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February 27, 2005

Emphasizing the Information we know versus the information that matters

Malcolm Gladwells's new book, Blink, has this terrific anecdote on the Cook County emergency room.  Turns out the Director of the  ER wanted to figure out a better way to diagnose when people show up to the ER complaining of chest pain whether they are having a heart attack or just a heartburn.  Since the costs of being wrong in the diagnosis is catastrophic, physicians tended to be conservative and keep patients in observation for a day if they had the slightest doubt.  This resulted in lots of folks staying overnight (personal inconvenience) and a lot of hospital beds lost unnecessarily (major financial and health inconvenience). 

A young cardiologist (then) by the name of Lee Goldman (full disclosure: he is a colleague of my wife) developed a decision tree that, using only four factors, evaluates the likelihood of heart attacks.  Here is a summary of the results using Goldman's decision tree:

For two years, data were collected, and in the end, the result wasn't even close. Goldman's rule won hands down in two directions: it was a whopping 70 percent better than the old method at recognizing patients who weren't actually having a heart attack. At the same time, it was safer. The whole point of chest pain prediction is to make sure that patients who end up having major complications are assigned right away to the coronary and intermediate units. Left to their own devices, the doctors guessed right on the most serious patients somewhere between 75 and 89 percent of the time. The algorithm guessed right more than 95 percent of the time. (pp. 135-136)

Goldman's decision tree needed drastically less information than the usual physical exam and questioning.  In fact additional research showed that extensive exam and questioning by the doctors actually made their diagnosis WORSE.  Turns out that the additional information obtained by the doctors led them to weigh it more than the simple 4 item criteria laid out by Lee Goldman.

This is not surprising.

As a venture capitalist, I do various kinds of diligence on prospective companies.  Occasionally I meet a company who is in a market or whose founders are intimately acquainted with someone I know.  In those cases, I reach out to the contact and ask him/her for their opinion on the company or the person  I end up weighing their opinion very highly in my decision making even though the importance of that information is not clear.  I am weighing more heavily the information I can access versus the information that *MATTERS*. 

Of course the trick is knowing what is the information that MATTERS.  There is no easy answer here but its important to be cognizant that just because you don't know what is the information that really MATTERS does not mean you should value the information you have received much higher than other pieces of data.

Posted by Venky Ganesan at 11:13 PM in ventures | Permalink | Comments (176) | TrackBack

Controversy at Harvard

The controversy over Lawrence Summer's comments at an academic conference continues to simmer.  The NY Times had an article on it and the press coverage on it is just overwhelming.  While it is terrific that people are spilling ink on the issues of gender discrimination and the trials and tribulations women continue to face in the world today, I find it very frustrating that people are attacking Larry Summers without actually trying to understand what he really *SAID*.  Here is a link to the transcript of his speech:


Please read it if you are interested in this topic and then try to contrast what he actually said with what is written about what he said.  It is abundantly clear to me that most journalists who write on this topic have not read his comments.  He raises issues that are extremely valid and whether you agree or disagree with him, you would want it to be raised, discussed and argued in the academic world.  To castigate someone for asking whether we need to look at different worldviews to fully answer the question of discrimination is totally at odds with academic freedom or philosphical inquiry. 

Posted by Venky Ganesan at 10:43 PM in Current Affairs | Permalink | Comments (0) | TrackBack

February 21, 2005

Mountain Biking

For the most part this is a semi-serious blog.  We try not to interrupt our pretentious thoughts with personal anecdotes and idiosyncrasies but I have decided to throw that tradition out the window.  Sri one our close friends has gotten Chari and I to take up mountain biking.  Chari and I ended up buying the exact same bikes - while I have not done my first ride yet, Chari just did one with the rest of the Tropos founders.  Here are a couple of pics from the first trip:



Dsc01477Especially love this picture of Chari still trying to get a drag before starting on his ride.

Posted by Venky Ganesan at 11:00 PM in Current Affairs | Permalink | Comments (0) | TrackBack

February 20, 2005

IRR Calculations

One of the blogs I track is Concrete Covina by Jim Lejeal.  Jim has a recent blog on IRR calculations

He talks about the "First Chicago" method of calculating IRR's and how various top tier firms use a scenario based model (probability based outcome) to calculate IRR and if a certain threshold is reached then they will do the deal everything else checking out okay.

This definitely flies against the way I work (yes I know maybe that why I am not a top tier venture capitalist ;-)) I have never made an investment decision based on an IRR model.  As a firm we use a financial model as part of the investment memo but its done more to get a general sense of how this company's business plan looks.  We also use the financial plan to check assumptions and understand how well the entreprenuer has thought about his/her business.  The only thing I know about financial plans for startups past 18 months is that its going to be wrong (mostly on the downside but sometimes on the upside).  Excel sometimes makes people confuse between precision and accuracy . . .

Posted by Venky Ganesan at 07:25 PM in ventures | Permalink | Comments (9) | TrackBack

February 15, 2005

Experimentation and Failure

Last weekend I attend the Stanford Entrepreneurial Conference.  The lead keynote speaker was Jeff Bezos of Amazon and he did a terrific job.  He talked about historical innovations and innovators.  Some of his examples were:

  1. The guy who invented toilet paper
  2. The woman who invented windshield wipers - prior to her invention people just stopped every mile or so and wiped the windshield
  3. The woman who invented "white out" - she was an executive assistant who made a lot of mistakes while typing and was annoyed there was no quick way of correcting her mistakes.  By the way "white out" was nothing but white paint - just shows you don't have to always invent cutting edge stuff to be successful

Then he talked about Amazon and how he tries to instill a culture of "innovation' within Amazon.  He said the two important factors that help drive innovation at Amazon are:

  • Cost of Experimentation is low - its easy to run experiments in an online business and check to see effectiveness.  Amazon runs experiments all the time and evaluates which of his innovations are more effective
  • Cost of failure is low - again another terrific element of online businesses is that the cost of failure can be controlled since you can run these experiments without a significant cost if it fails.

The combination of these two factors also result in an open non-hierarchical organizational culture at Amazon.  Even front-line folks can run a experiment since the cost of doing and the cost of failure is low.  These two factors are not unique to Amazon, they apply to all online businesses and good online businesses take advantage of them - the folks at Plaxo (full disclosure:  portfolio company) are masters of this.  Rikk, Todd, and Cameron and the other engineering folks constantly experiment, test and iterate on their new feature set before releasing it.  No wonder they are at 5 million users. 

Posted by Venky Ganesan at 10:11 PM in software, technology, ventures | Permalink | Comments (8) | TrackBack

February 14, 2005

The allure of big VC rounds

A lot of good discusson in the blogosphere about Webroot's recent $108 Million round.  Arun Natarajan blogs about it and provides a couple of different thoughts on the financing from Robert Cringely and Fred Wilson

I don't buy Robert's argument that its the fear of losing management fees that drove the Webroot financing.  I don't know any of the details of the financing and have no secret source.  However the people who did the financing (Accel, Mayfield, and TCV) are some of the smartest folks around and really understand the security space (full disclosure: Robin Vasan was on the board of Trigo Technologies - A company I co-founded).  I suspect that unlike traditional VC financings in which VC's invest their money in the company, a part of this transaction was done to buy secondary interest from the founders.  This is way for the founders to get some liquidity without necessarily selling the company.  This provides some risk mitigation for them and allows them to shoot for a big outcome.  The founders and investors probably believe that they can build a huge security company starting with the base of spyware/virusware and then expanding into IDS/IPS/etc. 

Can this company fight off Symantec /McAfee/Microsoft in this space?  We will have to wait and see. 

On a side note Brad Burnham has a post on private companies that have raised over $100 Million in venture capital and its not a pretty history.  Hopefully this one will have a better outcome

Posted by Venky Ganesan at 02:24 PM in security, software, ventures | Permalink | Comments (20) | TrackBack

February 08, 2005

Value of Customer Development

We are all very familiar with software product development.  Its a process with well designed steps (design, code, test, iterate, release, etc.).  We schedule, plan, and track the various stages.  Given how granular we track the product development process, its strange how we have such a laissez-faire attitude towards sales.  With sales, we just hire a VP of sales give him some budget to hire a few more folks and hope (and in my case pray) that sales show up. 

Chris Whitted, VP of sales at Steelwedge (one of my portfolio companies), forwarded me a presentation from a gentlemen at Berkeley who tries to formulate a "Customer Development" framework.  I found it to be very useful.  I am attaching the presentation for everyone's benefit:
Download customer_development.pdf

Update 1: Just received an email from Steve Blank identifying himself as the author of this piece.  He teaches a course at Berkeley in the business school.  I highly recommend it for all current and aspiring entreprenuers. There is also a book that covers the material in the slides I posted and follows the course.  It can be found at: www.cafepress.com/kandsranch.  Steve can be reached at steveathassdotberkeleydotedu



Posted by Venky Ganesan at 02:44 PM in software | Permalink | Comments (4) | TrackBack

February 04, 2005

Bypassing security systems

Sometimes a picture is worth a few hundred words (via Bruce Shneier):


Posted by Narasimha Chari at 09:13 PM in security | Permalink | Comments (5) | TrackBack

APIs and innovation

I had written a while back about Skype's API. I found out recently that someone's developed an answering machine application using the API:

SAM is a simple voice answering machine for Skype® users.

When you are away from your PC and there is no one to answer your incoming Skype calls, SAM will pick up the call, play a greeting message and the "all-time clasic beep" so that the calling party will leave a voice recorded message.

It looks a little rough around the edges right now, but I still think it's a great example of how opening up APIs, done well, can fuel user-driven innovation. Apropos of this, also see the recent Google AdWords API announcement:

Google's free AdWords API service lets developers engineer computer programs that interact directly with the AdWords server. With the applications created, advertisers and third parties can more efficiently - and creatively - manage their large AdWords accounts and campaigns.

From the Google Blog:

The AdWords API beta program is an open invitation to developers to explore new concepts (and then write great software) for managing Google AdWords advertising campaigns. Large advertisers can use it for their complex ad management needs, like tying product margins to optimized keyword bids.Third parties can use the API to build new interfaces to manage their client accounts. Best of all, an API enables the creation of all sorts of unanticipated ideas.

Posted by Narasimha Chari at 08:00 PM in communications, innovation, Product Management, software, technology | Permalink | Comments (8) | TrackBack

Sales Learning Cycle

Many of us are familiar with the MLC (manufacturing learning cycles) which basically provides a framework to understand how manufacturing costs decline as volume increases.  Mark Leslie (of Veritas fame) has applied some of that thinking to software sales and I think its brilliant!!! There were many moments reading this slide deck that I hit my head saying wish I had known this a few years go ;-)

Some of the salient points Mark makes are:

  1. There *IS* a sales learning cycle for selling software
  2. The curve is different for different categories of products e.g. faster better cheaper, innovation, brave new world, etc.
  3. VC's and entrepreneurs tend be too optimistic and do not plan for "learning"
  4. Rather than acknowleding the "learning curve" we tend to staff sales on a capacity basis and then wonder why we missed the number and burned so much cash
  5. Early on we need to hire different kind of sales reps (one who can learn and iterate)

My summary does not do the powerpoint justice.  Here is the complete presentation 
Download markLeslieSLCslides.pdf

Posted by Venky Ganesan at 04:03 PM in software | Permalink | Comments (383) | TrackBack