I met with Hank Weghorst of Troux who talks about his next project-- a startup in the mobile space as well as the local startup environment. Hank is also working on an idea for starting an incubator to help seedstage companies get up and running.
What do you see in the local startup scene?
The model has changed dramatically today from when I started Troux five years ago. A company like mine needed $20M dollars. Now that same company needs $5M or even less. The whole software world has moved to a different model. It’s beginning to come to angel groups like yours.
What are you doing now?
I moved out of Troux a few months ago. I’m working on another startup idea. We’re going to focus on the mobile space. I’ve done several enterprise deals. All of them have $10M, $20M, $30M dollar deals a piece. The whole enterprise space is dead. The next step down from that is the Software as a Service model. The intent of it is to build an annuity stream. The success stories are few and far between, because if you run the financial model on it. It takes forever before you make money. If you have an enterprise company now trying to convert to an SAAS model it could take 3 to 5 years before you turn the corner and make the same amount of money as a perpetual license. When you take the perpetual license you get all the money up front. On a subscription model, it could take 3 to 5 years to get the same amount of cash. Now the good news, is that once you get to the 3 year mark then it’s gravy. It just takes a long time to get there and you have to have very patient investors and huge amounts of startup capital. This panacea of SAAS is talked about by everyone who hasn’t seen the bottom line. If you go one step down you get back to the old “eyeball” web deals. A lot of the deals that are successful now aren’t good, they’re just lucky. I don’t like to depend on luck. I want to depend on hard work. In an enterprise deal you were always looking at a 5 to 7 year horizon. The first 12 to 18 months I’m developing the product. In the next 12 to 18 months I’m rolling it out to my alpha/beta customers. Then in my 4th year, I’m in a growth cycle. If you only have a half million dollars you have to turn the whole thing on in 12 to 18 months. If you look at that model, you have to pick something where you believe the discontinuity is only about 12 to 18 months away.
I believe the mobile market disruption is about 12 to 18 months out. With such a short timeline, it’s all about execution. The smarter guy isn’t necessarily going to win because of the shortened timeline. An investor has to be willing to do whatever it takes in that short timeframe to make it successful. I believe the funding required will be $3M to $5M in total but will be consumed in a short period of time. It has to be a model of killer execution. The challenge is that in a 3 year timeframe, everyone can see the discontinuity coming up. The entrepreneur with a view on it no longer has an exclusive.
You mentioned the mobile market. What do you see in the mobile space now?
There’s a huge discontinuity in the 18 to 36 month window. I don’t know if you’ve been following it but we’re about to transition from cellphones to smart phones. Apple showed us what that will look like. The difference between a smartphone and a cellphone is the access to data. It’s not the communications. It’s in the web access capability. In a sense, the device becomes a disconnected computer. In less than five years, when you walk into your office your device will sense the monitor and keyboard and they will come alive. It’ll be your computer you’re carrying around. Then when you go to your car, your car will sense it. Sprint just announced that they are spending $5B in the next five years to rollout a WiMAX network nationwide. WiMAx is Wi-Fi everywhere.
What kind of product/service would you offer?
The thing I’m focusing on is the form factor and usability of the mobile device. When I’m on my phone, I want this thing to be smarter than my desktop computer. I want it to go and do things for me. “Here go do this for me.” If you go back to the advent of the web there was also the “semantic web” which was built for computers to communicate with computers. The shift from the desktop computer to the mobile device will use that concept in a real way.
The mobile phone in the future will have an “agent” mentality that will go do things for you. Any applications will reside on the web. If you take Google apps and move them to the mobile phone you can start to see what that will look like. Google is going to own this. Two months ago they released their Android software and opened up a contest to developers to show the best Android applications.
In a few years, you’ll go to Fry’s and you’ll find the Apple stuff on one side of the aisle and on the other side will be the open hardware—Motorola, Nokia, and so on but they’ll have a Google OS. I don’t know where Microsoft will be in all of this. I think they get belted by this. It’ll be Google vs. Apple.
What about Research in Motion?
With the advent of ubiquitous broadband networks, RIM’s advantage goes away. There are two distinct markets – mobile professionals and then there are the digital natives (kids from 13 to 25) who use it because it’s their digital lifestyle.
In a few years everyone will own a pocket PC and there will be no need for that big thing under their desk. There will be servers in the backroom running it.
The usage paradigm for mobile computing will change dramatically from a ‘desktop—I have time to sit and search’ to a ‘do’ mentality of the mobile space. I want to be the ‘do’ company. I want them to be configurable. I want to give people toolsets that can let people do what they want.
What’s a killer app?
It’s more of an approach than a killer application. Imagine an iPhone screen with a set of icons and you can configure those icons to do something for you. It could be anything from “have there been any new contacts that have come in for my territory in the last six hours?” All the way to “show me the latest score for my basketball team and who do they play next?” You can imagine configuring a matrix of thirty of these things to do. I want to extend that to something bigger. These agents that are collecting the information are storing it in a central area so you can access it from a desktop as well. It would be a mistake to build a mobile only application at this time.
The mobile phone and the desktop have to work in concert. The iPhone is one example of how well that works. What do you think?
That’s right. The computer and the phone always works as one although the biggest thing the iPhone missed is that you have to plug it in to synchronize it. The Blackberry does this already. I can’t believe they missed that one.
Tell me about the incubator idea you’re working on.
There are a couple of models out there for incubating startups. The one I like is called YCombinator. I just thought it was relatively unique in that it was team shotgun approach. Instead of hunting for one deal at a time, we hold a competition. They find the five or six best ideas and put them in a class and move them through a training process. That class gets a little bit of funding. We could hold once or twice a year a well publicized competition to find the people who want to join that class. We’ll surround them with the resources that they need to get going – not just funding but management, operational, financial, etc. The goal is to get them to the next level whether that be angel funding or something else. Typically the entrepreneur knows what they want to do but they need help.
Where I began to hang up is that I found myself becoming a VC – raising funding, etc. I could get the funding but then I’m competing against the guys I want to hand them off to.
I’m now looking at gathering a group of four with backgrounds in management, financial, operational, and HR along with four entrepreneurs. They may take an equity position. It’ll need some operating capital. I don’t know where that will come from just yet.