Milestone Matters Newsletter
Summer 2006

“A number of factors have contributed to the rebound . . . startup costs and overhead have plummeted, hardware prices have fallen, and packaged open-source software has taken the place of programming departments . . . new types of targeted advertising from companies like Yahoo and Google have allowed small companies to sell ads online without sales staffs but perhaps the biggest change in the Alley has been the shift from profligacy to one of financial discipline.”  Warren St. John, Alive And Well In Silicon Alley, The New York Times, March 12, 2006

Dear Friends, Investors and Associates:

Although I write this on a sulky, hot, languid day amidst the summer doldrums, the business climate is anything but somnolent. At Milestone we are busier than ever in our efforts to select the best of the many captivating investment opportunities that we see. This task is made more challenging by the acceleration of technological change and technology’s impact on the business landscape.

We were becoming more comfortable with the new Internet paradigm of “Web 2” – a catchphrase used to characterize the emergence of a new wave of web-based applications, especially those with unique approaches to information sharing and collaboration. Indeed, some of our portfolio companies certainly fall under this rubric. Now it would appear that thought leaders are eager to contemplate the next phase of the web, which some are already referring to as Web 3. One interesting view of the next phase centers on a concept called the Semantic Web, an idea that has been touted for a good while now by no less an authority than Tim Berners-Lee. Mr. Lee was instrumental in the founding of the Web’s programming language at CERN, the European Science Institute, in 1989.

At the recent 15th International World Wide Web Conference in Edinburgh, Scotland, Mr. Berners-Lee painted a picture of the Web future that he envisions - an Internet which offers the individual immediate access to dozens of inter-connected, layered pertinent databases which will lead one, with very little prompting, along useful, rich informational pathways. This topic is complex, and we will describe it in more length at a later time. I cite it now only to illustrate the acceleration of Internet-centric technological change.

An interesting related question is how business people and consumers will embrace or resist the changes. I believe the current pace of innovation gives new urgency to the educator’s bromide—“We don’t prepare our students for careers, we teach them to think.” This had better be the case because young people need to be prepared to adapt rapidly. Current projections suggest they will have eleven jobs during their professional lives whereas their parents had six and their grandparents one or two. This adaptability is even more imperative for the business person, the entrepreneur and the investor. Lacking this ability to evolve quickly, the business person will be disintermediated by forces he doesn’t understand. The entrepreneur will be eclipsed by these same changes and the investor will lose money.

One area of torrid change is in the publishing industry. Publishers, who have not generally proven to be technology-forward, are very vulnerable. One astonishing indicator of such change is the fact that more Americans now listen to books than read them. Of greater moment, is the likelihood that books will soon be distributed digitally, in whole and in part, to a variety of devices such as PCs and PDAs in a fashion similar to the downloading of songs to iPods and similar devices. In some cases, the books will be posted on the Internet to permit broad and instant access.

Yochai Benkler, a Yale University professor of law who spends a lot of his time focusing on the complex nexus of law and technology, has just completed a book entitled, “The Wealth of Networks: How Social Production Transforms Markets And Freedom.” Professor Benkler posted his entire book on his website and it has been downloaded by more than 15,000 readers, some of whom have added comments and links to the online version. Benkler said he saw the project as “simply an experiment of how books might be in the future . . ..” Some have suggested that if 99 cents is reasonable for a song download, then perhaps $3.00 for a book might be appropriate.

This development has not met with universal enthusiasm. At the annual BookExpo in Washington, DC in May, the novelist John Updike characterized the digital future and the prospect of the mixing and matching of snippets of text as a “grisly scenario”. On the other hand, Vikram Chandra, whose 1,000 page novel will be released in January, takes a more philosophical if not enthusiastic view; “The barbarians at the gate are usually willing to negotiate a little, and the guys in the fort usually end up yelling that ‘we are the only good things in the world and you guys don’t understand it.’ At this point the barbarians knock down your walls with their amazingly powerful weapons and put a parking lot over your sacred grounds.”

I think Mr. Updike has not thought things through and Mr. Chandra is inclined to apocalyptic visions. Change cannot be halted. One must accept it and see the opportunity. Television did not displace radio nor did airlines kill railroads, but roles changed. There is no reason Mr. Updike’s books will not be enjoyed by many in the traditional fashion while being shared with countless more in new ways. At Milestone we hope to finance some of these transformations.

With warm regards,

Edwin A. Goodman
General Partner
 

In April 2006, MVP II invested in New York city-based Oddcast. Oddcast, the fund’s thirteenth investment, develops and distributes talking animated characters (Avatars). The company's avatar platform enables companies to improve business results, and consumers to personalize online communications. Oddcast’s technology is the industry-leading solution, serving over 5,500 business customers worldwide and millions of consumers. Oddcast’s products are Web-based, ASP-hosted and can be delivered to any device including browsers, mobile devices, TVs and CD-ROMs.

On August 18, 2006, Octagon Research Solutions (King of Prussia, PA), a provider of specialized outsourced services and software to the bio-pharmaceutical industry, raised $10 million in an up-round from Zurich Financial Investors, Phoenix Investment Partners, and existing investor, Edison Venture Fund. The use of proceeds is to fund growth initiatives and working capital. Octagon’s key areas of expertise are electronic drug application submissions to the FDA, clinical data management, and process management software solutions.

By Todd Pietri

The venture capital community has re-discovered the importance of marketing in the last few years.  Just about every VC I know is trying to find a digital marketing guru who possesses the expertise to reach consumers and small to medium size businesses (SMBs) with search engine optimization, search engine marketing, viral online communications, and free trial enticements.

An unfortunate by-product of this trend is that the art of “old fashioned” direct sales is not getting the attention it deserves.  That is why I recently decided to reach out to a mentor of mine, Jerry Yaeger.  I worked for Jerry in sales and sales management for five years at his enterprise software company, CompuSystems.

Here are excerpts of an interview I did with him recently:

Todd: Where did you learn how to sell information technology products and services?

Jerry: The first technology company I worked for was IBM (1963 to 1967).  I had 24 weeks of formal training and another six months of field training before I was put on quota.  IBM understood the science of selling and there is no question they were producing the best salesmen in the world.  Comprehensive sales training like this is rare today.

Todd: Beyond the obvious, what makes a good information technology salesman?

Jerry:  The good salesman uses time intelligently.  For example, they learn the product and write proposals after business hours, using the business hours to interact with customers, prospects, and referral sources.  A disciplined salesman will schedule two hours of prospecting per day as if it were his most important appointment.  In fact, if he is scheduled to prospect from 10 a.m. to noon and a prospect wants to sign a contract at 10:30 a.m., he should keep his prospecting appointment and close the business during another time slot.  The really great salesman, like the really great executives, do things they don't like to do but they do them in order to be successful.

A great salesman will also have patience.  After he has qualified a prospect, that prospect may not buy for a year or more.  But if he stays close to the prospect during that time, he will develop a great relationship and become aware of his readiness to buy earlier than the competition.  Nothing frustrates me more than when I sit down with a salesman who tells me he doesn’t have any great prospects.  I always ask, “What were you doing a year ago?”

Todd: What makes a bad salesman?

Jerry: A poor salesman of course lacks prospects.  I also never liked the slick salesman.  The slick salesman talks too much and lacks empathy.  The best salesman I ever met barely spoke during the first two thirds of a meeting except to prompt the prospect to speak about his needs.

Todd: How do you deal with salesmen who aren’t hitting quota?

Jerry: I've always found that probation letters and periods just exacerbate the problem.  You will usually find that the poorly performing salesman has a death wish and won't do what is required to be successful.  Therefore as quickly as I realize a problem exists, we have a brief conversation in which I convince him to quit.

Todd: How important is pre-sales engineering?

Jerry: The pre-sales engineer is critical to a successful selling process.  This individual gives credibility to the salesman and develops trust with the customer.  But the salesman should only bring in the pre-sales engineer after the opportunity has been qualified, the initial product demonstration has been completed, and the buyer is ready to go deep into questions of functionality and technology.  In general, salesmen bring in pre-sales engineers too early, which increases the cost of sales.

Todd: Should pre-sales report into sales, service, or development?  

Jerry:  It should report to sales.  Proposals are often mis-priced when pre-sales reports to the service or development departments.  This is because their heavy workloads often reduce their motivation to aggressively pursue the business.

Todd: What else can you tell me about what selling was like in the “old days”?

Jerry: We always liked to know who the rival salespeople were.  That way, if you lost a deal, you could picture his face when you contemplated what he had taken from you and your family.

We also used to say that expenses were always proportional to income.  If you were spending $50k per year, you were going to be a $50k per year kind of guy [i.e. an unsuccessful salesman].   To be successful in sales, you have to spend some money, take risks and be confident.

SYMBOLIC CHANGE

•The Business Council, the quintessential big business membership group (General Electric etc.) has announced the admission of Henry Kravis of famed buyout firm KKR. Rumored in line for admission; David Rubenstein of the Carlyle Group and Stephen Schwarzman of Blackstone.  The barbarians are no longer at the gates.  They have entered the walled garden of establishment big business.  (NYT May 3, 2006)

CHINA’S INEXORABLE GROWTH

•“China is about to become the leading nation in the world in terms of using TMT (technology/media/telecom) products and services.  China is No. 1 in mobile phone usage and cable TV subscriptions, No. 2 in Internet users and No. 4 in installed PCs and growing fast.” Mary Meeker – Morgan Stanley analyst

BLOGGING

•At this writing, there are 35 million blogs (up from 300,000 a few years ago) and 78,000 are being created each day

About Milestone Venture Partners

Milestone is an early stage venture capital fund with $42 million under management. We focus on technology-enhanced service businesses in the New York metropolitan area. Companies that we find attractive possess the nucleus of an exceptional management team, an attractive business model, and a compelling market opportunity.

Milestone Venture Partners
551 Madison Avenue, 7th Floor
New York, NY 10022 
V: [212] 223 7400
F: [212] 223 0315
www.milestonevp.com

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