip technologies enabling rapid provisioning of massive amounts of computing (Moore’s Law) and in networking technologies enabling incredibly fast transfer of data (10, 40, 100+ GbE), the underlying storage backbone supporting these new infrastructure advances has stayed largely the same. Since 1973, when IBM introduced the 3340 Winchester disk drive, storage technology gains have for the most part plateaued. Sure innovations within and around the HDD software stack (RAID, high availability, replication, thin provisioning, dedup, etc.) have optimized scale, performance and reliability of these systems, but the underlying, core piece of technology – the hard disk drive – has remained the same for more than 30 years.

Until recently, storage issues have been viewed as problems associated with scale and the classic response was to throw more and more disk to deal with the data deluge. Regarding performance of applications, the bottleneck was either the CPU or the network.  

Things have changed. Today, we are living in a world where applications require massive amounts short-term compute power and storage. The centralization of computing resources via virtualization and the cloud has correspondingly pushed primary storage systems to their limit as the performance (I/O) bottleneck has shifted. Enterprises are now experiencing the effects of disk contention and latency, resulting in significant deficiencies in database and virtualization performance. Traditional “high performance” storage systems, whose spindles and rigid rotating platters simply cannot keep up with the demands of today’s I/O-intensive Web and enterprise applications, are quickly becoming legacy systems. IOPS (read/writes per second) now matter more than ever.

Enter SSDs, whose I/O potential over traditional rotating magnetic disks is on the order of 2 to 3 magnitudes. Unlike HDDs, SSDs retain data in non-volatile memory chips (often in the form of NAND Flash) and contain no moving parts. More importantly, technical advances in SSD management software have resolved issues pertaining endurance, write problems and data leakage appear and the cost equation from a Gig / $ has become more favorable.

So what is the state of play in the storage industry? Clearly companies have awakened to the IO bottleneck and more companies are incorporating SSDs in some form or fashion into their systems design. Companies like Fusion-IO develop SSD solutions in a drive form-factor that plug in directly to servers via the PCI Express bus (not a viable long term solution in my mind, but that’s a topic for a different blog post). Still others such as Avere, GridIron Systems and Nimble Storage have opted for a tiered or hybrid storage approach which relies on software to identify I/O intensive workloads and then run those through an SSD cache. Finally, there is a new breed of storage upstarts emerging who believe that SSDs will ultimately replace HDDs entirely for Tier 0 / Tier 1 primary storage applications and are creating storage subsystems comprised entirely of SSDs. Pure Storage, which just raised an additional $28M in capital, is supposedly building an “EMC killer” out of flash storage - though now word on the street is that this is more of a file system with tiers of SSDs. 

Among this final group, is a company that we at RRE invested in called WhipTail Technologies. WhipTail has created SAN appliance made entirely of MLC-based NAND Flash SSD drives and is the acknowledged leader in extremely high performance, pure Solid State Storage appliances. Today, the company sells its appliance into server and desktop virtualization, database acceleration, file sharing and exchange applications where the I/O squeeze is the most painful. Suffice to say, they have no shortage of interested potential customers.

SSD systems are not going to rip and replace existing storage infrastructure overnight. It’s going to be a long, expensive process that will require the re-assembling to the storage software stack is resolve issues of data leakage, security and reliability.  With that said, however, I believe we are in the early days of a transformational boom in the storage industry. 

Color Me Confused: Thoughts on the Mobile Social Bubble

Historically, you would not have made a lot of money betting against Sequoia, but their most recent gamble, leading a $40M pre-launch investment in Color, a mobile photo sharing application, left me scratching my head.

Like its mobile photo sharing brethren Instagram, PicPlz and Path, Color allows users to take snapshots with their mobile phone camera, edit those pictures and then share them. What differentiates this one from the bunch is that there is no explicit friend or following system – photos appear in a unified stream that is shared based on proximity to other users. For those familiar with the Group Messaging Wars (http://on.mash.to/dWKaIk) and intent on drawing parallels, the analog here seems to be:

Yobongo:GroupMe :: Color:Instagram

However, the point of this post isn’t to bag on Sequoia or Color. What I’m getting at will probably sound like heresy to a venture community that has pumped over $150M of early stage dollars into the mobile social space in the last 9 months, but the more I think about the endgame in mobile social the less these bets seem to make sense to me.

First, let’s understand what I mean by mobile social since clearly companies like Kik, Foursquare and PicPlz have, today, entirely different products and don’t appear directly competitive.  

The definition of mobile social is simply a class of mobile applications that facilitate interaction among interconnected mobile users – think a lightweight Facebook-esque application that enables you to communicate, share and transact with anyone on the go.

Using this definition, it quickly becomes obvious that whether you’re Path or Foursquare (who just a few months ago added a photo sharing feature and supposedly is working on a messaging one) you are ultimately on a collision course to broadly own users’ entire mobile experiences. Look no further than this quote from Sequoia Partner Doug Leone, who led the firm’s investment in Color:

“Color aims to lead us all into the post-PC world. Their goal is to become the most widely used social network on smartphones. Sharing by sitting alone in front of a PC browser will cease to exist. Color will usher in a world where people use everyday mobile technology that allows simultaneous connecting and sharing.”

While today these companies are masquerading under the guise of location (see: Foursquare, Gowalla, Whrrl), groups and messaging (see: GroupMe, Kik, Posterous, Ning, Yobongo, GOGII, Pinger, Formerly Beluga) or photo sharing (see: Instagram, PicPlz, Path, Color), the goal for each is the same: engage, connect and own the mobile user – so really the fundamental distinguishing qualities of these businesses are just their initial chosen access points to the greater mobile market.

So what is the issue I have with these businesses? To me, it’s the very idea of creating a large, and most importantly, sticky and engaged network of mobile users which stands at odds with the inherent functionality and consumer value proposition of mobile computing – convenience.

By nature, I don’t expect or even want my mobile applications to be engaging, for lack of a better word. I want them to be quick, dirty (ok, maybe not dirty), simple and convenient. I want them to connect me with the person(s) I’m trying to reach, share a photo or message with just one or two clicks, find a specific piece of information within a few seconds and show me – when I request it – personalized, relevant, curated content. 

The inconsistent logic behind mobile social businesses is based on an assumption that the way we communicate, share and engage with users and content on our mobile devices will be, in large part, analogous to how we have done it on our computers. Few are willing to admit otherwise, because if this assumption doesn’t hold then the beautiful, feature-rich mobile apps that have taken on hundreds of millions of investor dollars will be largely defunct and simple, clean commodity applications – which would never sell for $500M+ to Google – would win out.

Perhaps my thinking here is flawed and too narrow because I’m assuming most mobile users are like me: when I’m not at home on my MacBook or iPad and when I’m not sitting by my PC at the office, I’m out engaging in activities and with people where my attention doesn’t need to siphoned by a screen. The ideas of browsing and compulsory attention, so critical to web-based businesses, are not native or natural to the mobile computing experience. 

Mobile applications are utilities – and no, I’m not going to listen to the argument that Facebook and Twitter are utilities too in that case – where success hinges largely on performance not user engagement metrics. Generally, a good web application is one where average time on site is maximized, whereas a good mobile application is one where average time on-site (or in this case, time in-app) is minimized. 

Given these structural dynamics, I have a hard time imagining a world where any one mobile application can boast a large and truly engaged network – at least not by current engagement standards. And if this is the case, then it is even harder to imagine how these businesses can effectively scale revenues outside of foraying into payments or group commerce – neither of which is a picnic of a market. Surely advertisers (as dumb as they may be) wouldn’t pay a premium to gain entry into a channel where user engagement is transient at best. 

Now, I’m not arguing that these are necessarily bad businesses, but it does appear that investors have jumped all over them, hoping  to snag the next Facebook, without fully realizing just how different the value propositions of these companies are. Nor have investors identified the multitude of factors at play that could prevent these types of companies from successfully scaling any sort of meaningful revenues. Instead, many VCs have taken the stance of “let’s just get as many downloads as possible and then figure out what to do with these users,” a tactic that may work (in rare cases) for web-based platforms but has yet to see any sort of measured success in mobile land.

At RRE, I was excited about our investment in Kik not only because I thought it would be a good horse to get behind in the mobile social race, but because the company had an elegant, extremely fast messaging product (see: performance) with very cool back-end technology (yes, actual technology – a seemingly far removed concept for consumer internet startups and their investors these days) that nobody else had.  That powerful architecture not only would give them a leg up today, I thought, but also would leave the business with flexibility to move into adjacent markets and opportunities if or when the social (pixy) dust finally settled.

Me and This Blog

Me:

Born behind the Iron Curtain in Sankt-Peterburg, USSR; went to UC Berkeley to become an engineer; graduated…with a finance / econ degree; helped found a hyper-local news aggregation startup; worked over 100 hours a week as a tech I-banker; now, spending my days trying to discover the coolest tech companies as a VC with RRE Ventures in New York.

This Blog:

This blog serves two purposes: 1) acquiesces my mandate as a VC to spout off on technology and 2) gives me a place to vent publicly about the San Jose Sharks.