I recently sat down with Dave Hersh, former CEO of Jive Software (NASDAQ: JIVE). Dave grew the company from its inception as a small open source project with no revenue to a $55M, pre-IPO company (and a $1.1B market cap as of today).

NH: What lessons can we take away from Jive's success?
DH: With Jive, it wasn't until 5 years into the company (2006) that things started taking off. We hit the sweetspot - with the product, with sales, with Facebook emerging. We thought: "this is a new category that's emerging, and we're not going to lose it." That's the benefit of bootstrapping. You can be patient for the right opportunity.  

"That's the cool part about B2B  -  there's lots of room for serendipity"
NH: What advice do you have for b2b/SaaS entrepreneurs?
DH: Find your hook -- what's your hook of value? Something that's unique to your product. For example, Demandbase's hook was "target specific companies" (vs. people). You have to have a unique hook to succeed -- it's noisy out there. The other thing to ask yourself is: "is it a platform?" It's always an issue: can it be useful out of the gate for enough people?

NH: Should startups be worried about competition during the early days?
DH: A lot of it comes down to solid execution. It really doesn't matter if two companies are starting in the same space at the same time.

NH: What can you tell us about Crushpath, which you co-founded after Jive?
DH: I co-founded Crushpath with Jive's former CMO, and currently serve on the board. Crushpath is doing really well, and offers an interesting lesson. The entire original premise of the company was wrong. Customers said they wanted one thing, but after we built the initial product, they didn't use it. But they really liked this one feature, which became the whole company. That's the cool part about B2B -- there's lots of room for serendipity and you can keep trying, keep trying, keep trying. And eventually, find the right fit. But if you raise too much money, you might not be able to do that.
I read an interesting post this morning by John Greathouse -- a renowned SaaS blogger and investor -- "Why Entrepreneurs Hate (Most) MBAs." A couple months back, I had answered a similar question on Quora ("Why Does the Startup Community Hate MBAs?"), so I thought I'd highlight some of those points here. 
I can think of a number of reasons why startups might look suspiciously on MBAs:

1. Sense of Entitlement
 - Some MBAs have a sense of entitlement about how much responsibility and status they should get. When joining a large organization, there is some (limited) basis for truth in that high self-regard. But in a startup context, this is laughable. This also translates to salary expectations, as John points out:
Top MBA programs are expensive and their graduates have astronomical salary expectations. 
2. Enron - We all hate crooks and people without moral compasses. Unfortunately, too many of those people also have MBAs, sullying the reputation of the degree. 

3. VCs - Some startups resent VCs for all the obvious reasons. Many top VCs are MBAs. Therefore, startups resent MBAs. It's not just that they possess the degree, but also that many of them are a different "breed": the business-type. As a result of this negative sentiment, look for VCs loudly -- and sometimes inauthentically --proclaiming themselves as geeks, entrepreneurs and CS majors (even if they can't write a line of code anymore). 

4. Lack of Product Orientation - Startups have to be product and engineering oriented at the outset. Many MBAs don't have technology backgrounds and are making a career switch, and are therefore not a good fit.

5. Risk-Aversion / Un-Contrarian-ness - Startup people are a bit crazy, believing something many sensible people don't. Some MBAs are perceived to be conventional thinkers, and come from a background of high and steady achievement, without huge spikes with creativity and risk-taking. Stanford MBAs, for example, are diverse in many incredible ways, but not so much in undergraduate academic institutions - almost 1/3 of my class came from  Stanford, Harvard, Princeton, Yale and Dartmouth (of course, founders of Facebook, Quora and many other sites also came from those same schools).

Needless to say, none of this is to say hatred or prejudice against MBAs is justified. Indeed, many of Silicon Valley's most highly respected entrepreneurs are MBAs, such as Scott Cook of Intuit and Vinod Khosla of Sun Microsystems. But that is a topic for another blog post.  
I recently sat down with Sean Jacobsohn of Emergence Capital Partners. For those not familiar with the firm, they are the LinkedIn of VCs: quietly producing big results, including early investments in Salesforce.com, Yammer and SuccessFactors. Sean joined Emergence last summer, after an impressive career as a SaaS executive at YouSendIt and Cornerstone OnDemand

"Don't take [seed] money from a later stage VC. If they don't follow on, it sends a bad signal."
NH: What is Emergence Capital's investment focus?
SJ: We focus on companies between $500K - $5M ARR, which we we think will get to $100M ARR within 4-5 years.  We partner with our portfolio companies on go-to-market and team building.

NH: How many investments does Emergence Capital make per year?
SJ: We make about 5-6 investments a year, which allows us time to be a value-added partner.  Out of our new $250M fund, we expect to make a total of 20 investments.  
We have quite a ways to go since we've only done 3 investments in this fund. 

NH: What fundraising advice do you have for earlier stage SaaS companies?
SJ: Focus on stage-specific firms.  A few exclusively focused on SaaS include Cervin, Illuminate and Rincon. To start, you may also want to draw upon friends and family. If you're just starting out, get a Minimum Viable Product created and get a couple of paying customers. Investors almost expect that, because it's so easy to do.

NH: What mistakes do SaaS companies make in raising VC funds?
SJ: Don't focus too much on the valuation for the first round of funding. If you raise $1M, it's unlikely to be the last capital you put into the business. If you're successful, you'll need more capital, and if you're unsuccessful you'll need more capital. You have to consider the challenges of getting a follow-on round. 

NH: What about raising seed capital from a later-stage VC?
SJ: I highly recommend that you don't take money from a later stage VC at a seed round. If they don't follow on, it sends a bad signal. We see it all the time -- where a company with VCs provided seed capital, but choose not to lead the later round. There's more than enough early stage money out there. And the early stage guys will be more focused and give the necessary support.  In the rare case the later stage firm wants to lead your next round they likely will want an insider's discount.  

NH: How many firms should a company approach?
SJ: My advice is, be focused. People talk. If word gets out that you've been fundraising for awhile, you might appear stale. Also keep in mind that when you have a meeting, you probably only have one shot.  Only a small percentage of firms will get a second look.
Sarah Lacy of Pando Daily published an interesting follow-up on Scout-Gate, the secret/stealthy angel-investment-by-proxy program run by large VCs such as Sequoia Capital and Andreesen Horowitz. I wrote the following comment, and thought I'd elaborate here:

The secret vs stealthy thing is a bit of a making-a-mountain-out-of-a-mole-hill situation. Entrepreneurs aren't lied to; they're more protected from signalling risks; VCs still get to deploy capital (ahem "spray and pray") and angels get to feel important. Everyone gets what they want. As to the would-be-Series A-crunchees- they know the rules and have only themselves to blame if they don't keep enough tank in the gas to get to the next milestone (e.g. $2-4m ARR run-rate for a SaaS company Series A).
Perhaps I'm naive, but it strikes me that no one's any worse off as a result of this development, and it's quite likely that almost everyone is better off. It used to be that entrepreneurs went from bootstrapping or taking small angel investments to much larger VCs rounds (and much later). Now there are more gradations in investment, and VCs seem to be happily ceding the lower-tier (and higher risk) territory to seed funds. This raises the tricky situation that an entrepreneur can feel like they've passed the high quality threshold of an institutional investment, but still not be set up for success to get to a VC round. And that's exactly why this conversation is now taking place. My view is that it's ultimately good for the ecosystem, and merely a symptom of increasing market efficiencies. 

What do you think? Please comment below.
I recently had a chance to catch up with Andy Rachleff, who taught me at Stanford GSB. Andy is the CEO of software-based financial advisor Wealthfront, and is of course well known as a founding partner of legendary VC firm Benchmark Capital. If Benchmark's Bill Gurley is the sage of Silicon Valley, surely Andy is its professor. Below, I've shared some of Andy's professorial wisdom, which I thought the broader entrepreneurial community might benefit from.

NH: What advice do you give your students about finding a co-founder?
AR: I've learned from the experience of my former [Stanford MBA] students, that it usually doesn't work to "recruit" a technical co-founder. You need to have a common point-of-view, and find someone who sees the problem as you do, and is equally passionate about solving it. The challenge is that it's really hard to get it right out of the gate. That's because you build a product, and target customer segments sequentially. The odds of that first segment being the right one are low. When it doesn't work, then doubts set in. That's when it's critical that both co-founders are committed to each other and to solving the problem. I haven't always held this view, but I've now come around to it, based on my students' experience.

NH: When should entrepreneurs consider outsourcing product development?
AR: If you're in constant iteration mode -- pre product/market fit -- it's a false economy to outsource. It works better for situations with a defined market and longer development cycles.

NH: Do you advise entrepreneurs to raise seed capital when it's available?
AR: It's a good idea to raise capital when you can, especially if you have a significant other. I used to be against founders selling their stock in a secondary offering. Now, I believe that if you sleep better at night, it's good for everyone. Seed funding is analogous to secondary stock. You're no more macho by not taking a salary. And you'll think more broadly. 

NH: What advice do you have about the chicken-and-egg issue of raising capital and attracting a solid co-founder?
AR: There's nothing wrong with signing up a lead investor conditional on having a CTO join. It's a totally reasonable approach. People with better judgment wouldn't fault you for that. You could have the potential CTO join the investor meeting. 

NH:  What advice do you have on customer development and finding product/market fit?
AR: You have to identify people that have the problem AND that have spent money trying to solve it. It's not enough for them to simply have the problem. Focus on "Who Cares" - a particular group. Develop your hypothesis, and test one hypothesis at a time. You can't just ask a customer what they think. Tell them, and then listen to their reaction. 

NH: What's the best way for an entrepreneur to identity the right investors to target?
AR: The best way is to hire an attorney that's experienced at your stage. Use them to identify which angels are oriented towards your sector. You want to be introduced to those angels, vs cold calling. 

NH: What separates a lead investor from a follower?
AR: A lead investor is someone who knows your space, and probably you, and is willing to sit down and negotiate a price with you. Followers might not want to do that, in order to remain the good cop.

NH: What do you do with negative VC feedback?
AR: Listen to objections. Is the objection to you poorly articulating the problem or a disagreement on the market opportunity? The former is your fault. But if they don't believe in the opportunity, don't waste your time on "missionary" work. Startups can't afford to do that. Preach to the choir. Not everyone needs to like your idea.

Related Posts by Andy
To be a great entrepreneur, you must be non-consensus and right
Entrepreneurs in Silicon Valley love to talk about disruption, though few know what it really means. They mistake better products for disruptive ones. 

Andy Rachleff is president and CEO of Wealthfront, an SEC-registered software-based financial advisor, and teaches at the Stanford Graduate School of Business. Before Wealthfront, he co-founded and was general partner at Benchmark Capital. @arachleff
Nadim Hossain is a SaaS entrepreneur based in San Francisco. He was the CMO at PowerReviews (NASDAQ: BV), and was previously a marketing executive at Salesforce.com. @NadimHossain
Originally appeared in Forbes. By Nadim Hossain and Dave Feinleib (author of The Big Data Landscape). Re-published with permission. 
With several successful IPOs this year, the Software-as-a-Service (SaaS) space is enjoying strong momentum. This renewed attention begs the question — who will be in the next wave of cloud application winners?

In our view, a key characteristic to look for in emerging software companies is whether they have the potential to evolve into broader, “Big Data” information businesses. This is because winning software companies of the future will find ways to unlock value from the mountains of data being generated — whether by humans or machines — thereby creating formidable competitive “moats.”

Below, we examine three categories of software where this trend manifests itself, looking at both mature and emerging companies.

Example 1: Data Center Software — Splunk

Our first example is from deep inside the data center. Technically, Splunk isn’t a SaaS company. While its software enables cloud application providers such as Salesforce.com, it is itself a versioned, old-fashioned software company. However, the trend it taps into is very much consistent with the cloud wave.

Splunk is surfing a massive trend — that the volume of “data exhaust” from IT systems is growing at an accelerating pace. IT managers need a way to manage this data, and make sense of what their systems are telling them. Just as brands want to separate the signal from the noise when it comes to social data about their products, corporate IT departments want to differentiate a routine alert from something that might presage a broader security problem, for example. Splunk’s software enables them to do just that.

So far, that part of the business looks like a traditional software model. Where Splunk has a tremendous opportunity is in making sense of data not just within one client, but across numerous clients.

While there are the beginnings of this trend in the form of Splunk clients sharing information and applications with each other, Splunk has not yet fully capitalized on this opportunity. Standing in its way, in part, is the fact that it is a software offering, with client silos that don’t talk to each other, or share the same database.

It can address this, of course, by offering an online version, which it now does. There are also emerging startups that are betting on the same transition to online — namely online services Sumo Logic and Loggly. It remains to be seen whether these new services, or Splunk’s online offering, will be able to create true network effects by having one view of machine data across clients.

One early stage startup that is trying to do just that is CloudPhysics. They’re also focused on the data center, but specifically on the unique challenges and opportunities associated with virtual machines. Since virtual machines hog real network and storage resources, managing them effectively has real consequences. Where this becomes an information business is that millions of virtual machines can share their configuration and performance information through the cloud, enabling more effective use of resources across the board.

Example 2: Social Software — Bazaarvoice

With its successful IPO this year, Bazaarvoice (which Nadim joined as a result of its acquisition of PowerReviews and which has a current market cap of $950 million) is recognized as one of the winners in the social software movement. Bazaarvoice, along with PowerReviews, which it acquired in June 2012, built its core business by allowing online retailers to use its software modules to gather, display and analyze customer reviews and ratings (what would have been called a “widget” before the term became unfashionable).

In that respect, the company is a classic enterprise software success story, replacing a piece of software that was built in-house with a stronger product. Just as retailers moved from home-grown ecommerce platforms to packaged solutions such as Magento and Demandware, they also turned to Bazaarvoice and PowerReviews to power the social interactions that sit on top of their e-commerce stores and to BloomReach to capture maximum demand from their content, thereby enabling them to compete with Amazon.com. So far, it looks like a software business.

What makes the company an information business, however, is the fact that there are built-in network effects in its usage. For example, the more retailers it signs up — such as its customers Walmart and BestBuy — the more value it can provide to branded manufacturers, such as Proctor & Gamble and Samsung. This is because it can analyze retailers’ real-time customer review data to provide valuable insights to brands.At scale, this is quite powerful. And indeed, the scale is quite large — by one estimate, the company’s clients process 18X the ecommerce volume that Amazon.com does.

This enables Bazaarvoice to monetize not just its software, but also its data. For example, by analyzing the millions of pieces of social interactions on behalf of its brands. It has also announced plans to go beyond software and analytics to offering advertising solutions, by powering more effective ads for brands; for example, by dynamically serving up a customer testimonial from someone like you.

So can other social software companies tap into this opportunity?

Given the inherently large amount of social “data exhaust” that such B2B2C companies are dealing with the answer is yes. Companies in the social identity management and gamification spaces are ones to watch — such as GigyaJanrain, Badgeville and BunchballGigya, for example, recently announced plans to go beyond powering social login for media and retail sites to managing the user data itself. This is potentially a much bigger opportunity than the social login piece (though potentially fraught with privacy landmines).

Example 3: Energy Software — Opower

The final example is an application serving a very different industry from e-commerce, namely the energy industry. Opower, which is rumored to be filing for an IPO soon, has built itself a nice recurring revenue business by serving the needs of these lumbering giants, such as PG&E.

Specifically, it generates better electric bills for them — yes, the pieces of paper you get in the mail — by actually customizing your utility bill with your personalized usage data, and how you might compare with neighbors. The goal is to get you to use less energy, especially the peak kind that results in firing up inefficient power plants. This change in consumer behavior through better presentation of usage information is incredibly valuable for utilities, because even a 1% reduction in peak usage can mean significant savings and subsidies from the government.

Of course, the company has plans to do a lot more than this. But the essence of their business is providing consumers with better usage data. Utilities would rather outsource this to Opower, at the right price, and they do.

So far, this looks like another typical software business, in this case software that creates better utility statements. But where it has an opportunity to become an information business is in doing more with this energy data. What Opower shares with Bazaarvoice is scale, and the fact that it is a B2B2C business. If almost half of North American e-commerce transactions touch Bazaarvoice in some way, the same or greater percentage of households’ energy consumption data flows through Opower.

This becomes quite powerful, if Opower offers new services built on top of that data. For example, Opower is ramping up its consumer business, which involves selling intelligent, network-connected thermostats to end users. Not only do these devices provide more control to consumers, they also have the potential to allow energy companies to centrally control residential energy consumption, in the event of a shortage, for example.

Even though Opower hasn’t done much to espouse this vision, the opportunity at stake is quite large, given how important energy is to our future (if you have any doubts, play the 2012 Presidential debate highlights again!).

Big Data Whitespace

So what other companies can benefit from such an approach? An obvious one is Tom Siebel’s C3 Energy, which attempts to do for commercial users what Opower does for residential users. And perhaps startups targeting other regulated industries, such as healthcare, can benefit from similar dynamics. Electronic heath record (EHR) providers come to mind, such as Practice Fusion and CareCloudwho are taking on healthcare giants such as McKesson.


In summary, traditional software models are giving way to “big data” approaches that seek to monetize the underlying information contained within the software. This means that even cloud computing leaders such as Marc Benioff’s salesforce.com will have to pay attention to not being stuck in yesterday’s SaaS paradigm. Successful cloud applications of the future will need to look more like LinkedIn–combining subscription businesses with ad-driven models–and less like Salesforce.com.

Above, we’ve seen three very different applications of such approaches, at varying stages of maturity. There are undoubtedly many more. What is clear is that both humans and machines are generating more data than ever before, and software players that can uncover intelligence from such data will prosper.

Nadim Hossain is a SaaS entrepreneur based in San Francisco. He was the CMO at PowerReviews (NASDAQ: BV), and was previously a marketing executive at Salesforce.com. @NadimHossain

David Feinleib, the Big Data expert, is the author of The Big Data LandscapeHe helps buyers and vendors unlock the value of their data assets. Reach him at dave@thebigdatagroup.com.