Startups Needed For Cloud Computing Gray Areas

Cloud computing is still all the rage in the business world these days. Yet I find that most business people don’t understand and fully trust it, and I defy even the technologists to define it in ten words or less for business people. Many say it’s just marketing hype applied to old principles that have been around for a long time.

A typical definition (from Wikipedia) is that “cloud computing, is Internet-based computing, whereby shared resources, software and information are provided to computers and other devices on-demand, like a public utility.” That’s about 25 words which I’m certain doesn’t paint a very precise picture to the entrepreneurs I know.

Putting aside the acronyms and technical jargon, I think I can distill the essence of the cloud computing vision to the following five key points:

1. Buy service from a central utility, rather than buy assets. Now you can pay for a metered service delivering compute power, data, and storage, based on your business demand, through the Internet. No need to buy and manage these as assets. This is a great cost leveling advantage to businesses, which used to be called time sharing.
   
   
2. Maintenance and support are provider responsibilities. Small companies no longer need an IT staff, with the inherent costs and management responsibilities. That allows them to focus on their core competencies, reduce overall costs, and be more agile in responding to market changes.
   
   
3. Access to new services and data is instantly global. Employees don’t need to come to an office to do their job, and customers don’t need special software installed access a new application. International standards and localizations are assumed from the beginning, rather than added much later.
   
   
4. Availability is 24/7, just like your electric utility. No more down time on weekends, or during the nightly backups. Especially when looking at software for field service workers or other mobile teams, it's important to consider services with constant availability. The Internet is a huge power grid that services computing needs (cloud computing) of businesses and consumers, just like the electricity grid services power needs (cloud power).
   
   
5. Easy integration of customized applications. People have traditionally bought their own computers simply to provide a common platform where all their applications could talk to each other, even though customized, and share data. The cloud provides these transformations with security and integrity.
   

Make no mistake about it, these are the dreams, not the reality today. Even the pundits agree that cloud computing is still for “early adopters,” meaning it’s not all there yet. Many people can quote cloud computing successes, like businesses using Amazon Web Services for huge scaling, or failures, like the Google App Service major outage a while back.


Other gray areas include how to do secure credit card transactions in the cloud, tax considerations for international operations, multiple virtual machines in one cloud, and properly addressing differing geographic regional requirements in a single cloud. Then there is the connection problem of sharing data with standard applications not in the cloud.

When a vendor starts talking about his paradigm shift to a dynamically scalable and virtualized solution in the cloud, with SaaS (software as a service), PaaS (platform as a service), MSP (managed service provider), or web services in the cloud, tell him to skip ahead to the chart which shows you how well he does on the five points above, and the five gray areas outlined.

Even though “the cloud” is a familiar cliché for the Internet, cloud computing is still very much an opportunity for startups, with lots of room for innovation and better solutions. Now is the time to jump on board, but a cloud usually means you should expect a few storms ahead before you see the sunshine.

Marty Zwilling

David S. Rose – Father of Angel Investing in New York

I recently had the privilege of interviewing David S. Rose, who has been described as "the Father of Angel Investing in New York" by Crain's New York Business, and a "world conquering entrepreneur" by BusinessWeek. He chairs New York Angels, one of the most active angel investment groups in the country, which has invested over $60 million into nearly 70 companies.

Marty: Welcome to Startup Professionals interviews. It sounds like you could be a full-time Angel investor, but I know you have other activities as well. Tell us a bit about these.

David: I’m also a serial entrepreneur who has founded half a dozen companies, including Angelsoft, which provides the underlying Internet infrastructure for most of the world’s organized angel investing ecosystem. I also spend close to half my time teaching, and in addition to serving on the entrepreneurship advisory boards at Columbia, Yale and NYU, I am Chair of the Finance, Entrepreneurship and Economics program at Singularity University in Silicon Valley.

Marty: Were your own first investment ventures a positive and learning experience?

David: Absolutely. Because one rushes in all flush with the enthusiasm of giant exits, and soon begins to realize just how challenging it is to actually get to a positive exit! My first angel investment in the 90’s was into a video hardware company run by a good friend with great connections to the industry.

After that evaporated, I didn’t invest again until just after the dotcom crash (when my long-suffering spouse grounded me from any further entrepreneurial ventures :-)). The second company in which I invested, back in 2001, was a novel concept from the serial entrepreneur who invented social networking.

It had a great idea, great team, and great angels…but was ahead of its time. The third company is still alive. Its indefatigable founder, however, has since raised an additional $25 million from other angels, never made a penny of profit, and the value of my original six-figure investment is now about zero.

My fourth investment, and the first one I led, was into a mobile applications company, which was also ahead of its time and never truly understood its market. It, too, went down the tubes. The fifth one was a high-buzz, high-tech play with lots of big-name angels, and we eventually brought in a rock star CEO and a major VC followed us in with many millions. But that one fell victim to rapidly developing technologies, the recession, and the collapse of the consumer electronics market, and is unlikely to return a significant profit.

But while they certainly weren’t positive exits, the optimistic side of me continues to believe that they were all positive learning experiences, and I’ve tried to never repeat the same mistake twice. Luckily for me (and regardless of what anyone else says, there is a lot of luck involved in angel investing), I have since had significant positive exits to companies like Kodak, CBS and Facebook, and the current value of my portfolio is approaching the 30% IRR that rational angels target.

But my experiences are probably living proof of what the academics have been pointing out over the past few years: angel investing can be very lucrative, but it is a challenging path. It requires a mindset that can accept an enormous risk of failure, an ability to stick to at least a ten-year plan, and a willingness to continue executing on your plan despite losses early in the J-curve. According to most studies, getting into angel investing without being prepared to make a total of between 20 and 80 investments is a good way to lose ALL your invested capital.

Marty: How has the business world changed since you first started?

David: The exponential development of technology has begun to cause deep and fundamental changes to the world of early stage finance. It used to be that without millions in funding you couldn’t easily start a high growth company, and that funding could only come from venture capital firms that were hard to find.

My first Internet venture in the early 1990s took about $20 million in venture capital to get to our product launch. My second, six years later, took only $2 million in VC funding. When I started investing, my first angel deal took $200,000 to get to Internet product launch, and one of New York Angels’ recent investments only took $20,000. That’s a three order of magnitude difference!

Combine this with half a dozen books by investors like Bill Payne, Jeff Bussgang and Dermot Berkery explaining everything in painstaking detail, and there is enormously more information to help entrepreneurs achieve their funding goals. This is quite literally the best time in history for an entrepreneur to take a shot at creating a new venture.

Today, with facilitators like Angelsoft connecting over 35,000 accredited investors and bringing best practice tools to over 600 groups, with national and international organizations such as the Angel Capital Association, and with myriad VCs, angels and experts such as yourself blogging exhaustively about the field, this is also the best time in history for people with available assets to get into angel investing.

Marty: What is a key personal attribute you see in successful entrepreneurs?

David: Without question, the single most important attribute of a successful entrepreneur is integrity. And that’s not some philosophical or theoretical malarkey; it’s hard-nosed fact. When we invest in a startup, we’re NOT investing in cash flow or assets. Instead, we’re investing 100% in the person, because that’s all we’ve got.

So if we get even the slightest whiff of anything that doesn’t feel right, we’ll just move on. That means your entire life must be an open book, 100% of the reference checks we do on you (including ones we find on our own) must come back positive, and we need to see that you’ve treated former investors, employees, partners and customers with impeccable fairness.

Marty: Any advice you would like to give to someone contemplating a startup?

David: Being an entrepreneur is tough. Really, really tough. The entrepreneurial life is one of challenge, work, dedication, perseverance, exhilaration, agony, accomplishment, failure, sacrifice, control, powerlessness…but ultimately, extraordinary satisfaction.

It will be without question the hardest thing you will do in your life, and it is absolutely critical that you find personal joy and fulfillment in the process of entrepreneurship, in which case the economic success of your venture will be simply the icing on the cake.

Marty: David, it’s obvious that you personify that advice, and your path has not been an easy one. Thank you very much for your insights and your continuing role-model leadership for all of us, and best of luck in all your ventures! For more, you can contact David directly via his personal website.

Marty Zwilling

Don’t Pay Bribes to Get International Expansion

By Ernst Gemassmer

Expanding into International is both necessary and positive for every company, including startups, but it has some unique challenges, as I have found out personally, like expected “under the table” payments in dealing with other cultures and bureaucracy. Some companies look at this as a “cost of doing business,” but it can easily cost you your reputation and your business.

In a recent update by Thomson-Reuters, the U.S. Justice Department and SEC reported imposing over $1.5 billion in penalties on companies in 2010. In a very recent international bribery case, Alcatel-Lucent decided to pay $137 million to settle charges that it paid millions of dollars in bribes to foreign officials to win and maintain contracts in Costa Rica, Hondurus, Taiwan and Malaysia. The days of a “slap on the wrist” for offenders are gone.

The U.S. crackdown started way back in the late 1970’s with the advent of the “Lockheed Bribery Scandals,” in which the company was accused of paying bribes to foreign governments in order to secure aircraft and equipment orders. The resulted in the U.S. “Foreign Corrupt Practices Act,” which made it illegal for U.S. corporations to make any payments to foreign officials.

Last year, this same type of legislation was adopted by thirty other nations and countries who are member of the Organization of Economic Cooperation and Development (“OECD”), with its much-awaited Good Practice Guidance for anti-bribery compliance programs.

Now all companies, more than ever, need to implement internal controls and directives to meet the current legislation before they go International. As an example, one major public company, for whom I worked at the time, issued the following internal directives:

• All foreign subsidiaries are no longer permitted to engage ‘expeditors’ to obtain permits, licenses and other permissions from government entities.

• All distributors are obliged to sign documents stating that they would not use any of their commissions for payments to foreign officials.

For our subsidiary, in one of the key countries of South America, these internal regulations dramatically complicated the task of obtaining various permissions from local authorities. For example, obtaining periodic renewals of business licenses became a very tedious and time-consuming process for the local subsidiaries. These efforts proved to be a major distraction from our main objective, namely sales and service of our high tech products.

Distributors willingly signed the required documents, since they were threatened by corporate with cancellation if they did not comply. However, in reality the U.S. corporation had no opportunity to audit distributor books and therefore could not determine whether a distributor adhered to the letter and the spirit of the document.

After a number of complaints and extensive lobbying from industry, the ‘Foreign Corrupt Practices Act’ was amended. The new regulations now permitted so-called ‘facilitating payments to petty bureaucrats’. In practice that meant that we could once again focus on running our sales and service activities.

Dealing with the bureaucrats for permits and licenses was once again outsourced to expeditors specialized in these areas. Generally the cost for each such transaction was nominal, i.e. less than $200. These costs were small, especially when compared with the predictable outcome, which could be achieved in a timely manner.

In my personal opinion, little progress in simplifying bureaucracies can be expected any time soon, in any country. However, it is absolutely essential to adhere to local laws, rules and regulations. Failure to do so in a timely manner could result in the suspension of a business license, negative articles in the local press, slowing down imports, restricting the outflow of profits or even jail sentences.

Thus, I highly recommend that you take local regulations in each country seriously, and avoid the temptation to resort to bribery. If necessary, you may need to hire a local consultant to help you and your company in navigating complex, and in many instances illogical, rules and practices. The other alternatives are not worth the risk to your reputation and your business.

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Today’s article is presented by one of the founders of our Startup Professionals team, Ernst H. Gemassmer. He resides on the West Coast, and has long helped entrepreneurs there, as well as providing turn-around assistance as interim CEO, and International coaching. You can contact him directly at ernst@startupprofessionals.com.